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Lawlessness and Economics

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Lawlessness and Economics

Alternative Modes of Governance

Princeton UP,

15 min read
10 take-aways
Audio & text

What's inside?

How game-theory modeling explains the way economies function without laws.

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Editorial Rating

8

Qualities

  • Innovative

Recommendation

In Shakespeare’s Henry VI Part 2, a member of John Cade’s gang famously suggests that the rebels should, as an initial step toward utopia, “Kill all the lawyers.” Certainly, anyone who has forked over a hefty retainer can sympathize, but can societies function without legal systems? And if so, how? The answer, according to Princeton economist Avinash Dixit, is that they can indeed function and have for thousand of years, provided the right kinds of social institutions are in place. In fact, lawless systems can work better than traditional justice systems for some small, homogenous groups. Thus, extralegal institutions are still common, from trade associations that arbitrate members’ disputes to private security guards. While this slim book is thick with equations, getAbstract thinks it gives a nice overview of the empirical literature. The game-theory models yield a few surprising conclusions and many areas for further research. While killing all the lawyers still is probably not prudent, Dixit begins to show when quasi-legal institutions lubricate and when they gum up the wheels of commerce.

Summary

Economics Without Law

“When the butcher comes to me to buy an animal,” says a Sicilian cattle breeder, “he knows I want to cheat him. But I know that he wants to cheat me.” Such mistrust is hardly good for commerce. The obvious solution is legal: a simple contract or the threat of a lawsuit should work. However, there are alternatives, like “Peppe.” The cattle breeder and his fellow businessmen turn to this upstanding citizen, because, they explain, he “makes” them agree. In exchange, Peppe gets a cut of the deal. Who is “Peppe” and how does he “make” them agree? Why, he’s the local Mafioso, and his role in this deal is a perfect example of how economies with minimal, nonexistent or dysfunctional legal systems not only function, but sometimes thrive.

Such informal social institutions are nothing new. The Gold Rush in 19th-century California was a free-for-all, with prospectors eager or desperate to strike it rich. Property rules were ill-defined, but even well-defined rules would have been hard to enforce. Rather than wait for the government to fill the void, prospecting camps set up their own “governments” and passed “laws.” A few hundred years earlier in Medieval...

About the Author

Avinash K. Dixit is a Professor of Economics at Princeton University.

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