The visible hand in economics

Who needs government anyway?

Posted on: August 12, 2007

We talk about government intervention all the time, but there are those who believe that governments themselves are unnecessary in modern economies. Peter Leeson says

Anarchy, like all political-economic organizations, is riddled with problems. It is not clear that these problems are any
more numerous or severe than those that plague governments, however. …Where the state does not provide law, order, or the
institutions required to produce these things, private institutions emerge to perform these roles instead.

It may be that many small, everyday transactions, such as those cited by Leeson, would still happen smoothly without government involvement. However, as Rodrik points
out
, these sort of things don’t scale well. They tend to rely on repeated transactions between individual agents to maintain co-operation. Once people have to interact on a one-shot basis, as happens in most large economies, this co-operation breaks down without enforcement. If you don’t expect to transact again then there is no incentive to invest in a reputation as an honest trader.

There is also the problem of maintaining a functioning financial system in a large economy. This is very difficult to do without some
regulation, as the online life simulation Second Life is finding out.

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