Review of Private Governance: Creating Order in Economic and Social Life, Edward P. Stringham, New York-Oxford: Oxford University Press, 2015, 296 pp.

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Private Governance: Creating Order in Economic and Social Life
Edward P. Stringham,
New York-Oxford: Oxford University Press, 2015, 296 pp.
There already exists a large and consistent literature about the virtues of private
governance, a literature to which Edward Stringham himself has already contributed. His
latest book, Private Governance: Creating Order in Economic and Social Life, partially based
on previous publications, is a new study devoted to the same topic. Yet, this book is
important because it is particularly useful at demonstrating that private governance works.
More precisely, it is not only what is demonstrated but how the demonstration is made that
gives the book its value.
Private Governance is not an exercise in “pure” and abstract science, the kind that
mainstream economists are familiar with, but rather a study of institutions that it come from
individuals, correspond to their needs, and are adapted to each situation. To adopt such a
“pure” and abstract approach to study private governance would be vain and useless
because it would miss the main feature of private governance, it’s adaptability and
specificity. Thus, “[b]ecause private governance is not a one-size-fits-all solution, research in
private governance can analyze the various ways that parties deal with problems.” “Can” and
must, we should add. That is precisely what Stringham does in the book: he studies different
examples of private governance and provides empirical evidence that, in a variety of
different contexts, people devise their own (institutional and private) solutions to deal with
the problems they face.
Such was the case in the 18th century, when the London Stock Exchange was
created, or in the early 19th century, when “San Franciscans created a system of private
police to ensure their physical security”; or, more recently, when PayPal faced massive
frauds and lost huge amounts of money. Rather than waiting for a possible governmental
solution, Paypal devised private solutions. Actually, all the examples given in the book
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confirm that it is not rare for individuals to not rely on state intervention—to not wait for a
deus ex machina, to use Stringham's words, to solve their problems for them. This might
surprise those who are used to government interventions and tend to believe that markets
cannot emerge and function without governments. But it has not always been like that.
Despite the book’s empirical focus, it is not merely a spineless, a-theoretical,
collection of facts like the kind of empiricism that was used – by the institutionalists for
instance. That would also be a serious flaw. Instead, Stringham adopts an approach that
combines, in the words of George Mason Professors Peter J. Boettke and Christopher J.
Coyne, “the logical structure of economic reasoning with the rich institutional details of
history and anthropological and sociological analysis”—an approach which also
characterizes most of the recent analyses of private governance (see for instance Anarchy
Unbound: Why Self-Governance Works Better Than You Think by Peter T. Leeson (2014),
and The Social Order of the Underworld: How Prison Gangs Govern the American Penal
System by David Skarbek (2014). In other words, Stringham uses economics to make sense
of the empirical evidence.
From this perspective, a first argument is that private governance works—and one
could even say works better—than public governance because decentralized mechanisms
work better than centralized ones and because private governance emerges from
individuals. Only individuals know, first, when they have a problem and, second, how to fix it.
As Stringham reminds us, this is the classic argument about decentralization, markets, and
knowledge forwarded by Friedrich Hayek in his famous 1945 essay “The Use of Knowledge
in Society.”
But decentralized knowledge alone does not explain why markets and private
governance works. Someone could admit that “individuals know better” and therefore that
one must rely on their particularized knowledge, but that does not necessarily mean that
they will use their knowledge or, more broadly, agree to cooperate with others. There is also
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the issue of incentives. Incentives are crucial for mainstream economists. People are self-
interested, and thus they seize opportunities to free-ride and behave opportunistically. Thus,
all human interactions should essentially take the form of prisoner's dilemmas.
For some, that opportunism explains why markets and decentralized mechanisms
necessarily fail and why the intervention of the State—that is, external coercion—is
necessary. According to the same reasoning, private governance should also fail. Yet, as
Stringham’s book shows, we have many compelling examples that it does not fail. It seems
that individuals, even though they are self-interested, spontaneously use their particularized
knowledge and cooperate with others. For instance, in San Francisco during the 19th century,
“[r]esidents privately financed police”– that is a public good – without realizing, notes
Stringham, that “what they did was actually impossible” according to traditional economic
theory. It seems that, in many cases, there is no need for coercion or, at least, there is no
need for external coercion—i.e. threats of force from others. People behave pro-socially, as
it has largely been evidenced by experimental economics, and they can “police” or “govern”
themselves. “Individual self-governance,” writes Stringham, “is one of the most important
sources of governance,” and it’s crucial to explaining why private governance works at all.
In addition, the capacity to police oneself and the corresponding willingness to
cooperate do not depend on the size of the group. This realization is important because both
opponents and those who are rather favorable to private governance seem convinced that
individuals may cooperate in small groups but they free ride in large ones, what James
Buchanan called a “large group dilemma.” To Stringham, such a dilemma does not exist.
Individuals cooperate and coordinate with others in large groups as well as in small groups,
as well as when they are engaged in both simple and complex transactions. Game theory
may tell otherwise, admits Stringham, but “rather than using game theory to debate whether
cooperation is or is not possible in relatively large advanced markets without enforcement, a
more fruitful approach is to study actual markets to see how they work.” For example, the
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history of the world's first stock exchange, created in Amsterdam in the 17th century, proves
that large groups and complex transactions did not prevent cooperation. Participants devised
an informal mechanism of governance based on reputation that worked even between those
who did not interact repeatedly.
Finally, Stringham also explains why public institutions should not be added to—and
should not replace—the private ones that already exist. This is indeed a serious question: if
private governance works, and if individuals find institutional solutions to their problems, why
are public institutions needed? Obviously, the only possible answer is that public governance
—public institutions—would represent an improvement.
This is a twofold claim: First, that private institutions can be improved and, second,
that the improvement can be brought by governments. It is not clear, however, what
“improvement” and “better” institutions mean; especially, if the institutions of private
governance are not one-size-fits-all solutions that have emerged to fit the needs of the
individuals themselves. The lack of a clear definition or characterization of “improvement”
probably explains why the opponents to private order argue that the failure of private
governance justifies the intervention of the state. But that defense of public governance is
fallacious. Partly, as Stringham explains, because certain problems are not “failures” of
private governance. During Bernard Madoff's Ponzi scheme, for example, mechanisms of
private governance existed that “easily could have prevented such fraud” but the investors
themselves “chose not to demand them.”
Additionally, it is well known that governments can fail too. Arguing that governments
may solve market failures implies that governments do not fail or fail less than markets.
There’s no way to prove that claim. The only way to know if public governance works better
than private governance is to run experiments. But once public institutions have been added,
it becomes impossible to remove them. If public institutions can’t be removed, then it can’t
be shown that they represent an improvement over private governance. Furthermore, it can
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also be shown that that adding institutions of public governance to those of private
governance that exist, or replacing them, would deteriorate the situation. Indeed, the state
often does not help but crowds out good governance Indeed, here’s the “best” governments
can do: “crowd out rules that providers of private governance would have provided; or worse,
government can impose rules well beyond the optimum and thereby drag down markets”;
interfere with and consequently to undermine what is provided by private governance; or
coerce and “strong-arm” private entities. All in all, replacing private governance with public
governance is usually a net loss.
Lastly, the limitations of public governance help explain why private governance is so
pervasive. In fact, individuals do not only create private governing institutions when
governments are absent. Private governance also exists when there are governments.
Often, we do not realize that private mechanisms are at work, and many of our problems are
solved without the intervention of governments. This is the “unseen beauty” of private
governance. And this is the story that Stringham tells us in this book.
Alain Marciano
Université de Montpellier, Faculté d'Économie
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