Is Governance Apart from Government Possible?

How much government is sufficient? What sort of governance is appropriate?

Contrary to popular belief, the common view even among free market advocates is that some government is good. Most people argue government is necessary to enforce contracts, ensure market participants act in good faith, maintain law and order in the street, etc.

Edward Stringham’s recent book, Private Governance: Creating Order in Economic and Social Life, seeks to upend that common view. What he ends with is a thesis that points toward valuing and celebrating private governance, which is an idea vastly different that anarchy.

Summary

The book is divided into three uneven parts. Part One consists of three chapters that explain what private governance is and why it is often preferable to government. Part Two contains eight chapters in which Stringham walks through historical and modern examples of private governance in action. Part Three has three chapters attempting to summarize the lessons learned about private governance from the previous eleven chapters.

As Stringham outlines in his introduction, “Private Governance describes some of the major mechanisms that private parties use to produce social order and highlights how modern markets would not be possible without them.” Basically, he is describing the reality that the government cannot effectively regulate the market, no matter how hard it tries. That, however, is something entirely different than saying the market is unregulated.

The “legal centralist” view, as Stringham calls it posits the law as a sort of Deus ex machina that can step in to settle disputes, enforce contracts, and make everything go just right. Even among free market advocates, there is still a strong acceptance of legal centralism.

Instead, Stringam argues, club rules are both more effective, more fair, and more likely to result in mutually acceptable outcomes. Voluntary associations, which are a bedrock of a free society, are typically more effective in governing because they tend to be interested in overall success, not merely seeking self-justification or simply unconcerned for the outcome as much of the government can be.

This is a bold thesis, so Stringham provides a number of case studies to illustrate when private governance worked well in the absence of legal support. The most startling example is of the world’s first stock market, which was founded in the early 17th century in Amsterdam. The early market had a wide range of securities with contracts that the government expressly refused to enforce. And yet stock in the East India Company and other ventures were traded successfully between willing market participants. New derivative forms of stock were invented and futures contracts arranged, all without legal enforcement.

Similarly, the London Stock Exchange arose as a club designed to self-regulate to ensure fair play among its members. Because access to the market was not guaranteed, it encouraged right dealing. So, Stringham is showing, it isn’t that there was no governance, it is that the governance came from non-legal, club-style regulations.

Self-governance led to the creation of mandatory reporting requirements and audit requirements in some stock exchanges. However, those who were willing to accept more risk could form different privately regulated exchanges that managed risks less rigorously.

Stringham provides several other very interesting examples where, undeniably, private governance worked more effectively that legal structures could have. He recounts how PayPal uses private governance to ensure good faith on the vast majority of transactions; transactions that are too small to make legal recourse worthwhile. He recounts the successful use of private police forces in San Francisco when the government was unable or unwilling to deal with threats. He also spends a chapter talking about self-governance, which can be more successful than we allow often simply because of common grace. Stringham spends a chapter outlining the role and benefits of arbitration. He also helps to explain how private governance actually helped mitigate the 2008 financial crisis and how government action significantly contributed to the problems.

Whether you accept his final thesis or not, the examples he provides all illustrate the possibility of significant, complex forms of private governance that help markets and the people who engage in them flourish.

In the last few chapters, Stringham seeks to show how government strips away agency from the customer by intruding in the relationship between the customer and the company. He argues that more often than most acknowledge, governments cross over the threshold from helping to hurting those in the market. Surprisingly, he applies his thesis to the economic philosophy of Hayek and argues that Hayek was too strongly reliant upon government to regulate the market. Stringham concludes the book with an appeal to continue to value private governance, to argue for it, and to seek to reduce imperial entanglements in the market as much as possible.

Analysis and Conclusion

Stringham’s thesis is thought provoking. He argues it well and provides a number of case studies that illustrate clearly how private governance succeeded when most people would expect it to fail. While he didn’t pull me all the way into his camp in eschewing reliance on government enforcement, he does provide a great deal to reflect upon.

Significantly, it isn’t clear that Stringham adequately considers that lack of parity between customers and many corporations. For example, mandatory arbitration clauses are now included in many contracts as a standard feature. So, for example, customers defrauded by Wells Fargo’s malicious creation of accounts on their behalf were prohibited from legal action because of an arbitration clause. When there are no other legitimate options (most banks use some form of this clause), it creates a situation where the customer gets a far worse deal by some accounts. There is more to deal with on this topic, so I hope to conversation continues in the future.

Private Governance: Creating Order in Economic and Social Life
$34.48
By Edward Peter Stringham, Edward P. Stringham, Edward Stringham

Note: I was given a gratis copy of this volume with no expectation of a positive review.