Democracy, Parliament And The Market

Just a few thoughts on this topic, sparked by a comment on Twitter today…


Why parliamentary democracy? Why not participative democracy? Why not have electorate vote on every decision now we have technology to help?

Well how do you balance competing views? How do you stop everyone just instantly voting for more money for all and bankrupting the country?

How do you stop all in class A from getting their self-interest schemes funded by all in class B, as happens now?

Maybe only people paying tax can vote? Maybe they could have votes proportional to the amount they’re willing to pay in tax – one tax pound = one vote? A voluntary subscription? And it becomes truly participative. Then no vested interest group can tax another group, people only spend on schemes that they want and are prepared to contribute towards, in the proportion they want: they have to prioritise. And if they want to raise money now to spend against their future tax deposits, then why not? But it would have to be guaranteed with a mortgage against their assets to ensure they pay back the borrowed monies in the future. No one could borrow more than the assets they have (or the lender is willing to risk against those mortgageable assets).

Hang on, if we’re going to let our citizens spend their taxes on the projects they want to contribute towards then why bother having the intermediary of government? Why not let the people choose these services without tax, but directly? What a great idea? Let’s call it the market?

David Friedman: Law And The State

The third of David Friedman’s evening lectures was hosted by the Adam Smith Institute and held at the National Liberal Club. The irony of the venue and the current state of liberalism in the UK was not lost on the attendees. It was introduced by Eamonn Butler, Director of the ASI, and very well attended – about 130 attendees in total.

Private Property

David Friedman started the talk with a discussion of private property and the old falsehood: that private property only exists because of the state. He used territorialism predating the human race, and not specific to our species, as the proof of this falsehood.

He challenged us with a puzzle: how did we get out of the Hobbesian state of nature? Why do we behave in a peaceful way? He went on to discuss commitment strategies that are mutually recognised by all involved. This approach exists without the state (and his example of parking your car in snow-bound Chicago is very collaborative, with anarchistic overtones). He suggested that he thinks of rights as a behavioural category.


His next area of discussion was contracts and the challenge: how do you enforce contracts without governments?

Friedman used as an example Imperial China ceding the island of Formosa (now commonly known as Taiwan) to Japan. Chinese law had no contract or civil law. What we would regard as breaches of contract were treated as criminal (cheating or swindling); they were reported to a magistrate and then pursued as a criminal matter, if the magistrate could be bothered. This resulted in very complex contract interactions. (See his online article for more information here).

David then moved on to cyberspace and how difficult it is to enforce contract law; but as he pointed out there are ways:

Two basic mechanisms:

Firstly he mentioned the ‘discipline of constant dealing’ – if you deal with someone frequently enough then you trust them. If they cheat you then you won’t do business with them again.

Secondly he covered reputational interests. As an example he suggested a vendor that may offer “money back, no questions asked”. If they broke this contractual commitment then the mechanism to resolve this is ‘informational enforcement’ – that is letting others know that you beach your commitments – effectively reputational enforcement.

Other private contractual mechanisms do exist, such as arbitration, which is commonly used in the UK and USA, or deposits, which are effectively holding something of value hostage, for example in escrow.

Law in general

David’s last area for discussion was law in general, that is tort etc.

Friedman stated that a good deal of what is really ‘law’ happens outside the state. e.g. contracts, American Arbitration Service, legal interpretation, a system of norms, etc. He then briefly discussed a number of examples of societies with their own private law, such as the Amish (basically anarchists), Saga-era Iceland and Somali law, which is similar to Iceland.

He also mentioned self-enforced law, such as laws being produced on the free market. This is an interesting area for further discussion.

The State

David then discussed the state and its shortcomings where law is concerned. He described a ‘simple-minded explanation’ of why democracy works (for the state, that is, not for the general populace). The voter has such a low marginal benefit for keeping track of politicians, there is little incentive for individual to monitor them (one in several million chance your vote makes a difference). Where the incentive and ability to compare private systems is possible, this is not the case for public systems; therefore laws under a competitive market are inherently better.

As he stated “we as libertarians believe liberty works” and so we believe that private laws will generally be more libertarian. So, for example, if the people who want to ban heroin can outbid those who want to use heroin then it will be banned; but in a libertarian world this is unlikely to happen.

Friedman then said “I reject the Whig theory of history, that institutions get better over time” and asked the question: “is child protection better under state law?” Children are a difficult case in politics as kids generally have no property or votes.

David mentioned his paper ‘Making sense of English law enforcement in the 18th century‘ as in this period there only existed civil law – the prosecutor was the party offended against. Between 1830-1870 this system changed from no public prosecutors, via paid constables (for the first time) and statutes.


At the end David answered a few questions, one of which was from Brian Micklethwaite. He asked whether David was still happy with his most famous book Machinery of Freedom. David said “Generally yes”, though he cited a conversation he had subsequent to James Buchanan‘s review on the topic ‘who pays for capital punishment’. In this section he thinks he now has stronger answers to back his position.

The link for the video to this session is available here.

David Friedman on Market Failure: An Argument Both For and Against Government

The second of David Friedman’s recent lectures in London was called ‘Market Failure: An Argument Both For and Against Government‘ and was held at the Institute of Economic Affairs on Tuesday the 15th January.

David started by clarifying what he believed was a market failure, as in his view many commonly held examples are incorrect.

Again, as with the previous lecture, Friedman described how resorting to using the state in certain market failure circumstances would be the best course of action if the state was a ‘perfectly wise and benevolent regulator’. As he points out there is however a shortage of perfectly wise and benevolent regulators. He then elaborated on this point with his hypothesis, and supporting evidence for it, that the state itself is a form of market failure. The one thing that protects from market failures, he said, is property rights.

David stated that politicians have insecure political ‘property rights’ as their tenure is limited by the next election. They therefore always care about short-term effects, that is changes that can be effected before the next election; anything beyond that is significantly less important as it may not be their responsibility. To win the next election they have to appeal to people now, on current delivery, not with promises of wealth in the future (note this ‘time value’ of political delivery is the same effect as used in calculating interest-based decisions, such as return-on-investment and pricing of options).

Friedman also covered his view that tariffs transfer wealth from disperse to concentrated groups. He saw that this transfer in wealth via government tariffs and other taxes is an endemic market failure of the political market. He reiterated his view (and his father’s) that on balance government causes more problems than it solve, even with extreme examples such as poverty. To support this claim he mentioned a few example mechanisms that make overall poverty worse: minimum wage laws, immigration controls and other barriers to entry (e.g. licences).

At this point David mentioned the old protectionists favourite metric: the balance of payments deficit. As he pointed out “you can build cars in Detroit or grow them in Iowa: send wheat off on ship into pacific and it comes back with Honda cars on them”.

As with all three of David Friedman’s London talks during his visit it was interesting and informative; in addition David’s love of classic mythology and historical examples of successful libertarian societies are used to illustrate his talks.

For more information on David Friedman’s views on market failure and how this can be dealt with without a government there is an interesting paper of his here.

I will put the link to the video live once it appears on the IEA’s website.