1This conclusion is qualified, for this market as for other markets, by the possibility of the usual sorts of market failure. In particular, since the legal rule applying between A and B is negotiated on their behalf by their protection agencies, the decision will not take account of effects on C. Consider the case of intellectual property. When B agrees to respect A's intellectual property, the result is an increased incentive for A to produce such property, which may benefit others who use it. Such benefits will not be taken into account in the negotiations that determine whether or not B makes such an agreement. Similar problems will arise with pollution law, where A's right to sue B for polluting his air results in a reduction of B's emissions and thus an external benefit for A's neighbor C.


This problem is not part of the argument Cowen offers for why anarcho-capitalism is unworkable, and I have therefore not discussed it in the body of this article. Its implication is that the legal rules generated by anarcho-capitalism will not be perfectly efficient. That is not, however, a reason to prefer the rules generated by other institutions, unless we have some reason to expect them to generate efficient rules. Arguments for the efficiency of the legal rules generated by ordinary political processes are, however, weak or nonexistent. For an attempt to argue that the common law tends to generate efficient law, but not, in my view, a convincing one, see Posner (1992, pp. 254-255. 535-536).

2This omission was pointed out in a perceptive review of The Machinery of Freedom by James Buchanan (1974).

3For one approach to understanding how the solution to such conflicts is determined and maintained, see Friedman (1993).

4For a description of a historical society with some, although not perfect, similarity to what I have described, see Friedman (1979).

5It is unclear to me whether Cowen, in this part of his discussion, intends to describe the institutions proposed in Friedman (1989) or a different set of institutions that he believes they would evolve into.

6There will be some market pressure towards legal uniformity, since there are costs to a system where the legal rules applying to a transaction vary widely according to who you happen to be transacting with. There will also be some pressure towards diversity, designed to satisfy the different legal needs of different segments of the population. It seems likely that the result, as in the U.S. states, will be a small number of basic legal systems, but variations in detail among the legal rules followed by different arbitrators. See Friedman (1989, p. 120).

7Of course, the structure of the two networks is not the same. Protection agencies will typically have contracts with both other protection agencies and arbitrators. Grocery stores may have contracts with other grocery stores providing for joint purchasing, or lobbying efforts, or whatever, but the essential contracts are with suppliers. Perhaps Cowen can show that the particular structure of contracts in the former case somehow leads to an industry that acts like a single firm-but so far as I can tell, he has not done so anywhere in this article.