On private governance as the key to modernity:
Judges, police, and regulators are a deus ex machina. Government is often dysfunctional and crowds out private sources of order, or it is simply absent or too costly to use. That means parties can either live with their problems or attempt to solve them. In some cases solutions have yet to be found or are too difficult to implement. Such is the world. But quite often solving problems is a profit opportunity and the more at stake, the more potentially profitable the solutions. Throughout history we can see lots of examples of private parties benefiting by figuring out better ways of facilitating exchange or protecting property rights. These protections of the market come not from government but from the market.
Private governance is responsible for creating order not just in basic markets but also in the world’s most sophisticated markets, including stock markets, futures markets, and electronic commerce. The role of private governance in enabling stock markets and modern capitalism is one of the least known but most important achievements in the history of the world. Private governance also protects contracts and property rights in scores of other markets. Private governance can be found working in ancient and modern societies, in small and large groups, among friends and strangers, and for simple and extremely complex transactions. It often exists alongside, and in many cases in spite of, government legal efforts.
The invisible hand analogy in economics sheds light on underappreciated processes of coordinating behavior, and the study of private governance sheds light on similarly underappreciated mechanisms for creating order. Private governance works behind the scenes so most people miss it, but it makes the modern world possible.
(We haven’t seen anything yet.)