State-free economy?

I argued earlier this week that, as a matter of historical fact, Western economies have not been state-free zones. My question here is more theoretical and general: Is it even possible to have a state-free economy?

Yes, at a small scale, in, say, a tribal economy. But then in a tribal economy, there is barely a “state” to intervene or refrain from intervention. Certainly, there is nothing like the modern bureaucratic state. For modern economies, the state has an indispensable role.

At a minimum, the state is the guarantor of contracts, and functional economies depend on reliable contracts. Virtually every time two individuals or two companies enter into a contractual agreement, they invoke the legal power of the state. (Exceptions occur when a contract includes clauses that require private arbitration in the case of a contract dispute.) In modern economies the most significant economic activity is contractually protected, and the state is potentially involved in all of those. Without the “backup” of state enforcement of contracts, economic actors would not have enough confidence to enter into productive and lucrative agreements with partners (who are sometimes virtual strangers). They wouldn’t be sure what to expect. State-enforced contracts reduce risks and encourage entrepreneurship.

Also at a minimum, the state is the guarantor of property rights. The difference between what Hernando de Soto calls the “undercapitalized sector” that is the world of the poor and the capitalized economies of wealthy is, de Soto argues, largely a measure of property rights. The poor have assets, lots of them. But they do not have legal ownership of those assets, and so the assets cannot be used as capital. They resolve this by informal quasi-contractual relations. De Soto says that “their only alternative is to live and work outside the official law, using their own informally binding arrangements to protect and mobilize their assets. These arrangements result from a combination of rules selectively borrowed from the official legal system, ad hoc improvisations, and customs brought from their places of origin or locally devised” ( The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else , 23). If the undercapitalized poor could become legal, they could use their assets to build businesses and rise from poverty.

In short: For a modern economy to be functional at all, the state has to have some economically-relevant role. All this is well understood by even the freest of the free market economists. Thomas Sowell writes ( Basic Economics: A Citizen’s Guide to the Economy , 237 ): “A modern market economy cannot exist in a vacuum. Market transactions take place within a framework of rules and require someone with the authority to enforce those rules. Government not only enforces its own rules but also enforces contracts and other agreements among the numerous parties in the economy.”

Free market rhetoric, however, often ignores and obscures these realities. Opposition to state “intervention,” for instance, obscures more than it illuminates. “Intervention” implies that the state is “outside” reaching “in.” For at least some of the state’s involvement in economic life, that is not what happens. Rather, the state is “inside” economic arrangements from the outset (as the enforcer of contracts and property rights, for instance).

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