Chapter 7: Do Contracts Require Formal Enforcement?
* Peter T. Leeson INTRODUCTION Patrick Gunning’s ‘Towards a Theory of the Evolution of Government’ attempts to explain the emergence of government by ‘its role as a provider of the service of contract enforcement’ (Gunning 1972: 19). According to Gunning, anarchy is characterized by the Hobbesian state of nature. Specifically, he defines it as ‘social interaction under uncertainty’ (ibid.: 25).1 ‘It is true,’ Gunning tells us, ‘that for infinitely recurring contacts between two persons . . . certainty will emerge,’ but he adds that, ‘contacts are not likely to be infinitely recurring.’ As a result, ‘continuing uncertainty about the behavior of others in potential mutually beneficial trading situations’ pervades anarchy (ibid.: 19). In Gunning’s essay, in order to alleviate uncertainty in trading, trading partners hire a third-party enforcer to ensure that contracts made are honored. The traders grant the enforcer the right to use coercive means ‘to impose the most severe penalties on both’ parties in the event that one or the other breaks the terms of the previously agreed-upon contract. In this way, Gunning states, out of an otherwise ‘unmet demand for contract enforcement,’ government is formed (ibid.: 26).2 This chapter uses the logic of individual interaction under anarchy, economic history and the insights of experimental economics to critically explore Gunning’s claim that government is necessary for contract enforcement. Section 1 distinguishes coercive and non-coercive enforcement mechanisms. Section 2 explores the extent to which society requires third-party enforcement mechanisms to function properly. Section 3 considers contract performance in...
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