Most economists assume that markets depend on government to enforce contracts and rules against default or fraud. With small transactions, however, the cost to use the legal system far exceeds the value at stake in a contract, and even with large contracts, the legal system often cannot solve problems quickly enough to be helpful for companies. This article focuses on four real stories that illustrate how market participants solve problems privately rather than through law and then concludes with a fable to help illustrate that point.
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Von Mises ( 1998, p. 720) writes, “Beyond the sphere of private property and the market lies the sphere of compulsion and coercion; here are the dams which organized society has built for the protection of private property and the market against violence, malice, and fraud. This is the realm of constraint as distinguished from the realm of freedom. Here are rules discriminating between what is legal and what is illegal, what is permitted and what is prohibited.” He goes on: “Thus, within the sphere of private property and the laws protecting it against encroachments on the part of violent or fraudulent action, there is no antagonism between the interests of the individual and those of society.”
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Stringham, E.P. The fable of the leeches, or: The single most unrealistic positive assumption of most economists. Rev Austrian Econ 30, 401–413 (2017). https://doi.org/10.1007/s11138-017-0402-3