This month the Institute for Humane Studies and the Mercatus Center co-sponsored a fascinating seminar on the Law and Economics of Space Policy in Arlington, Virginia. Dr. Alexander Salter, a professor of economics at Rawls College of Business and a Comparative Economics Research Fellow at the Free Market Institute, Texas Tech University, presented his paper, Ordering the Cosmos: Private Law and Celestial Property Rights, on how a private legal system could protect property rights despite Article II of the Outer Space Treaty. (I have my own issues with whether Article II actually prohibits private property in Outer Space, but Salter’s ideas give me hope that it might not matter). He proposes a purely private legal system for space commerce to make up for any lack of government enforcement of private property rights.
The discipline of continuous dealings can be self-enforcing. Salter envisions self-enforcing property rights and rules for private parties to adjudicate their own disputes. He acknowledges the problems posed by game theory’s Prisoner’s Dilemma, where two individuals face the choice between respecting each other’s property rights or taking the other’s property. Respect results in them getting to keep their own property. But if one of them defected from the norms of civilized conduct that person could get double the property. Without a sovereign to enforce their respective property claims, the property-maximizing approach (if I am not abusing the lingo here) would be to go barbarian. As Salter notes, however, the scenario is limited in that it assumes a one-time interaction between the two parties, which is not realistic. In real life, there should be multiple interactions over a lifetime. If one of them were to defect, the lost trust would hinder future dealings. As Salter explains:
Social scientists call this the discipline of continuous dealings: since the gains from defection are gained only once, but the gains from cooperating extend into the indefinite future, rational individuals will be much more likely to cooperate when they repeatedly interact.
Adding additional players strengthens the tendency for cooperation because of the reputational effects of behaving badly. Space commerce, Salter posits, will select for patient players who can foresee the consequences of failing to cooperate. Large up front investments and long lead times before seeing positive cash flow do not reward the impatient.
History shows that self-enforcement can work. The international stage itself constitutes an example of the kind of cooperation Salter envisions. There is no king of the world, and “the world’s polities exist in a ‘state of nature.’” Yet international trade and commerce still manage to happen in a “sophisticated private and voluntary legal system.” The historical roots for this system extend all the way back to the 9th and 10th centuries, when Europe’s trade began recovering from the collapse of the Roman Empire in the West. Merchants developed law enforced in private, merchant-developed courts. This medieval lex mercatoria “was a system of self-enforcing property rights according to legal rules that emerged out of dispute resolution among interested parties.” The merchant courts, Salter explains, developed their own rules of evidence, allowed for consulting experts, and provided quicker decisions than the national courts of the time. Because the courts had no formal enforcement power, enforcement relied on reputational effects. Failure to comply with a decision would brand a merchant a defector and an unsafe trading partner. (Even without the internet).
Private courts have not vanished, even with the court systems of the modern nation state. Salter explains that nowadays at least 90 percent of international commerce contracts provide for private arbitration in the event of a dispute.
The desirability of private law. To determine the desirability of private law, Salter first explores the difference between organizations, such as corporations or regulatory agencies, and emergent or spontaneous order (called a cosmos). A market is an example of an order. A market has a tendency toward efficiency as millions of individuals somehow cooperate even though they don’t know each other or even all the conditions of the market. Prices—continually adjusting in response to changing conditions of supply and demand—provide the substitute for individual omniscience.
We also see orders in the creation of law. Where a regulatory agency’s rules are created by an organization, judicial decisions in a common law legal system exhibit the characteristics of an order. Under a common law system, whether public or private, and under lex mercatoria, “rules that do a good job of providing both stability and flexibility are likely to be discovered and maintained, while rules that do a poor job are likely to be discarded.” Innovation may take place at the margin as new circumstances extend the application of legal principles to new situations.
Both the market and legal systems are orders that generate information and align incentives. In a private legal system the reputational effects tend to keep the arbitrators impartial and disputants willing to abide by private arbitration. The lower costs of a private legal system tend to get passed on to consumers. The feedback mechanisms keep the order flexible, and the order itself stable enough for planning and investment purposes.
Do read the whole paper to best appreciate the discussion of benefits.
Pun acknowledgment: Now that we know the other meaning of cosmos, we can doubly appreciate the orderly aspects of the paper’s title.