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An implicit assumption in many normative debates is that private solutions cannot be relied upon for complex problems. Can private governance facilitate cooperation in sophisticated transactions, in large groups, in heterogeneous populations, under conditions of anonymity, or across long distances? Or will problems such as free riding and prisoners’ dilemmas lead to market failure? All of these are empirical questions whose answers are usually assumed rather than investigated. Yet mechanisms of private governance are far more ubiquitous and far more powerful than commonly assumed. Mechanisms of private governance work in small and large groups, among friends and strangers, in ancient and modern societies, and for simple and extremely complex transactions. They often exist alongside, and in many cases in spite of, government legal efforts, and most of the time they are totally missed. The more that private governance solves problems behind the scenes, the more people overlook it and misattribute order to the state. Milton Friedman, for example, recognizes that private rule enforcement could work, but considers it rare: “I look over history, and outside of perhaps Iceland, where else can you find any historical examples of that kind of a system developing?” (Doherty and Friedman, 1995).3 After reading this book, I hope Friedman would answer instead that private order is all around us. Private governance is everywhere and responsible for creating order not just in basic markets but also in the world’s most sophisticated markets, including futures and advanced derivatives markets. If the success of private governance were limited to the examples in this book, the track record should be rated superb. Yet they are a fraction of what has worked and will work in the future. I hope this research inspires others to document some of the countless mechanisms that have made markets as robust as they are. Research in private governance not only
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Edward P. Stringham (Private Governance: Creating Order in Economic and Social Life)