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The Impetus for Recognizing
Private Property and Adopting
Ethical Behavior in a Market
Economy: Natural Law,
Government Law, or Evolving
Self-Interest

Bruce L. Benson*

I.
Introduction

ises (1949, p. 725) convincingly argues that, given the
existence of the long-run objectives instilled by private
property rights, cooperation in the form of division of labor
and trade emerge naturally; and therefore, under these circum-
stances, “there is no need to enforce cooperation by special orders or
prohibitions.” His explanation is clear: when private property rights
are defined and enforced, the

reason why the market economy can operate without government
orders telling everybody precisely what he should do and how he
should do it is that it does not ask anybody to deviate from those lines
of conduct which best serve his own interests. What integrates the
individual’s actions into the whole of the social system of production

*Bruce L. Benson is distinquished research professor of economics at Florida State
University.

This paper was prepared for consideration for a Ludwig von Mises prize to be
awarded at the Mises Institute’s 10th anniversary conference, October 9-11, 1992. The
paper draws from and expands upon a manuscript entitled “The Evolution of Values
and Institutions in a Free Society: The Underpinnings of a Market Economy,” prepared
for the International Conference on the Unity of Sciences, held in Seoul, Korea in
August of 1992. It is also part of an ongoing research project on “The Evolution of Law:
Custom Versus Authority” which has been supported by the Earhart Foundation with
Fellowship Research Grants for the summers of 1991 and 1992.

The Review of Austrian Economics Vol.6, No. 2 (1993): 43-80
ISSN 0889-3047

43


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44 The Review of Austrian Economics Vol. 6, No. 2

is the pursuit of his own purposes. In indulging in his “acquisitive-
ness” each actor contributes his share to the best possible arrange-
ment of production activities. (Mises 1949, pp. 725-26)

But where do the property rights come from? Some suggest that there
is a “natural law,” perhaps given by some superhuman power (or by
the conscience of wise and decent men) which also has entrusted
authority into the hands of enforcement institutions. Another answer,
legal positivism in the tradition of Hobbes and Austin, typically
identifies law with observed legal institutions: generally the state.
This view assumes that without a monopoly in police and/or military
power by a coercive centralized authority, anarchy characterized by
continual conflict will exist, and that whatever the state defines as
law is “law.” Thus, the state is the necessary prerequisite to the
establishment of the fundamental ethical behavior that supports a
free market: Presumably individuals will not respect private property,
fulfill obligations, or recognize contracts unless a coercive authority
forces them to do so. In fact, legal positivism is closely related to the
natural law. As Mises (1985a, p. 11) suggests, “A new type of supersti-
tion has got hold of people’s minds, the worship of the state.”

Mises correctly rejects the natural law doctrine. For example, he
(1949, p. 720; also see p. 146; 1985b, pp. 4449, 82) explains that rules
and laws are made by people for specific purposes: there is “no such
thing as a perennial standard of what is just and what is unjust. . . .
All moral rules and human laws are means for the realization of
definite ends. There is no method available for the appreciation of
their goodness or badness other than to scrutinize their usefulness
for the attainment of the ends chosen and aimed at.” In a market
economy, the ends are the gains from trade that arise given recogni-
tion of private property, and the resulting long-run increases in
wealth for those involved. And as Mises says:

there is nothing inhuman or mystical with regard to the market.
The market process is entirely a result of human actions. Every
market phenomenon can be traced back to definite choices of the
‘members of the market society. The market process is the ad-
justment of the market society to the requirements of mutual
cooperation. (1949, p. 258)

Mises also rejects parts of the legal positivist view. In fact, he
(1985b, pp. 47-48) suggests that “[t]he chief accomplishment of the
natural law idea was its rejection of the doctrine (sometimes called
legal positivism) according to which the ultimate source of statute
law is to be seen in the superior military power of the legislator who


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Benson: Private Property and Ethical Behavior 45

1s in a position to beat into submission all those defying his ordinance.
...1t1is an illusion to deny that the best system of laws cannot be put
into place unless supported and enforced by military supremacy.”
There clearly are, in Mises’s mind, appropriate and inappropriate
laws (e.g., see 1985a, pp. 46-50). For instance, he emphasizes (1985a,
p. 58) that “[glovernments have always looked askance at private
property. . . . It is the nature of the man handling the apparatus of
compulsion and coercion . . . to strive at subduing all spheres of
human life to its immediate influence.” And he maintains that one
function of the “law” is to constrain the discretionary application of
coercive powers by officeholders and bureaucrats (1983, p. 76). Yet,
Mises does not take the final step and reject all of tenets of legal
positivism. He accepts the view that a state’s authority is essential
for controlling individual’s tendencies toward unethical behavior:

The state is essentially an apparatus of compulsion and coercion. The
characteristic feature of its activities is to compel people to behave
otherwise than they would like to behave. . . . With human nature as
it is, the state is a necessary and indispensable institution. The state
is, if properly administered, the foundation of society, of human
cooperation and civilization. (Mises 1985a, pp. 46-47)!

Without the state, Mises (1985a, p. 48) expects that anarchy a la
Hobbes will prevail. In fact, despite recognizing that the state is
always a threat to property rights, Mises (1949, p. 725) maintains
that it is also the source of those rights, or at least of their protection:
“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. . . . here are rules discriminating
between what is legal and what is illegal, what is permitted and what
is prohibited.”

The Hobbesian jungle is not the only alternative to the state,
however. Indeed, there is another possible source of property rights
and behavioral rules, which a direct extension of Mises’s analysis of
self-interest incentives for cooperation under private property can
explain. Thus, the purpose of the following presentation is to extend,
to a more fundamental level, the theoretical explanation offered by
Mises as to “why the market economy can operate without govern-
ment orders telling everybody precisely what he should do and how
he should do it,” by demonstrating that the same reasoning also

1Also see Mises (1983, p. 18; 1985a, pp. 48-50), and footnote 13.


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46 The Review of Austrian Economics Vol. 6, No. 2

applies to incentives for cooperation in establishing, recognizing, and
enforcing private property rights.” Given long-run goals rather than
short-run concerns, individuals have incentives to enter into coopera-
tive arrangements in order to reduce their costs of defending posses-
sion claims and to enhance the property’s value by increasing the
potential for mutually beneficial interaction, including division of
labor and market exchanges. As Rothbard (1970, p. 3) contends,
“no State or similar agency contrary to the market is needed to
define or allocate property rights. This can and will be done by the
use of reason and through market processes themselves; any other
allocation or definition would be completely arbitrary and contrary
to the principles of the free society.” Section II of the following
presentation explains why and how self-interested individuals
within a particular group will voluntarily adopt the behavioral
rules and develop the basic institutional framework that underlies
and facilitates a free market, as well as other mutually beneficial
interactions. The fact is that even though the concept of a perennial
“natural law” is erroneous, “customary law” can evolve naturally or
spontaneously, just as Adam Smith described the evolution of mar-
kets: “as if guided by an invisible hand.” Section III examines the
various competitive and cooperative relationships that can arise
between groups which facilitate the spread of customary law. It is not
contended that the voluntary evolution of the ethical behavioral rules
and institutions of customary law must arise, however. Rather, the
point is that they can and do arise without a coercive centralized
authority. Thus, the concluding section considers the issue of why a
centralized coercive authority appears to be the source of law in
most modern societies. The fact is that the voluntary rules and

Recognize with Mises (1985a, p. 14), that in order to “understand the present state
of political affairs [we] must study history,” and note that the literature on legal history
reveals a substantial amount of evidence which makes “clear that property and contract
were . . . functioning social institutions before state-made laws existed or were even
conceived of” (Fuller 1981, p. 174). Many predominantly voluntary arrangements for
internal order have been described by anthropologists, historians, and scholars study-
ing modern groups and associations (e.g., see [Hoebel 1954, 1967; Barton 1967; Popisil
1971; Goldsmidt 1951; Peden 1971; Friedman 1979; Berman 1983; Trakman 1983;
Umbeck 1981; Berman and Dasser 1990]). Nonetheless, while some economists (e.g.,
Rothbard [1970]; Friedman [1973]) recognize the logical contradiction between a
voluntary, decentralized free market and a centralized, coercive authority for law, an
observation made by Leoni (1961, p. 90) still generally applies: The fact is that even
Mises and others “who have brilliantly defended the free market against the interfer-
ence of the authorities have usually neglected the parallel consideration that no free
market is really compatible with a law-making process centralized by authorities.”
Thus, a theoretical presentation using the game-theoretic jargon of “modern” economics
seems appropriate.


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Benson: Private Property and Ethical Behavior 47

institutions are not universally observable because conflicting in-
centives also exist which are more effectively served by authoritarian
institutions and laws. Indeed, the evolution of law in most societies
is actually shaped by the ebbs and flows of the natural conflict
between customary and authoritarian institutions and norms within
and between groups, a conflict that Mises clearly recognizes (1985a,
pp. 58, 104, 240). The examination of this conflict emphasizes that
the expanding scope of centralized authority does not reflect its
superiority in preserving and protecting private property or in facili-
tating voluntary interactions such as those which characterize a
market economy.

II.
The Evolution of Ethics and Law Within a Cohesive Group

As Mises explains, cooperation in a market process generates long-
run benefits for everyone (1985b, p. 236), but if some individuals focus
on short-run considerations, long-run benefits may not be achieved.
The question is, under what circumstances are incentives tied to
short-run considerations? In the jargon of game theorists: if every
potential market exchange between people involves a discrete, simul-
taneous one-shot game, then mutually beneficial interaction is un-
likely in the absence of some threatened sanction by a coercive power.
Short-run concerns dominate potential long-run benefits. While this
argument applies to cooperative exchange, it also applies to coopera-
tion in the form of collective recognition and compliance with a set of
ethical values. An individual, person A, who bears personal costs
from adopting some type of conduct that constrains him in some way
(e.g., respecting someone’s private property rights and therefore not
using that property without permission, perhaps involving a payment
for the use) will get nothing in return if the other individual, B, does
not adopt a similar set of values and cooperative behavior (e.g., if B
does not recognize A’s property rights). Uncertainty about the behav-
ior of B in the resulting one-shot prisoner’s dilemma-type situation
induces non-cooperative behavior by A, and vice-versa. This pris-
oner’s dilemma scenario does not characterize many kinds of social
interactions, however (Tullock 1985). Individuals choices regarding
interaction with others are part of a continuous process, with each
unique decision representing only one link in a long-time chain of
interaction. For example, most businessmen expect to be active for a
long time and to be involved in interactions with other businessmen
and consumers over and over. Their focus is long run, not short run.

A more appropriate characterization of many interactions might
be as multi-contact or repeated games. Indeed, in a repeated game


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48 The Review of Austrian Economics Vol. 6, No. 2

setting with a finite uncertain horizon, cooperation becomes possible
(a la Luce and Raiffa [1957] and Axelrod [1984]), although it clearly
is not certain.’ This includes the potential for ethical behavior. For
instance, Fuller (1964, pp. 23-24) suggests three conditions which
make mutually recognized duties or obligations clear and acceptable
to those affected. First, the relationship of reciprocity from which the
behavioral obligations arise “must result from a voluntary agreement
between the parties immediately affected; they themselves ‘create’
the duty.” Second, the reciprocal acceptance of the duties must be
equitable in the sense that both parties must expect to gain: the
exchange cannot be one-sided so that one person gains and another
loses, once again emphasizing the paramount role of self-interest
motives. Third, the parties must expect to interact on a fairly regular
basis because the relationship “must in theory and in practice be
reversible.” That is, given reciprocal gains in a repeated game situ-
ation, recognition of common behavioral norms becomes likely as
each individual recognizes that the long-term benefits of remaining
on good terms with the other party by doing so are likely to be greater
than the immediate benefits of not cooperating (e.g., taking another
person’s possessions, committing fraud).

Even a repeated game involves weaker incentives to recognize a
common set of behavioral norms than those which exist in many
situations (Tullock 1985). In particular, each individual chooses to
enter into several different games with different players. Thus, re-
fusal to behave ethically within one game can affect the person's
reputation and limit his ability to enter into other games to the extent
that reputation travels from one game to another. When players value
ongoing relationships with other reliable players more than the
potential benefits associated with refusing to follow accepted behav-
ior in any single game, then the potential for cooperation in the form
of recognition of standard behavioral norms is even greater than
in simple repeated games (Schmidtz 1991, p. 102). Tullock (1985,
p. 1073) refers to this combination of multiple games over time with
reputation effects using Adam Smith’s phrase: “the discipline of
repeated dealings.” The incentives to cooperate that arise from re-
peated games are effectively reinforced, because anyone who chooses
a non-cooperative strategy in one game will have difficulty finding a
partner for any future game (Tullock 1985, pp. 1075-76). Therefore,
in order to maintain a reputation for fair dealings or “high moral
standards,” each player’s dominant strategy is to behave ethically

Actually, the solution still depends on payoffs and other considerations (Tullock
1985, p. 1073).

/


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Benson: Private Property and Ethical Behavior 49

throughout each game, whether repeated or one shot. And as a
consequence, in Mises’s words:

social cooperation becomes for almost every man the great means for
attainment of all ends. An eminently human common interest, the
preservation and intensification of social bonds, is substituted for
pitiless biological competition . . . Man becomes a social being. . . .
Other people become his fellows. . . . For man, until the optimum size
of population is reached, it means rather an improvement than a
deterioration in his quest for material well-being. (1985b, p. 56)

Property rights under “customary law”

Recognition of private property rights and the rights of individu-
als (rules against violence, malice and fraud) are likely to constitute
the most important of the voluntary and mutually recognized duties
or obligations when interactions arise out of reciprocity and reputa-
tion (Benson 1989b; 1990).* After all, individuals must expect to gain
as much or more than the costs they bear from voluntarily constrain-
ing their behavior in light of common behavioral norms. Indeed,
voluntary adoption of commonly accepted behavior (and participation
in the institutions that develop to support those values, as noted
below) is likely to arise only when substantial benefits from doing so
can be internalized by each individual. Recognition by others of a
person’s possessions as that person’s private property is a very attrac-
tive benefit.’ Therefore, individuals have incentives to reciprocate
and recognize other individuals’ property rights in order to reduce
their own costs of defending possession claims, and to enhance the
property’s value by increasing the potential for mutually beneficial
interaction, including market exchanges. From an individual's per-
spective, such behavioral norms involve both rights and obligations

4It should be emphasized that there is no distinction between criminal and tort law
in a customary legal system. However, a large proportion of the offenses which appear
in a modern criminal code are still illegal (e.g., see Hoebel [1954, 1967]; Barton [1967];
Benson [1989a, 1990, 1991b, 1992b]; Popisil [1971]; Goldsmidt [1951]; Peden [1971];
Friedman [1979]). Indeed, the primary concern of such a voluntary system is protection
of private property, including prevention of theft and violence.

SIndeed, private property is a key characteristic of all societies wherein reciprocity
and reputation is the primary impetus for recognition of behavioral norms or values
(Benson 1990). In such a setting, there does not even appear to be any viable reason
for voluntary cooperation that does not involve a relative increase in the degree of
privatization of rights to property for the group. Individuals with no existing claims to
property might conceivably cooperate in order to take property out of the commons and
restrict others’ access to it, for example; but the result, if the group is successful, is that
access and use rights to the property and claims to the benefits from such use become
internalized by the group (i.e., privatized relative to what they were).


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50 The Review of Austrian Economics Vol. 6, No. 2

(recognition of other individual's rights), of course. Indeed, “all such
relationships entail domination and submission” (Leach, 1977, p. 19).
In some cases an individual’s rights dominate, but in other cases the
individual must submit to the interests of someone else: “ ‘the law’,
by which I here mean the customary rules of society, . . . says who
must submit to whom and in what context” (Leach 1977, p. 19). The
use of “customary rules” is appropriate here. Recognition of property
rights becomes a customary obligation. Indeed, even today, as Hayek
(1973, pp. 96-97) explains, many issues of law are not “whether the
parties have abused anybody’s will, but whether their actions have
conformed to expectations which other parties had reasonably formed
because they corresponded to the practices on which the everyday
conduct of the members of the group was based. The significance of
customs here is that they give rise to expectations that guide people’s
actions, and what will be regarded as binding will therefore be those
practices that everybody counts on being observed and which thereby
condition the success of most activities.”

Property rights are more a matter of economic value than of legal
definition. That is why Mises’s (1949, pp. 725-26) arguments about
the reasons for cooperation in a market readily extend to explain
cooperation in rights formation. The fact that the potential for
long-run gains implies that self-interest incentives to cooperate in
market activities arise given recognition of private property rights
also implies that incentives can exist to cooperate in the establishment
of such rights, given that individuals have long-run objectives.

Similar incentives motivate the development of legal institutions;
and when a system of behavioral obligations is backed by institutions
for resolution of disputes and enforcement of obligations, the result
is a legal system (Fuller 1964; Benson 1990). If a legal system
develops from the bottom up through voluntary arrangements, as
suggested here, it can be referred to as “customary” law (Fuller 1964).
A customary legal system is based on individual decisions reflecting
individual self-interest, because each individual finds it beneficial to
obey certain rules (even though each probably recognizes that these
rules may occasionally work to his disadvantage) and to contribute
to the costs of enforcement, in anticipation that the long term benefits
will exceed the costs.

Institutions for Adjudication and Enforcement
of Customary Behavioral Rules

When a group of frequently interacting people is sufficiently
small and stable so that reputations are well-known and trust rela-
tionships are strong, there is little need for a formal institutional


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Benson: Private Property and Ethical Behavior 51

arrangement, perhaps beyond the institution of the immediate fam-
ily. The self-interest impetus for new institution formation can arise
when the potential for beneficial interaction expands to a larger
and/or less stable group than one in which everyone knows everyone
else’s reputations well enough to establish individual trust relation-
ships. As the group expands or becomes more dynamic (e.g., perhaps
because of increasing potential for specialization and division of labor),
individuals will want to interact with increasing frequency and/or with
growing numbers of other individuals with whom reciprocities and
reputation effects may not be firmly established. Such interaction, while
desirable, also increases the potential for dealings with someone who in
fact does not behave as expected, which in turn creates the potential for
a disagreement as a result of theft, deliberate fraud, malicious slan-
der, or some other form of taking of property rights. Therefore, for
such expansion to occur, each party’s commitments to accept com-
monly expected norms of behavior must be credible.

One way to unilaterally try to insure credible commitments by
another party to fairly resolve disputes is “self-help” (Nader and Todd
1978, p. 10): that is, accumulation of human or mechanical assets for
inflicting violence in order to threaten retaliation if the other party
does not behave as expected. This should reduce the probability of an
intentional offense against the individual, and increase the prob-
ability that the individual can make a property rights claim stand.
However, this can also be quite costly. Furthermore, when the threat of
violence is not sufficient and a dispute arises, the relevant institution
for dispute resolution is the “feud” or vengeance (Leach 1977, p. 24).

Unilaterally, an individual in a dispute has only two options
besides violence. He can simply decide that the cost of pursuing the
claim is too high, and drop it, while continuing to interact with the
perceived offender, or he can choose not to pursue the claim, and to
discontinue interactions with the other individual. The relative costs
and benefits of these options will be weighed if an individual unilat-
erally makes a choice; and if the property rights are expected to be
more valuable than continuing the relationship, violence will be
chosen (Nader and Todd 1978, pp. 10 and 18). Both individuals face
similar alternatives, however; so in combination, they actually have
a fourth option. They can negotiate a peaceful solution (Nader and
Todd 1978, p. 10). In doing so, they attempt to delineate previously
undefined property rights or reestablish the rights that have been
intentionally taken. Personal strength still plays a role in negotia-
tion, of course, in that it can establish a bargaining advantage.
Furthermore, direct negotiation may not be successful, so violence or
loses due to acquiescence are still threatened.


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52 The Review of Austrian Economics Vol. 6, No. 2

The high cost of either unilateral actions in maintaining personal
strength or of bearing losses due to acquiescing is an important
source of the incentives that individuals with mutual interests in
long-term interaction have to form groups or associations for mutual
support, even when feuding is still intended to be the ultimate means
of dispute resolution. Transactions costs fall through organization
and institutions for mutual support. That is, the benefits of negotia-
tion (violence avoidance and maintenance of long-term relationships)
are increased. Backing by a combined threat from the group reduces
the probability of an intentional offense, reduces the costs for member
individuals of large personal investments in the tools of violence,
reduces the probability that an individual will have to defend his
property relative to what it would be in the absence of such an
organization, reduces the likelihood that violence will have to be
employed to resolve a dispute, and increases the probability that
negotiation will be successful. Furthermore, when negotiation fails,
the costs of violent dispute resolution are now shared by the group
(e.g., asin a “blood feud”). As feuding begins to create costs for others
in the group, incentives arise to offer lower cost means of non-violent
dispute resolution than direct negotiation. Indeed, mutual support
groups are particularly attractive if group members are obligated to
(1) act as or provide access to third parties that mediate or arbitrate
any dispute between members, (2) assess judgments to make sure
that they are just and consistent with existing property rights, and
if necessary, (3) help enforce the dispute’s resolution (Benson 1990).°

If a dispute between group members arises, for instance, pres-
sure might be brought to bear by the group as a whole (the nature
of such pressure is examined below) to induce mediation, leading to
a settlement viewed to be “fair” by the group at large. A mediator acts
as a disinterested go-between who assists the disputants in their
negotiations. This may allow the parties to remain apart, thereby
avoiding potentially dangerous direct confrontations. Another low

Note that the mutual support group may have many functions besides its legal
role. Primitive kinship groups, for example, might have been primarily concerned with
cooperative production of food, shelter, protection from outside threats (or taking of
wealth from outsiders, as noted below), and/or religious functions. Even though they
also developed a system of customary law to maintain internal order, they may not have
fully recognized the importance of this function for facilitating interaction, attributing
the results instead to some mystical source. As Mises (1985b, p. 240) notes, “Where
people did not know how to seek the relation of cause and effect, they looked for a
teleological interpretation. They invented deities and devils to whose purposeful action
certain phenomena were ascribed. A god emitted lightning and thunder. Another god,
angry about some acts of man, killed the offenders. . .” Also see footnote 8 and related
discussion.


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Benson: Private Property and Ethical Behavior 53

transactions cost alternative may be a mutually acceptable arbitra-
tor, with an agreement by the disputants to accept the arbitrator’s
decision. As Leach (1977, p. 24) notes, however, “even then, the
function of the arbitrator is simply to restore peace; it is not part of
his duty to adjudicate about the rights and wrongs of the conflict or
to inflict penalties.” Given this function, it is not surprising that in
primitive or religious societies an arbitrator can be supernatural
(Nader and Todd 1978, p. 11): “When both parties agree to perform
an ordeal or divination and accept the outcome as a decision, the third
party in the arbitration is a nonhuman agent.”

Rather than assisting in negotiations, the arbitrator considers
the issue and proposes a solution which, ex ante, the parties have
agreed to abide by (a superhuman arbitrator reveals a decision by the
‘failure of one of the parties to survive the ordeal unharmed). The
parties involved must expect the benefits from resolving the dispute
peacefully (clarifying rights or, in the case of an intentional offense,
reestablishing the old right) to outweigh the cost of resolving the
dispute in that manner, or they would not take it to the arbitration
(or mediation) system: for instance, if arbitration is perceived to
involve more costs than other methods of dispute resolution (e.g.,
violence, direct negotiation), perhaps because the arbitrator is ex-
pected to be arbitrary or biased, then arbitration will not be pursued.
Indeed, if one party in the dispute perceives a high cost arising from
a peaceful settlement (e.g., because he knows he is guilty), he can still
resort to violence. Therefore, the “borderline between law and war”
is not fixed (Leach 1977, p. 25), and depending on the individual's
perception of relative costs and benefits, any of the resolution mecha-
nisms discussed here (violence, acquiescing, negotiation, mediation,
and arbitration) can be observed. Of course, when members of a group
are affected by a violent dispute they have strong incentives to raise
the cost of violence for group members, and to lower the cost of
non-violent dispute resolution.

In order to raise the cost of violence, acceptance of non-violent
dispute resolution will become a customary obligation that is re-
quired for group membership. Customary rights and obligations that
induce non-violent dispute resolution can include such things as
family loyalty, obligations for past care, honor (or reputation) and the
shame that comes with disrupting the social order or invoking the
wrath of some supernatural arbitrator. Indeed, resort to violence
without first trying to achieve a non-violent solution will result in
ostracism by the group. That is, refusal to behave according the
accepted rules of conduct, including acceptance of non-violent dispute
resolution, can be “punished” by boycott (i.e., exclusion from some or


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54 The Review of Austrian Economics Vol. 6, No. 2

all future interaction with other members of the group). This is
possible because customary law is tightly bound with all other aspects
of life. Fear of this boycott sanction reinforces the self-interest mo-
tives associated with maintenance of reputation and reciprocal arrange-
ments. It also deters intentional offenses. In other words, because each
individual has made an investment in establishing himself as part of
the community (e.g., establishing a reputation), that investment can be
“held hostage” by the community, a la Williamson (1983), in order to
insure that the commitment to cooperate is credible.

Furthermore, the costs of non-violent dispute resolution will
naturally fall as the institution evolves. After all, since the arbitra-
tor/mediator must be acceptable to both parties in the dispute, “fair-
ness” becomes embodied in the dispute resolution process. As Bucha-
nan emphasizes (1975, p. 68), “Players would not consciously accept
the appointment of a referee who was known to be unfair in his
enforcement of the rules of the game or at least they would not agree
to the same referee in such cases. ‘Fairness’ or ‘justice’ may emerge,
therefore, in a limited sense from the self-interest of persons who
enter into an enforcement contract.”

The arbitrator or mediator will have no vested authority to
impose a solution on disputants (Leach 1977, p. 24). They are not
“adjudicators” backed by coercive power. Under such circumstances,
the ruling must be acceptable to the group to which both parties in
the dispute belong. An arbitrator or mediator’s only real power in
such a system is that of persuasion.” Indeed, as Fuller (1981, pp.
110-11) explains, “Being unbacked by state power. . . the arbitrator
must concern himself directly with the acceptability of his award. He
may be at greater pains than a judge to get his facts straight, to state
accurately the arguments of the parties, and generally to display in
his award a full understanding of the case.” This is particularly likely
if either: (1) the arbitrator is a specialist who wishes to build a
reputation for good decisions in order to maintain or enhance his
position in the market for arbitration services, or (2) the arbitrator
is a highly reputable member of the community that wishes to
maintain that reputation for other reasons. Thus, if the group is large
enough so that disputes are not uncommon, certain highly reputable

In this light, Fuller (1981, p. 134) observes that “A serious study of mediation
can . . . offset . . . [the assumption] that all social order must be imposed by some
kind of ‘authority’. When we perceive how a mediator, claiming no ‘authority’, can
help the parties give order and coherence to their relationship we may in the process
come to realize. . . . that social order can often arise directly out of the interactions it
seems to govern and direct.”


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Benson: Private Property and Ethical Behavior 55

members of the community may be called on to arbitrate disputes so
frequently that they can have some formal designation (e.g., elder-
man, peace chief, consul; see Benson [1989a, 1990, 1992b] and Popisil
[1971]). Alternatively, an approved pool of competitive arbitration or
mediation specialists might develop (see Hoebel [1954]; Barton
[1967]; Benson [1989a, 1990, 1992a]; Berman and Dasser [1990]; and
Peden [1971]).

Given that the arbitrator has convinced the individuals in the
affected group that a proposed judgment should be accepted, the loser
must pay the arbitrated restitution in order to maintain his position
within the group; i.e., he buys back his reputation. Because “fairness”
is essential for arbitration to arise in a voluntary system, the ruling
can also be backed by a threat of ostracism by the members of the
entire group (e.g., see Hoebel [1954, 1967]; Barton [1967]; Benson
[1989a, 1989b, 1990, 1991a, 1991b, 1992a, 1992b]; Berman and Das-
ser [1990]; Popisil [1971]; Goldsmidt [1951]; and Trakman [1983]).
Thus, decisions can be enforced without backing by a centralized
coercive authority.

The nature of the sanction is also likely to vary depending upon
the intentions and status of the offender. After all, the members of a
group wish to deter costly and potentially violent disputes. Disputes
that arise because conditions change in unanticipated ways cannot
be effectively deterred, of course; but intentional violation of custom-
ary behavioral rules by theft, fraud, or malicious slander can be
deterred by explicitly setting a higher payment to buy back the peace.
In other words, when an intentional offense occurs, the payment is
likely to include both restitution and retribution. Indeed, economic
restitution and retribution will be the primary types of punishment
in a system of customary law, but they may not be the only types of
punishment. After all, “a fine is a [relatively] costless punishment:
the cost to the payer is balanced by a benefit to the recipient. It is in
this respect superior to punishments such as execution, which im-
poses cost but no corresponding benefit, or imprisonment, which
imposes costs on both the criminal and the taxpayers” (Friedman
1979, p. 408). It is clearly possible, however, that the members of a
group may hold that some offenses, perhaps intentional murder or
rape, are so heinous that it is impossible to compensate for the
harm inflicted. For instance, medieval Icelandic (Friedman 1979)
and primitive Kapauka (Popisil 1971) legal systems considered
capital punishment appropriate for some crimes. It is also possible
that the rest of an offender’s life will be committed to working to pay
the victim or the victim’s family, even if full restitution is never
achieved.


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56 The Review of Austrian Economics Vol. 6, No. 2

Ostracism can also vary in severity depending upon the behavior
that it is intended to deter. For some minor offenses or disputes,
individuals may face the threat of exclusion from some forms of
interaction but not others. The resulting shame or dishonor may be
an effective deterrent in these minor cases. In many primitive and
religious societies, mythology is invoked, for instance, and the resulting
religious ostracism can be a particularly frightening threat. Obligations
can be characterized as “taboos” punishable through sorcery and super-
natural sanctions, or sins punishable through excommunication. For
more severe offenses or disputes, an offender who refuses to participate
in non-violent dispute resolution or refuses to accept a fair judgment
becomes a social outcast or “outlaw.” In fact, “Expulsion from the group
is probably the earliest and most effective sanction or ‘punishment’
which secures conformity, first by mere actual elimination from the
group of the individuals who do not conform while later, . . . the feat of
expulsion may act as a deterrent” (Hayek 1967, p. 78). As a result of
such ostracism, the individual no longer can go to his support group
for protection. The plaintiff (or perhaps anyone in the group), there-
fore, is free to, and perhaps even obliged, to take physical revenge by
killing the offender and/or taking the offender’s property. Of course,
the threat of such violent punishment can be a significant deterrent
to illegal behavior. Indeed, similar threats apply in all legal systems,
including those that exist today (Umbeck 1981). The fact is, however,
that while boycott sanctions are possible, the primary impetus for
accepting such rulings is positive self-interest rather than fear of
negative consequences. The result can be characterized just as Mises
(1949, p. 283) describes the interdependence arising in a free market:
“[TThe individual is not bound to obey and to serve the overlord. [Yet]
he is certainly not independent. He depends on the other members of
society. But this dependence is mutual.”

Another characteristic of customary law’s sanctions can be pre-
dicted in light of its emphasis on individual rights. As with any
private property right, the right to restitution will be transferable.
An individual might call upon a sub-group (e.g., his immediate family,
his religious congregation, his neighborhood) to assist him in prose-
cuting a strong offender, in exchange for some portion of the settle-
ment, providing the threat necessary to induce that offender to
submit to a nonviolent form of dispute resolution (Hoebel 1967;
Benson 1991a). Alternatively, a marketable claim for a victim can
evolve which can be sold to someone willing to pursue and prosecute
the offender (Friedman 1979, p. 414). This, in turn, helps create
arrangements under which those who violate the rights of the poor
and the weak are pursued and prosecuted. As a customary law system


===== PAGE 15 =====

Benson: Private Property and Ethical Behavior 57

expands and evolves, victims could offer bounties or rewards, but they
might simply sell the right to collect a particular fine. Specialized
firms (thief-takers, bounty hunters) could arise to pursue criminals
and collect restitution; or individuals might contract with firms that
attempt to prevent aggression against clients, pay clients who are
victimized as insurance companies do, and pursue offenders to re-
cover the insurance payment. Marketable restitution rights increase
the probability of pursuit and prosecution, thereby reducing incen-
tives to commit intentional offenses even further.

It does not follow that violence and blood feud will be completely
eliminated under customary law. If one party in a dispute perceives
the cost of non-violent dispute resolution to be too high, even given
the threat of ostracism, a feud may erupt. As emphasized above,
institutions and incentives are developed in a customary law system
in order to enhance the potential for peaceful interaction and mini-
mize the potential for violence; but no legal system, no matter how
threatening, has ever completely eliminated violence. However, in
the event of a feud, customary “rules of war” also generally apply; the
result can often be described as “a kind of ritual game” (Leach 1977,
p. 25). If one party or the other exceeds the customary bounds of the
feud, thereby imposing significant costs on others in the group, they
are likely to bring down the wrath of the entire community, so feuds
tend to be constrained in their scope and duration. Thus, even when
violence arises, rights and obligations apply: “there is, in effect,
agreement about how to disagree” (Leach 1977, p. 28).

As Mises (1985b, p. 258) emphasizes, “to deal with social groups
adequately and completely, one must start from the actions of the
individuals,” a condition that clearly applies here. In essence, the
individuals “exchange inputs in the securing of a commonly shared
output,” to use Buchanan’s and Tullock’s words [1962, p. 19]—the
output is the order arising under a commonly accepted set of rules
which develops into a customary system of law. But as a consequence
of this exchange, total resources devoted to the production of credible
threats should fall relative to what individuals acting on their own
would have to invest, and the potential for interaction expands.

Changing Property Rights and the Development
of Contracts in Customary Law

Customary law has been described as an example of natural law.
For instance, Leach contends that

customary law is not viewed as the recent creation of rational men
but as something that was laid down by semi-divine ancestral


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58 The Review of Austrian Economics Vol. 6, No. 2

law-givers in remote antiquity. The justification for conforming to
custom is not that it makes sense, but that “that is what our ancestors
said we should do”. ... There is an implicit social contract with divine
ancestors to obey the rules that they laid down. Failure to conform
to conservative custom amounts to an act of sacrilege which will
automatically bring about supernatural disaster. (Leach 1977, p. 31)

Equating customary law with natural law is very misleading, how-
ever. First of all, even if the rules were passed down unchanged from
ancestors, those ancestors were rational humans, not gods, and they
developed their rules by considering the costs and benefits of doing
so. Second, mythology is important in some customary law systems,
particularly among primitive societies and religious communities;
but it is not relevant in others (e.g., see the discussions of commercial
law in Trakman [1983]; Berman [1983]; Berman and Dasser [1990];
Benson [1989b, 1990, 1992a]). Third, the fact that mythology plays
an important role in some customary law systems does not mean that
the myth actually describes the source of the law. In fact, mutually
beneficial behavior can often fit a variety of norms.? Fourth, and most
significantly, customary law is not static. It evolves and changes as
individuals adapt to meet the needs of new conditions. The important
issues, then, are why did the rules develop in the first place, an issue
discussed above, and why do they evolve and change, rather than how
those rules happen to be explained in particular customary law
systems.

As Demsetz (1967) explains, property rights will be defined when
the benefits of doing so cover the costs of defining and enforcing such
rights. Potential benefits of clarifying existing or developing new
property rights may become evident because a dispute arises, for
example, perhaps implying that existing rules do not adequately
cover some new situation. The parties involved must expect the
benefits from resolving the dispute and of establishing a new rule to

81n fact, mythology appears to be a rational development in itself. Taboos against
incest are common among primitive societies, for instance. These people do not know
why the offspring of incestuous relationships tend to be physically or mentally impaired
but through observation, they learn that they are. Thus, in order to avoid the cost of
caring for such people they decide that the gods have declared such relationships to be
taboo in order to discourage them. In addition, when the costs of obtaining information
exceed the benefits, it is very rational to be ignorant; and similarly, when the desired
behavioral results can be obtained without incurring all of the costs of informing others
of the precise reason for the behavior, then it is rational to do so. Whether the desired
behavior arises because an individual is correctly informed by those knowledgeable of
such things, so that he expects the economic benefits to exceed the cost of behaving
differently, or if he expects a supernatural disaster if he behaves differently, the
outcome is the same.


===== PAGE 17 =====

Benson: Private Property and Ethical Behavior 59

outweigh the cost of resolving the dispute and enforcing the resulting
judgment, or they would not take it to the dispute resolution system.
The arbitrator or mediator will often have to make more precise those
rules about which differences of opinion exist, and at times even to
supply new rules because no generally recognized rules exist to cover
a new situation (Hayek 1973, p. 99). A dispute resolution’s decision
becomes a universally applied rule of customary law only if it is seen
as a desirable rule by all affected parties, however (Benson 1990,
1991a, 1992a). It is not coercively imposed on a group by some
authority backing the court. Thus, good rules which facilitate inter-
action tend to be selected over time (e.g., rules that specify or clarify
private property rights), while decisions that do not turn out to
establish useful rules are ignored.’ For new rules to be accepted by
the members of a group, they generally must be consistent with
individuals’ expectations, so they must build upon or extend existing
values.

Dispute resolution is not the only source of evolving behavioral
rules. Individuals may simply observe that others are behaving in a
particular way in light of a new situation, and adopt similar behavior
themselves, recognizing the benefit of avoiding a confrontation: “It is
always an individual who starts a new method of doing things, and
then other people imitate his example. Customs... have always been
inaugurated by individuals and spread through imitation by other
people” (Mises 1985b, p. 192). As a consequence of adopting such
behavior, the individuals create an obligation to one another to
continue the behavioral pattern. A new contract form may develop,
for instance, that improves on existing forms by reducing the poten-
tial for uncertainty. Others see the benefits of the new contract form
and adopt it as well, so it becomes a standard practice in such
situations. Fuller (1981, pp. 224-25) explains that “the term con-
tract law, therefore, refers primarily not to the law of or about
contracts, but to the ‘law’ a contract itself brings into existence . . . If
we permit ourselves to think of contract law as the ‘law’ that parties
themselves bring into existence by their agreement, the transition

9This description of the evolution of customary law may appear to be quite similar
to the analysis of common law that has lead several legal theorists to conclude that it
produces “efficient” rules (Leoni 1961; Rubin 1977; Priest 1977; Hayek 1973, pp.
94-103). However, there are actually important points of departure. For instance, while
much of common law was simply a codification of the basic norms common to Anglo-
Saxon society (that is, customary law), common law was also authoritarian royal law,
and therefore, even during its earliest development some aspects of it were imposed by
authoritarian sources described below (Benson 1990). Footnote 24 contains related
discussion.


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60 The Review of Austrian Economics Vol. 6, No. 2

from customary law to contract law becomes a very easy one indeed.”
Customary law and contract law are typically differentiated much
more sharply than is suggested here. However, Fuller argues that a
sharp distinction is inappropriate:

if problems arise which are left without verbal solution in the parties’
contract these will commonly be resolved by asking what “standard
practice” is with respect to the issues in question. In such a case it is
difficult to know whether to say that by entering a particular field of
practice the parties became subject to a governing body of customary
law or to say that they have by tacit agreement incorporated standard
practice into the terms of the contract.

The meaning of a contract may not only be determined by the area of
practice within which the contract falls but by the interaction of the
parties themselves after entering the agreement. . . . The meaning
thus attributed to the contract is, obviously, generated through
processes that are essentially those that give rise to customary
law. . . . [In fact,] a contract [may be implied] entirely on the
conduct of the parties; . . . the parties may have conducted them-
selves toward one another in such a way that one can say that a
tacit exchange of promises has taken place. Here the analogy between
contract and customary law approaches identity. (1981, p. 176)

The expanding use of contract and development of contractual ar-
rangements is, in fact, a natural event in the evolution of customary
law. As customary legal arrangements evolve and are improved upon,
they tend to become more formal, and therefore, more contractual. In
addition, as inter-group interaction develops and expands so that the
trust relationships that characterize intra-group interaction do not
apply, conflicts are avoided by explicitly stating the terms of the
interaction a priori; that is, by contracting. A carefully constructed
and enforceable contract can substitute for kinship or some other
localized source of trust.

III.
Inter-Group Interaction:
Competition, Emulation, and Cooperation

No single group is likely to develop its norms and institutions in
complete isolation from other groups. Indeed, other groups generally
exist in close proximity to any particular group (note that the basis
for such groups can but need not be geographic proximity; other
bases include kinship and religious or functional proximity, as in
the “international business community”), and these other groups’


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Benson: Private Property and Ethical Behavior 61

legal systems are likely to be developing in a parallel fashion. Thus,
inter-group competition, emulation, and cooperation become possible.

Since voluntary associations include both the ability to voluntar-
ily join a group, given the individual is acceptable to the group’s
existing membership, and the ability to voluntarily withdraw, inter-
group movements are a distinct possibility (e.g., see Goldsmidt
[1951]; Popisil [1971]; Peden [1977]; Friedman [1979]; Umbeck
[1981]; Benson [1989a, 1990, 1991a, 1991b]). Thus, if rules and/or
institutions develop in one group which differ from the rules and/or
institutions in a parallel group, there will be a tendency for individu-
als to “migrate” to the group whose law best facilitates voluntary
interaction. The coexistence of diverse parallel jurisdictions and legal
systems therefore creates incentives to compete to attract or hold
membership. But, as a result, existing members of all the various
legal systems have incentives to adapt to their own uses many of the
legal concepts and institutions of other groups which appear to be
beneficial. Through imitation of desirable institutions and behavioral
rules developed elsewhere, groups can avoid the potential of lost
membership (and reduced beneficial interaction) to other groups; and
for that reason, too, there is a tendency for the rules and institutions
of each group to achieve the same degree of cohesion and sophistica-
tion as is developing in parallel systems. Not all differences need be
eliminated, but standardization of many rules and institutions across
similarly functioning groups is likely.

The formation of several parallel “localized” mutual support
groups can take on even more functions. For example, a member of
one group may wish to trade with a member of another group, but the
two individuals may not expect to trade frequently so the dominate
strategy is one of non-cooperation. After all, repeated-game and
reputation effects are localized within a group, and there generally
is no potential for a boycott sanction to be applied against someone
who is not in the group.’ It may be that there is considerable
potential for mutually-advantageous interaction between the two
groups as a whole, however, even though each individual within each
group may not anticipate frequent interactions with members of the
other group. That is, the groups of individuals as a whole may be in
a repeated-game situation with one another, with fairly large poten-
tial benefits from cooperation that can be internalized, even though
this is not necessarily true of any of the specific individuals in the
two groups (at least, before inter-group relationships develop). If

There are possibilities of inter-group boycotts, of course. Consumers as a tacitly
organized group might boycott individual producers or producer groups, for instance.


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62 The Review of Austrian Economics Vol. 6, No. 2

members of each group recognize the benefits from inter-group inter-
action, then inter-group legal cooperation may evolve.

Inter-group cooperation is hindered by a significant assurance
problem, however. Each individual must feel confident that someone
from the other group will not be able to take advantage of him and
then escape to the protection of that other group. Thus, some sort of
inter-group insurance arrangement becomes desirable, as well as
establishment of an apparatus for inter-group dispute resolution. For
instance, in order to develop a group’s reputation, the membership
might bond all members in the sense that they will guarantee pay-
ment if a member is judged to be in the wrong in a dispute with
someone from the other group. The mutual support group becomes a
surety group as well (e.g., see Rothbard [1973]; Peden [1977]; Fried-
man [1979]; Benson [1990, 1992b]). Membership in a group then
serves as a signal of reputable behavior to members of another group,
and lack of membership serves as a signal that an individual may not
be reputable. Furthermore, if a member of a group cannot or will not
pay off a debt to someone from the other group, as established by an
acceptable arbitrator, then the debtor’s group as a whole will, in order
to maintain the benefits of the group’s reputation. And as a conse-
quence, the individual for whom the group has had to pay will owe
his own group members rather than someone from a separate group.
In this way the boycott threat comes into play once again. Members
of a group are not going to continue bonding an individual who
generates debts to the group’s membership but does not pay them off,
after all. More significantly, however, because of the large long-term
benefits of intra-group interaction, the self-interest incentives to
maintain intra-group relationships come into play.

A dispute resolution apparatus is essential for inter-group coop-
eration to develop. A judgment involving an inter-group dispute will
have to be considered to be fair by members of both groups, of course.
Therefore, an equal number of individuals representing the group
might serve as an arbitration board for disputes between individuals
from the two groups (e.g., see Goldsmidt [1951]; Friedman [1979]; and
Benson [1990, 1992b]), for example, or a mutually acceptable third
party (i.e., an arbitrator or mediator with a reputation for good
judgment) might be chosen (as in Barton [1967]; Hoebel [1954]; Peden
[1977]; Popisil [1971]; and Benson [1990]). This provides another
reason for the tendency toward standardization of customary law
across parallel groups with similar functions.

A group whose members insist on strictly imposing their own
morality and penalties on outsiders would probably be unable to
initiate inter-group trade or other forms of beneficial interaction. And -


===== PAGE 21 =====

Benson: Private Property and Ethical Behavior 63

if they were able to begin such activity, they would face continual
clashes, followed by boycott sanctions by other groups whose mem-
bers refuse to visit or trade with them. Indeed, if the benefits of
inter-group interaction are substantial, those who hold the norms the
group wishes to impose, but relatively weakly, will leave first to join
other groups, and others will follow as property values and trade
generated incomes decline. Thus, if the membership of a group wishes
to simultaneously facilitate inter-group interaction and impose laws
that differ substantially from the norm in other groups, its members
have strong incentives to inform outsiders of the differences in order
to avoid conflict and minimize the difficulty of maintaining non-
standard laws. Part of the reciprocal agreements with other groups
may be the explicit recognition of differences in laws and procedures
for treating conflicts, for example. No group can effectively enforce
its rules on outsiders without the support of outsiders. Rules for
members of a group may be relatively restrictive, but the rules that
apply to outsiders as a result of interaction will have to be moderated
if the group is to survive in a free and competitive environment. This
in turn implies that as inter-group interactions expand, a hierarchi-
cal jurisdictional arrangement may become necessary. For example,
each localized group may have jurisdiction over disputes between its
members, while disputes between members of a confederation of
different groups that interact frequently are settled by some higher
confederation level court, and disputes between members of even
more dispersed groups from different confederations, such that indi-
viduals from the localized groups do not interact frequently but
individuals from the two confederations do, may go to an inter-con-
federation court (e.g., see Popisil [1971] and Benson [1990, 1992b]).
Note that these courts are not “higher” courts in the sense that one
has some power or authority over others that allows them to overturn
lower court decisions upon appeal. Rather, this is a jurisdictional
hierarchy that defines the role of each court and allows for increas-
ingly more distant interactions. This allows for differences between
the customary law that might be applied within different groups and
between groups (Popisil 1971). Indeed, Llewellyn and Hoebel (1961,
p. 53) point out that the traditional (Western) bias of trying to
delineate some all-embracing legal system for a society as a whole
can be very misleading: “What is loosely lumped as a custom [from
an all-encompassing perspective] can become very suddenly a mean-
ingful thing—one with edges—if the practices in question can be
related to a particular grouping.” They emphasize that an under-
standing of customary law requires that groups provide the points of
reference rather than some “society” as a whole (1961, p. 28): “there


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64 The Review of Austrian Economics Vol. 6, No. 2

may then be found utterly and radically different bodies of ‘law’
prevailing among these small units, and generalization concerning
what happens in ‘the’ family or in ‘this type of association’ made on
the society’s level will have its dangers. The total picture of law-stuff
in any society includes along with the Great Law-stuff of the Whole,
the sublaw-stuff or bylaw-stuff of the lesser working units.”

There clearly are limits to how extensive an inter-group network
of cooperation can be. The limits are not fixed, however. They depend
on the relative costs and benefits of information about other groups
and their customary legal systems. As economic conditions change
the costs and benefits of information can change, so new inter-group
relationships may evolve over time. The costs of establishing inter-
group legal arrangements depend in part on how “distant” the groups
are from one another, where distance can be in terms of geographic
space, or in terms of the behavioral norms that are relevant to the
groups. While customary groups all tend to emphasize private prop-
erty, the costs and benefits of establishing the rights and obligations
relevant to each group can be quite different, so that different norms
are applied. Members of families who join into a larger kinship group,
or members of a religious or commercial community with strongly
shared values, can easily have most everything go as expected be-
cause each individual's expectations about other’s obligations are
very accurate. Even if disputes arise (and quarreling among members
of a family is certainly commonplace) they are very likely to be settled
in an amicable way. On the other hand, where individuals in different
groups do not share significant values, and therefore, where intra-
group behavior is based on substantially different expectations than
inter-group behavior must be, inter-group organizations may fail to
develop. Individuals who do not interact frequently may base expec-
tations on incorrect or prejudicial views of members of the other
group, so mutual incomprehensibility is likely to prevent effective
cooperation.

This discussion implies that a customary legal system is, in a
sense, flawed, or inefficient. Relative to some perfect ideal, this is
certainly the case. However, the ideal against which such a system
must be compared in order to draw a conclusion that the system is
inefficient, is, in general, unobtainable. Thus, in a realistic sense, the
customary legal system is efficient. After all, it results from the
interaction of maximizing individuals. Maximizing behavior means
that the actions taken are never deliberately wasteful. The actions
reflect individuals’ weighing of their expected benefits and expected
transactions costs, so the perceived gains of a decision always should
exceed the perceived costs. Therefore, a decision by individuals in two


===== PAGE 23 =====

Benson: Private Property and Ethical Behavior 65

different groups not to establish cooperative legal arrangements is
an efficient decision. Of course, there may be benefits that the
individuals do not fully recognize, so there may be some potential
benefits from a more extensive legal arrangement that are not inter-
nalized, at least in hindsight, but the fact is that uncertainty and
expected transactions costs exist that may prevent the formation of
an all-encompassing customary legal system. Possibly through coer-
cion a benevolent legal authority could improve on a completely
customary legal arrangement then? Friedman answered this ques-
tion in the following way:

One cannot simply build any imaginable characteristics into a gov-
ernment; governments have their own internal dynamic. And the
internal dynamic of limited governments is something with which
we, to our sorrow, have a good deal of practical experience. . . . the
logic of limited government is to grow. There are obvious reasons for
that in the nature of government, and plenty of evidence. Constitu-
tions provide, at the most, a modest and temporary restraint. As
Murray Rothbard is supposed to have said, the idea of a limited
government that stays limited is truly Utopian. (1973, pp. 200-1)

In addition, the limit on the potential for inter-group interaction may
actually be less significant than it first appears to be. After all, in
reality, as Mises explains,

Man is not the member of one group only and does not appear on the
scene of human affairs solely in the role of a member of one definite
group. In speaking of social groups it must be remembered that the
members of one group are at the same time members of other groups.
The conflict of groups is not a conflict between neatly integrated
herds of men. It is a conflict between various concerns in the minds
of individuals. (1985b, p. 257)

A member of several groups has obligations to other members of each
group and they have obligations to him. Thus, he is in fact familiar
with the behavioral rules of several different groups and is in a
position to facilitate the development of inter-group ties. “Indeed, in
any complex society such as ours, there are almost as many distin-
guishable systems of customary rules and conventions’ as there are
individuals” (Leach 1977, p. 28), and yet people from many of these
different systems interact regularly without having to call upon any
dispute resolution process (not to mention, any legal authority).
Inter-group cooperation appears to be the norm rather than the
exception, and it appears to be quite widespread.


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66 The Review of Austrian Economics Vol. 6, No. 2

It should also be noted that an all inclusive legal system has some
very undesirable results because it eliminates the potential for com-
petition and emulation. For instance, if a dispute arises with someone
else who is also a member of some of the same groups, they might
choose among the groups’ alternative dispute resolution processes.
Indeed, the availability of alternative dispute resolution processes
reinforces the tendency of customary law toward fair dispute resolu-
tions. If one forum is biased, a disputant can demand the use of an
alternative. A compromise is to use a forum that is fair. As Berman
explains,

The very complexity of a common legal order containing diverse legal
systems contributes to legal sophistication. Which court has jurisdic-
tion? Which law is applicable? How are legal differences to be
reconciled? Behind the technical questions lay important political
and economic considerations. . . . The pluralism of . . . law, . . . has
been, or once was, a source of development, or growth—legal growth
as well as political and economic growth. It also has been, or once
was, a source of freedom. (1983, p. 10)

Berman includes the “or once was” phrase in recognition of the fact
that diverse legal systems are increasingly being subjugated and
centralized under the authority of coercive state governments.

IV.
The Conflict Between Custom and Authority

Short-run considerations can dominate under certain circumstances, of
course (Mises 1985b, p. 236), and while individuals have strong incen-
tives to cooperate and avoid conflict when they are likely to interact
frequently (e.g., when long-run considerations dominate), they have
very different incentives when “the discipline of repeated dealings” does
not apply (e.g., when short-run gains appear to outweigh long-run
benefits). Indeed, when wealth enhancing voluntary interaction is un-
likely (or when the gains are not likely to be very large), individuals may
have stronger incentives to take wealth away from the others rather
than attempt some reciprocal arrangement for mutual satisfaction."

Upor instance, as Tullock (1985, p. 1079) notes, once a person's reputation is lost,
there is virtually no reason to behave cooperatively in the future, because the cost of
rebuilding a reputation is extremely high. Therefore, such a person has incentives to
become a thief or to “con” people.

Note that wealth or well-being “does not refer only to concerns commonly called
egoistic but comprehends everything that appears to an individual as desirable and
worthy”; nonetheless, the “fact that most people are eager to get more tangible good is
a datum of economic history” (Mises 1985b, pp. 206-7).


===== PAGE 25 =====

Benson: Private Property and Ethical Behavior 67

The taking of wealth will be resisted, of course, if the potential victim
feels that he is strong enough to resist, so violent confrontation is
likely, particularly if the potential loser is a member of a support
group. After all, one form of mutually beneficial interaction within
the groups described above is in cooperative defense against outsid-
ers, since an important internal function of these groups is the
protection of private property, and such a taking by an external
aggressor is a theft. In order to reduce the cost of such violence, those
seeking transfers must amass sufficient strength to coerce compli-
ance.

One way to reduce the potential for resistance to a transfer effort
is to employ a “professional army.” However, if an individual can
persuade others of a like mind to cooperate and share the cost in a
taking effort (e.g., by serving in an army or contributing financial
support for it) in exchange for a share of the transferred wealth, then
that individual lowers his own costs. Thus, there are incentives to
develop cooperative mechanisms for taking and transferring wealth.
Of course, when some individuals form groups for the purpose of
taking from others, then others have incentives to expand their
groups which share the cost of protection. Indeed, many of the
historical examples of localized support groups whose internal legal
arrangements can be characterized by the customary legal system
described above, were simultaneously involved in warfare with other
groups (e.g., see Popisil (1971); Benson (1989a, 1990, 1991a, 1992b);
Hoebel (1954, 1967); and Peden (1971]). In European tribal groups,
for example, Kingship initially developed for purposes of warfare
(Benson 1990, 1992b). As kingship developed, a centralized hierar-
chical structure of top-down command also developed since this
institutional arrangement proved to be the most effective for the
purposes of warfare.'? During these early developments, however,
kings had no law-making or law-enforcing authority.”

121t does not follow that every kingdom was constantly at war. The competitive
process of emulation of successful military institutions, arms built up, and strategic
alliances between kingdoms, might maintain relatively equal levels of military power
for some time, thereby deterring aggression.

Bpespite the focus on nation-states and their governments, this theory of authori-
tarian law is not simply a restatement of the “rent-seeking” or “interest-group” theory
of government. Perhaps two points will help to clarify this. First, for reasons explained
below, many rules of conduct enforced by governments’ legal apparatus are codified
custom rather than new rules imposed by some authority. Thus, an examination of any
government’s law will reveal many aspects which may not fit a transfer theory. Indeed,
governments have functions which do not involve internal legal order, some of which
may be consistent with a transfer theory (i.e., warfare), but some may not be. Second,
as Mises (1985a, p. 47) recognizes, “not every apparatus of compulsion and coercion


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68 The Review of Austrian Economics Vol. 6, No. 2

Authoritarian Law

Military conquest means that different groups are forced to be-
come sub-groups within a collective kingdom (“kingship” will be used
to describe all such arrangements, and the area over which a military
leader exerts authority will be called a “kingdom”). As more sub-
groups are subjugated by a single centralized military authority, the
potential for taking from one sub-group and transfer to another within
that Kingdom arises. The evolution of kings’ authoritarian roles in
internal law making and enforcement (i.e., legislation, adjudication, and
law enforcement affecting relationships within the Kingdom as apposed
to external relations with other kingdoms), is completely analogous
to the development of the external role of Kingship (Benson 1990;
1992b). That is, a legal system emanating from a centralized
hierarchical authority, referred to here as “authoritarian law,” has
as its primary functions the development and use of rules and
institutions for taking wealth from some and transferring it to
others, and for discrimination among sub-groups on the basis of their
relative power in order to determine gainers and losers. Indeed, in
Europe, authoritarian legal functions were taken on by the kings’
military hierarchy initially, until the increasing demands for

is called a state. Only one which is powerful enough to maintain its existence, for some
time at least, by its own force is commonly called a state.” Historically, powerful entities
that were not geographically defined states or kingdoms, such as the medieval Roman
Catholic Church, have been able to take property rights from others through the use
of authoritarian legal institutions (Berman 1983). Even today, there are other sources
of such law. Consider modern organized crime, for example. These organizations
establish rules of conduct for members backed by enforcement mechanisms and sanc-
tions. Some of their rules and institutions have evolved over time as customary law,
through voluntary interactions of members, but they also use an enforcement appara-
tus and threat of sanctions to extort payments from individuals who do not want to
voluntarily interact with them (e.g., “protection rackets”). Thus, organized crime is like
kingship and modern representative governments in that it uses authoritarian insti-
tutions to take from some individuals within its sphere of influence for the benefit of
those with power. The scope of authoritarian law therefore reaches beyond govern-
ments’ legal arrangements, and it need not cover every aspect of modern government.
Nonetheless, “whatever functions it may assume, the state is always characterized by
the compulsion and coercion exercised” (Mises 1985a, p. 47) while non-state entities
are not necessarily so characterized.

On a related issue, recall the introductory discussion regarding Mises’s view of the
necessity of a coercive state. A group ruled by customary law need not constitute a state,
as typically conceived. Indeed, it might be appropriate to characterize the institutions
and processes of the customary law with Buchanan’s term of “ordered anarchy” (1975,
p. 180). However, von Mises (1985a, p. 93) argues that “The right and true state . . . is
the state in which I or my friends, speaking my language, and sharing my opinions,
are supreme. All other states are spurious.” Thus, Mises appears to mean that at least
some “customary law” group is the appropriate state, although he also rejects the idea
of ordered anarchy (1985a, p. 48).


===== PAGE 27 =====

Benson: Private Property and Ethical Behavior 69

authoritarian law led to its own specialized bureaucratic hierarchy.

In many nation-states, rule by kingship has been replaced by
other sources of authoritarian law, such as elected representative
bodies. Nonetheless, “The essential characteristic features of state
and government . . . are present both in despotic and in democratic
governments” (Mises 1985a, p. 47). Authoritarian law, whether im-
posed by kings or an elected representative assembly, involves the
taking of wealth from relatively weak sub-groups in order to transfer
it to relatively powerful sub-groups, or “interest groups” in reflection
of the self-interest motives of the decision-making authorities (Ben-
son 1990; 1992b): the distinction is in terms of who gets what, “not in
the incentives and motives” (Mises 1985a, p. 5; also see Hayek 1973,
p. 3). Authoritarian decision-makers discriminate between competing
interest groups on the basis of what they can give to the decision-
maker." The self-interest motives of government decision-makers
must be recognized in the context of an authoritarian transfer proc-
ess. Kings were clearly not simply impartial transfer mechanisms.
They demanded (took) transfers for their own benefit when they felt
they had sufficient power, and even when they entered an exchange,
thereby transferring to others, the support gained generally en-
hanced their own wealth and power relative to what it would have
been in the absence of the exchange.

Authoritarian Law and Property Rights

The internal taking/transfer mechanisms all involve property
rights alterations to benefit some at the expense of others. Taxation
is the taking from a resource owner of part of the right to the income
derived from productive uses of property (including labor services),
for example." Another fairly obvious transfer occurs when property

141n competition between national governments, the determinant of wealth trans-
fers is military strength. Military power can be an important discriminatory criterion
in determining internal wealth transfers as well. The control of military forces by earls
and barons was one of the most important considerations in early development of
authoritarian law under the kingship form of government in England (Benson 1990,
1992b), and military power is still a major factor in many non-western countries (e.g.,
the Philippines, Nicaragua, El Salvador, Lebanon, Iraq, South Africa, Yugoslavia, etc.).
The threat and use of military-like terrorism is also an important political factor, and
the ability to threaten political disruption remains an important political consideration
everywhere. Other bases for sub-groups’ political power may be economic power, the
number of members (perhaps because of the potential for physical force, but also
because of the votes it can muster in a representative democracy), and the ability to
organize and voice demands in a political arena.

151ndeed, under kings, a major purpose of taxes and other authoritarian develop-
ments in law was extraction of revenue to support the external function of kingship—
wealth transfer through warfare. As Mises (1985a, p. 3) argues: “Foreign policy and


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70 The Review of Austrian Economics Vol. 6, No. 2

of some kind is confiscated or someone is forced to sell property for
less than its value in a voluntary exchange, and then the property is
given to or used for the benefit of others.'® Other rights modifications
simply place limitation on a person’s use of his property. For instance,
a monopoly franchise simultaneously grants an exclusive right to
produce and restricts or attenuates rights to the use of other indi-
viduals’ resources who might wish to enter that market. All such
transfer activities are completely analogous to theft (Tullock 1967).
An important implication of an authoritarian modification in prop-
erty rights, is that there will be a series of adjustments through time.
Some of these changes are predictable. For instance, once sufficiently
organized power is exerted to cause decision-makers to make an authori-
tarian change in a rights assignment, those who would be harmed by
the change must either organize and apply counter pressure, or resign
themselves to being worse off. The same “prisoners dilemma” arises in
this internal political struggle for property rights as arises in the
external struggle between governments.!” Thus, there is a potential
for spiralling competition between interest groups much like the
spiralling arms build up that typically characterizes inter-govern-
mental competition.'® As the relative strength of interest groups
change, the magnitude and direction of transfers change. Of course,
as a new interest group successfully organizes, it does not follow that
the original rights modification will be reversed. After all, that would
harm the previously organized and already powerful group. Some
modification of the earlier change is possible, but a more probable
response is that the authority will grant some alternative favorable
treatment to compensate the new group for its earlier losses. This
change is likely to harm an as yet unorganized group.” That group

domestic policy are closely linked together; they are but one system; they condition each
other.”

8property rights transfers can alter the behavior of those directly impacted in ways
that benefit other groups as well, so not all beneficiaries need be obvious.

"Recall footnote 11, and recognize that once a sub-group establishes a reputation
as a political interest group intent on achieving transfers, the probability of that group’s
becoming an effective part of a cooperative customary law system is very small, because
the cost of rebuilding a reputation is extremely high.

This kind of competition implies that resources are “wasted” in the sense that
they are used up to “produce” wealth transfers rather than to produce additional
wealth.

Often the changes in authoritarian laws and institutions are slow, or marginal,
as with customary law, but at times they can be large. Indeed, the competition for
authority can turn violent, if the authority attempts to impose a relatively large
transfer at the expense of a potential rival for power. Thus, both evolution and
revolution shape the development of authoritarian laws (Berman 1983). But a new
authority is not likely to radically change the basic institutions of the legal system. After


===== PAGE 29 =====

Benson: Private Property and Ethical Behavior 71

then has relatively strong incentives to organize and seek rights
modifications. Competition leads to emulation, of course, and at times
competing interest groups might cooperate with one anotherin an effort
to defeat yet another group. The repeated “redistributive game” is often
one of coalition formation and splitting (Jasay 1989, pp. 117-21).
Thus, demands for authoritarian rights modifications grow over
time.

Another series of adjustments arising from an alteration in prop-
erty rights is also predictable. Legal authorities can never anticipate
all of the consequences of their rulings (Hayek 1973, p. 51; Mises
1985b, pp. 195-96, 378). “Yet every action. . . . affects the course of
future events” (Mises 1985b, p. 195). After all, property rights provide
incentives which condition behavior, so a change in rights changes
behavior. The customary legal structures described above empha-
sized private property and individual rights. Since authoritarian law
produces rights transfers, it follows that at least initially, authoritar-
ian legal developments imply restrictions on private property and
individual rights (later, interest groups may form which successfully
press for reestablishment of certain rights, of course—those who suffer
loses tend to press for a return to a previous rights structure (Benson
1990, 1992b). At any rate, it is clear that under authoritarian law,
property rights are permanently vulnerable to authoritarian altera-
tions. When rights are significantly altered through authoritarian
changes in law, or when they become sufficiently tenuous due to frequent
legal changes, individuals’ behavior changes. Given a loss of rights, for
instance, individuals will quit performing previously worthwhile
functions. If the functions are demanded by powerful interest groups,
the legal authority will either try to force the previous behavior, or
directly produce the functions (Benson 1990, 1992b).%!

all, those institutions developed for the purpose of transferring wealth and they can
serve one authority as well as another. As Mises (1983, p. 120) explains, “the handling
of the government apparatus of coercion and compulsion, must necessarily be formal-
istic and bureaucratic. No reform can remove the bureaucratic features . . .”

20There are other reasons to expect increasing numbers of rights modifications.
Substantial benefits typically must be anticipated for individuals to incur initial
organizational costs, but once organized, the costs of demanding more benefits are
relatively low. Also, as power increases goals expand.

21g English Kings began to develop a role in law enforcement, they began to shift
the form of “punishment” from victim restitution to a fine paid to the king. The right
to restitution was one important incentive underlying the reciprocal arrangements for
protection, insurance, pursuit, and adjudication. The taking of this right meant that
reciprocal arrangements began to breakdown, and ultimately, kings had to create a
separate hierarchical enforcement apparatus (Benson 1990, 1992b).


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72 The Review of Austrian Economics Vol. 6, No. 2

Authoritarian Institutions

Authoritarian decision-makers could conceivably respond to
growing interest group demands strictly through legislation, and
enforce the resulting law personally, but the fact is that a decision-
making authority’s own time and resources are limited, so increased
demands ultimately force delegation of certain responsibilities to
lower levels of authority: a bureaucratic system must emerge “in the
administrative apparatus of every government the sovereignty of
which stretches over a large area” (Mises 1983, p. 15).?* This is
particularly true in the area of policing. After all, “while there is
usually little need for external force to uphold the customary law, the
authoritarian law . . . needs for its enforcement the prestige and
influence or even the intimidation and physical force of the authority
and his supporting minority” (Popisil 1971, p. 344).

When authoritarian law applies and a dispute arises, litigants
are generally trying to manipulate the existing rights structure.
Wealth transfers are the goal of one party in a dispute and avoidance
of the transfer is the goal of the other. The dispute might be taken
before a third party tribunal to be resolved. Under these circum-
stances, disputes are negative sum competitions: one party wins,
another loses, and both parties incur dispute resolution costs. They
are, therefore, much more adversarial in nature than potential posi-
tive sum customary law disputes (i.e., clarification of private property
rights to generate long-term benefits), and as a result, the authori-
tarian institution of dispute resolution will be different from the
institutions of customary law. Adjudication, in which a judge is
backed by coercion (a police force, prison system, executioner, etc.) to
force the disputants into court and impose his decision, is generally
necessary when negative sum disputes are involved. The authority
may actually take on an adjudication role, as English kings did, for
instance, (and use military forces to back his rulings) although a
judicial (and policing) bureaucracy is certain to arise. As the scope of
legal authority expands and property rights attenuations increase,
the cost of judicial activities, in terms of time and effort, become too
high for the authority.

22There are at least two important consequences of such a hierarchy of delegated
authority: (1) as these bureaus increase in number and/or size the ability of higher
decision-making authorities to monitor their actions decreases, the power of bureau-
crats grows relative to the power of those they supervise, and those they originally
obtained their authority from (Mises 1983, pp. 54, 80); and (2) as their discretion
increases and they grow in size they generally will demand more rights modifications
to enforce (Benson 1990), thus resulting in wealth transfers to bureaucrats (i.e., larger
budgets and/or more power).


===== PAGE 31 =====

Benson: Private Property and Ethical Behavior 73

Since authoritarian law transfers wealth from the weak to the
powerful, a powerful individual or group often can induce the author-
ity to serve as a representative in the litigation process. Indeed, the
legal authority often benefits from the transfer, and while the author-
ity might be in a position to simply take the desired property, there
are strong incentives to make “legitimate” the taking by using legal
institutions, in order to minimize the potential for a public outcry and
organized resistance, and in order to offer the loser a non-violent
arena for protest. Therefore, in matters of authoritarian law the
authority often takes on the role of prosecutor before his own judicial
bureaucracy and then, as legal activities increase, develops a prose-
cutorial bureaucracy for that purpose. Thus, as dispute settlement
becomes one of deciding who gets what in a negative sum transfer
process, rather than a clarification of property rights, “the true plaintiff
becomes the victim, [and] the state becomes the plaintiff’ (Nader and
Todd 1978, p. 38). Indeed, so called “victimless crimes” become increas-
ingly likely as powerful groups demand that new “offenses” be defined
as criminal because they offend the “morality” or transfer potential of
those with power. Clearly, restitution backed by ostracism can no longer
be the relevant sanction since the victim is the loser. Therefore, sanc-
tions take on other forms: capital punishment, confiscation of property,
fines paid to the authority, and imprisonment.

Of course, given the expected cost of adjudication, as well as the
cost of sanctions which can be imposed through coercion, “extrajudi-
cial processes will develop . . . ; so will self-help procedures” (Nader
and Todd 1978, p. 38). The expected loser may be willing to negotiate
an out-of-court settlement, for instance, or accept a mediator or
arbitrator. The impetus for these extrajudicial processes is similar to
the impetus under customary law in that they are means of avoiding
costs. Under customary law, they are used to avoid the cost of
violence, however, while under authoritarian law they are used to
avoid the cost of adjudication. As explained below, however, a legal
authority has incentives to monopolize the legal system, so arbitra-
tion and other sources of non-adjudicated dispute resolution may be
discouraged by making it more costly or even “illegal” (e.g., see
Trakman [1983]; Benson [1989b, 1990, 1992b]). But if the potential
loser perceives the expected cost of avoiding adjudication and of using
extrajudicial processes to be greater than the expected cost of “self-help”
(i.e., violence against the other party), then that also becomes a viable
option. This self-help is no longer constrained by the threat of ostra-
cism. If the physical and/or economic sanctions threatened by the
authority are less effective than the threat of ostracism by a custom-
ary law group, then violence can increase. As policing bureaucracies


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74 The Review of Austrian Economics Vol. 6, No. 2

are expected to enforce increasing numbers of laws (e.g., such as those
against victimless crimes), for instance, the probability of being
caught by an imperfect policing system is lowered. Indeed, if scarce
policing resources are also increasingly less available to control
customary offenses against persons and property, such offenses can
also increase, and self-help solutions are likely to follow.*

Custom versus authority

Authoritarian law requires a substantial amount of localized
monopoly power in order to truly impose law that generate transfers;
as Mises (1985a, p. 46) notes, “A state without sovereignty is a
contradiction in terms.” When people can choose between alternative
sources claiming legal authority, for example, then these legal ar-
rangements have to compete for the attention of potential subjects.
Thus, the supposed authority really has little authority, since indi-
viduals will be able to opt for an alternative legal system whenever
there is an attempt to take wealth from them without sufficient
compensation. As a result, those who wish to generate wealth trans-
fers by establishing some authoritarian rule will have to claim to be
the source of all law, whether that truly is the case or not. Competition
leads to emulation, of course, and at times competing legal authori-
ties might cooperate with one another in an effort to defeat yet
another rival for authority. The changing tides of cooperation and
competition between cannon law of the Roman Church, royal law of
developing kingdoms, and feudal law of the manors in medieval
Europe were very important in shaping Western legal tradition (Ber-
man 1983). Coalitions do not last, however: ultimately authority
requires monopoly.

Authoritarian legal systems, with their centralized power, also
attempt to absorb customary legal systems over time, simultaneously
adopting many aspects of the customary system and altering others.
The reason for this absorption is the same as the reason for competing
with alternative claimants to legal authority: an effective authority
must be an exclusive legal monopoly in some area. In addition, as
Mises explains: |

people have been eager to falsify historical evidence and to mis-
represent the course of events. The endeavors to mislead posterity
about what really happened and to substitute a fabrication for a

23Police resources have been shifted to control drug crimes, for example, and
property crime has been less effectively deterred so property crime has risen signifi-
cantly (Benson et al. 1992).


===== PAGE 33 =====

Benson: Private Property and Ethical Behavior 75

faithful recording. . . . were often prompted by the [falsifiers’] desire
to justify their own . . . actions from the point of view of the moral
code of those whose support or at least neutrality they were eager to
win. (1985b, pp. 291-92)

Thus, Hayek (1973, p. 126) suggests that as “the enforcement of law
[became] regarded as the primary task of government, it was natural
that all the rules which governed its activities came to be called by
the same name [law]. This tendency was probably assisted by a desire
of governments to confer on its [authoritarian] rules of organization
the same dignity and respect the [customary] law enjoyed.” Further-
more, beneficiaries of the authoritarian transfer process support and
encourage this falsification and absorption effort of the authoritarian
decision-making institution.

In this regard, Kings claimed exclusive “divine rights” as they
attempted to impose legal authority. Authoritarian law also evolves
“naturally” from the self-interested behavior of individuals, after all,
so it is not surprising to find the concept of natural law being invoked
to support authoritarian legal arrangements, just as similar myths
are evoked to explain naturally evolving customary law. Indeed, while
mythology is often seen as a characteristic of customary law, it may
play a more significant role in authoritarian law. Legal positivism is,
in fact, a convenient “myth” for those who want to assert the control
of a nation’s authoritarian legal system.

The myth of legal positivism is clearly revealed when law and
justice are equated, as they often are by the backers of a centralized
legal system. Centralized authority has increasingly claimed to be
the only source of law, but as MacCallum notes, the result is that

There is in the public sector of our society . . . an organization of
force which in collecting its necessary revenues and carrying out
its operations contrasts sharply with the proprietary norms.
Western society suffers a schizophrenia in the public field
whereby the same agency that provides wanted public services
also performs such public dis-services in the course of its opera-
tions and acts so irresponsibly in other ways as to be cannibal-
izing the society from which it springs. Its system of coercions
and its irregular administration of rules deter, demoralize, and
drain the resources of those engaged in economic tasks. Conse-
quently the very word government has ambiguous connotations.
In one breath it calls to mind an image of benign public service, and
in the next, a threat to the continued existence of the community.
(1964-65, p. 58)


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76 The Review of Austrian Economics Vol. 6, No. 2

The apparent “schizophrenia” in government arises because of the
conflict between the rules and institutions of custom and authority
(or “property and sovereignty”). Yet, so pervasive are the processes of
authoritarian absorption of law that Fuller suggests that (also see
Mises 1983, p. 4):

the tendency is to convert every form of social order into an exercise
of the authority of the state . . . Legislation, adjudication, and
administrative direction, instead of being perceived as distinctive
interactional processes, are all seen as unidirectional exercises of
state power. Contract is perceived, not as a source of “law” or social
ordering in itself, but as something that derives its whole significance
from the fact that the courts of the state stand ready to enforce it.
(Fuller 1981, pp. 156-57)

Customary rules and institutions which are relatively efficient
evolve to replace those which are less efficient. Since authoritarian
law often evolves to replace or at least absorb and build upon custom-
ary rules and institutions, some observers might contend that the
authoritarian system must be more effective. While it is true that
“everything that happens is the necessary sequel of the preceding
state of things” (Mises 1985b, p. 77), it also follows that the legal
institutions which evolve to facilitate involuntary transfers will be
quite different from those which characterized the customary law
systems detailed above. It is quite conceivable that authoritarian
legal institutions which are relatively ineffective will be replaced by
more effective institutions through a similar process to that which
characterizes the evolution of customary law and its accompanying
institutions. The evolutionary processes themselves need not be dif-
ferent, however, for outcomes to be quite different. Mises (1983, p. 52)
notes “Government efficiency and industrial efficiency are entirely
different things,” and in the same fashion, while customary and
authoritarian legal institutions could be equally effective at facilitat-
ing their purposes, those purposes are different.” As Mises (1985b,

24Leoni (1961, p. 17) notes that authoritarian legislation may deliberately

or accidentally disrupt homogeneity by destroying established rules and by
nullifying existing conventions and agreements that have hitherto been volun-
tarily accepted and kept. Even more disruptive is the fact that the very
possibility of nullifying agreements and conventions through supervening
legislation tends in the long run to induce people to fail to rely on any existing
conventions or to keep any accepted agreements. On the other hand, the
continual change of rules brought about by inflated legislation prevents it from
replacing successfully and enduringly the set of nonlegislative rules (usages,
conventions, agreements) that happen to be destroyed in the process.


===== PAGE 35 =====

Benson: Private Property and Ethical Behavior 77

pp. 48-49) emphasizes, one of the primary underpinnings of the
natural law doctrine is valid: “the idea that every . . . law of a country
was open to critical examination by reason.” The problem with the
advocates of the doctrine of natural law is that they fail to recognize
what the appropriate standard of comparison is. The standard is not
some set of pre-ordained natural laws, but rather, it “must be found
in the effects produced by a law” (Mises 1985b, p. 49). Law can
facilitate voluntary interaction or involuntary transfers; clearly this
is a standard of comparison. Indeed, Mises (1985b, p. 54) maintains
that the “ultimate yardstick of justice is conduciveness to the preser-
vation of social cooperation.”

Given the undesirable consequences of authoritarian law for
large numbers of individuals, it is not surprising to find that in no
case has the power of the authority become absolute (Leach 1977;
Mises 1985b, p. 374). In fact, in some cases, the rise of authoritarian
law has been successfully resisted to a substantial degree. Resistance
to legal authority is likely to be most effective where the benefits
generated through voluntary interaction are vary large and/or the
relevant group interacts across the jurisdictions of different authori-
ties so that inter-jurisdictional competition occurs. Thus, the inter-
national merchant community of medieval Western Europe is one such
example (Trakman 1983; Berman 1983; Benson 1989b, 1990, 1992a),
and it was from the resulting system of values and customary law that
modern commercial law, the backbone of international trade, emerged.
Indeed, modern international commercial law which evolved from this
medieval legal system, remains as a largely voluntarily produced and
enforced system of customary law, despite many attempts by various
coercive governments to subjugate it over the centuries (Trakman 1983;
Berman and Dasser 1990; Benson 1989b, 1990, 1992a).

Many other groups which started with customary law systems did
not achieve a market order, however. The fact is that at some point

Recall that Leoni and others (see footnote 9) view judge made law to be fundamentally
different from legislation. A sharp distinction is inappropriate, however (Benson 1990).
When a coercive authority’s judges set a precedent, the resulting rule becomes enforce-
able law for everyone in the society whether it is a mutually beneficial law or not. And
like authoritarian legislation, authoritarian precedent can make major alterations in
law without the consent of all parties affected. Thus, as Mises (1983, p. 16) suggests,
common law has also failed to resist the arbitrariness of centralized, bureaucratic
management of legal affairs. The resulting uncertainty about the longevity of rights is
a significant source of allocative inefficiency. In contrast, under customary law, an
inefficient dispute settlement might arise, but if other parties recognize this the
settlement does not become a universal rule of customary law. This suggests that
efficient rules are relatively more likely to evolve in customary law than in authoritar-
ian law, including judge made law.


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78 The Review of Austrian Economics Vol. 6, No. 2

many of these evolutionary processes have beeninterrupted by coer-
cive forces, either from internal or external power bases, before a
market order was able to emerge. The interruption can be abrupt, as
through military conquest, or gradual, as through a gradual break-
down in the incentives to voluntarily interact for mutual gain (and
the resulting breakdown of these incentives’ accompanying norms
and institutions), as authoritarian institutions expand their scope.
The evolution of rules and institutions is an ongoing process, how-
ever, characterized by a continuing conflict between custom (volun-
tary arrangements) and authority. In some cases custom dominates
and the authoritarian powers of government are limited or even
diminished, as during the “liberal” era of much of the nineteenth
century in the United States, Britain, and some parts of Europe (and
apparently today in parts of Eastern Europe). But the fact is that
“government becomes liberal only when forced to by the citizens”
(Mises 1985a, p. 58). When citizen resistance is not strong enough,
authority expands its scope, as it has in most of the world during most
of the twentieth century. Indeed, a combination of custom and author-
ity virtually always exists in any legal system. However, just as Mises
(1985a, p. 241) convincingly argues that “It is a delusion to believe
that planning and free enterprise can be reconciled,” it is similarly
true that authoritarian government’s control of the legal apparatus
is incompatible with the establishment of the freedom that arises
under customary law. The objectives that underlay these two differ-
ent sources of law are inconsistent, so no stable “equilibrium” rela-
tionship between the two will ever arise.

References

Axelrod, Robert. 1984. The Evolution of Cooperation. New York: Basic Books.

Barton, R. F. 1967. “Procedure Among the Ifugao.” In Law and Warfare, Paul
Bohannan, ed. Garden City, N.Y.: The Natural History Press.

Benson, Bruce L. 1989a. “Enforcement of Private Property Rights in Primi-
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