Economy, Society, and History

The topic of this lecture is the production of law and order within a natural order. That is, the production of law and order without a state. Tomorrow, I will talk about the origin of the state, but here we are still considering what would naturally evolve; just as the division of labor naturally evolves, money as a medium of exchange naturally evolves, capital accumulation will take place under decently favorable circumstances and not so much under less favorable circumstances, so it can also be expected that every society will develop mechanisms for defending itself against asocial individuals. As long as mankind is what it is, we will have people who engage in productive activities and never have any other desire but to be productive individuals. So long as that is the case, we will also have people who try to hit other people on the head and rob and rape them, and every society that wants to survive will have to do something about this.

I will first return briefly to the subject of property and property rights, because what it is that we want to defend in a natural order is, of course, property and the rights of people to their property. We have seen that people take it for granted, even from the very most primitive situation on, that they own themselves, due to the direct connection that we have with our physical bodies. People also never had any doubt that those tools that they themselves produced were their tools and not somebody else’s tools. When it came to the development of settled agriculture, this idea was expanded to pieces of land. People then began to put up signs in order to claim certain plots of land as theirs, and these signs typically consisted in visibly doing something to the land so that other people could see that this is not a piece of uncultivated wilderness, but rather that this is a piece of land that has been worked on. Somebody has done something to it, and I can see that. And as you will admit, of course, it is quite easy in almost all cases to distinguish between a piece of land that has been cultivated in any way by mankind and a piece of wilderness. Just drive through, say, the Rocky Mountains, and you will see that most of the places are completely untouched, nobody has done anything to them and you can see that that is the case. On the other hand, drive through similar mountain ranges in Europe, let’s say in Austria and Switzerland. You see that people have, indeed, cultivated the mountains all the way to the top of the mountain. That is visible for anyone who has eyes to see. And, of course, people will show willingness to defend themselves against invaders trying to take these cultivated pieces of land away from them.

Let me emphasize again why it is that we need norms of property. If goods are scarce, then conflicts over these goods are possible. If we want to avoid conflicts over the use of scarce resources, there exists only one method to do it, and that is to formulate rules of exclusive use regarding scarce resources. That is, formulating rules that say that one person can do something with it, but others are excluded from it. As long as all of us have access to the scarce resources, conflicts are unavoidable. As a result, we can say that property norms, in this sense, are natural and necessary institutions for avoiding conflicts. And the rule of the first one to produce something, the first one to appropriate something, is that he becomes the owner and not somebody else (such as the second one or the third one or the rest of mankind sharing in what somebody else has originally appropriated). You can recognize the naturalness of this rule by recognizing that if mankind wants to act without conflicts, from the beginning of mankind on, then, the rule that the first one to use something becomes the owner of it is the only rule that makes this possible—that is, that mankind can, from the beginning of mankind on, conceivably act without any conflicts. In this sense, these norms are natural norms or natural laws. No other laws have this advantage of making it possible to avoid conflicts between humans from the very beginning of mankind on.

There’s only one additional consideration that I want to present when it comes to conflicts over property rights, and that concerns the problem of easements. So, if this is my piece of land and I have no neighbor so far and I spew out smoke here, there, and everywhere, and after a while, somebody settles next to me, can this person (B) complain about person A (me, the original settler) that he causes physical damage to the property of B? And the answer is no, in this case, he can’t, because person A has acquired what is called an easement. He was there first and nobody’s property was damaged by his initial activities. If somebody else now comes along, B, then what B has appropriated is, from the outset, soiled or dirty property. And if B wants to have unsoiled or clean property, then B must pay A to stop this. But, A, being there first, has acquired an easement to continue with this activity if he so desires. B must pay A in order to stop it.

If the situation is the other way around, that is, B is here first and then A settles next to B and then spews out his smoke or whatever it is, onto B’s property, then the situation is different. B has acquired clean property, and he has acquired an easement for his property to be left clean. In this case, he could take out an injunction against A and tell A that you must stop this or you must pay me in order for me to let you continue with this activity. These are the elementary rules that have been accepted by mankind for thousands of years. Again, there exist disputes sometimes about who was there first and who was there second, but those rules were considered to be the basic fundamental rules of dealing with conflicts arising over who owns what and who is permitted to do what and who is not permitted to do what. When we are talking about the production of security in a natural order, I have in mind the defense of these principles. Who has appropriated something first, has the right to defend it. Who was there first, without any neighbors, acquires an easement if certain negative externalities result, or if negative externalities come later, then the initial owner has the right to stop these negative externalities.

Now, in a natural order, the first thing that I want to point out, is that this does not only include self-defense. I’ve already mentioned the fact that insofar as we control something, we automatically would defend ourselves against people who try to take control away over things that we ourselves are in control of. We also, from the very beginning, select the places where we have our property, partly with consideration of how easy or difficult these things are to defend where they are. To just give you an example, the location of Venice is somehow in the marshes, but it is difficult for invaders, especially in an age when you had very limited technological abilities, to invade a place like this because you have to go through the water and the water is flat and you don’t know your way around; it is easier to defend a place like this. So, the location of many places was chosen precisely with this idea in mind. Is it a place that can be easily defended? Of course, if there’s nobody around for tens of thousands of miles, you are alone, then that might not be an important consideration for you to choose certain locations, but if you are surrounded by other people, then these sorts of considerations are of importance. The same thing is true for the low countries, the Netherlands. They also offer certain possibilities for defending yourself by flooding certain areas and making an invasion by land very difficult. Another example would be valleys in mountain regions. Some people settled in Swiss valleys, very remote valleys in high elevations, precisely because they knew that those were places that were comparatively easy to defend and very difficult to occupy. Even in modern times, this has made a difference. The Germans could have probably, because of their significantly larger size, invaded a country such as Switzerland, but Switzerland had, on the one hand, a militia, every man being armed and having semiautomatic machine guns at home with ammunition in the closet.1 And also, of course, because a country like Switzerland is very difficult to invade and occupy because of its mountainous terrain. You can see that, again, how our brave soldiers in Afghanistan struggle up and down the mountains to find the people that they are looking for. Or take a place like San Marino, which sits on top of a 1,000-foot mountain with a big fortress around, and a population of 8,000 people; they were able to defend themselves for 1,500 years from any invasion.

The second thing I want to point out is the way justice will be done in small societies. We always hear about the necessity of having a state, in order to do justice. The world provides us with hundreds of thousands of examples of how absolutely ludicrous this idea is. In every little society encompassing a few people, there are very quickly a few people rising to the rank of some sort of authority. They are braver, smarter, more successful, more trusted than others. You can see that in every village. And whenever there is a conflict, that is, A steals something from B or A knocks over B and they fight over who did it and who didn’t do it, while it was possible that they engaged in vigilante justice, that is, tried to beat the crap out of each other right on the spot, in most cases and for good reasons, they don’t do that because it is very difficult, then, to justify themselves afterward before the other members of the village. So, they turn to people who have more authority than others do and these people, let’s call them nobles, or aristocrats, or the elite, whatever the term is, it doesn’t matter—these people will then act as judge, typically without charging any fee, just out of the responsibility of being a leader of a small community. And based on their judgment and on their authority that they have among their fellow men, this judgment then will be enforced automatically. In most cases, there’s not even violence necessary in order to enforce it on the person who was found to be guilty. The person himself will accept it and will be willing to provide restitution, because otherwise he will be expelled from the community; he will be an outcast and nothing is, in those societies, worse than being an outcast. Again, even in modern times, this sort of ostracism works magnificently in many professions.

I met a large grain dealer in Switzerland at some point. He had dealings with grain dealers all over the world, and he reported that they had a dispute regarding certain qualities of grains and delayed deliveries from a grain dealer in the Soviet Union. This was at the time when the Soviet Union was still intact. No regular court was involved, just the association of grain dealers handled this. The proceedings took place in the Soviet Union, and the unanimous verdict was that the guy in the Soviet Union had done wrong. The judgment was enforced and this person was thrown out of this association of merchant dealers, of grain dealers. Nobody dealing in grain would have anything to do with this person ever again. Mere ostracism was entirely sufficient to do it.

Now, of course, you sometimes have recalcitrant people, people who were by and large forced to give compensation to the victim. That was a principle of punishment, to provide compensation to the victim. You realize, of course, that criminals nowadays do not compensate their victims at all. As a matter of fact, victims typically have to shell out more money so that recalcitrant criminals can play table tennis, watch TV, engage in workouts, get their müesli and whatever it is in prison. A very different situation than what would exist in a natural order. But, even on this relatively primitive level, we would, of course, expect that there are certain limitations to self-defense, and that people would want to rely on specialized defense providers. They want to take advantage of the division of labor also in this field. Not everybody is equally good at protecting somebody else. That’s why bars usually have big people standing in front of the door making sure who goes in and who doesn’t go in, and not teeny old ladies. So, yes, division of labor is as important in that area as it is in others.

And what I want to do now is first to describe how this system of defending oneself against aggressors worked during the feudal times, during the Middle Ages, a time when no state existed, just a large number of highly decentralized lords and vassals, etc. And then, in the next step, I will explain with some cues taken from the feudal order how such a system would work in modern times.

Now, in these feudal times, there existed landlords, owners of pieces of land, and they had tenants, tenant-farmers. Both were contractually connected. Most of the stuff that we learn about feudalism tends to be half-truths at best. Feudalism has a very bad name, an undeservedly bad name. The contract between the landlords and the tenants typically provided for the landlord providing protection and the tenant working for a certain period of time for the landlord, and in cases of conflict, the tenant is also willing and prepared to fight on the side of the landlord. Law was at that time considered something that was given. Law was not considered to be something that was made by people, but something that existed eternally and was just simply discovered. People learned what it was. New law was from the very outset considered to be suspicious, because law had to be old, it had to be something that had always existed. Anybody who came up with some sort of new law, was automatically dismissed as probably a fraud. The subjects, the tenants, had a right to resist. That is, they were not subject to their lords no matter what, because, as I said, there existed an eternally valid law, which protected the tenant as much as the landlord, and if the landlord did break this law, then the tenants had the right to resist, up to the point of killing the landlord.

Landlords, in turn, had been contractually tied to other landlords. The lords had, so to speak, other overlords and again, these contracts provided by and large for mutual assistance agreements. If such and such happens, you will provide so-and-so many soldiers who are peasants to do this and you do such and such and so forth. And what came about was called the feudal pyramid. That is, another contract with somebody who might be even more powerful, meaning, in this case, someone who had even larger landholdings and a larger number of tenants, all the way up to the king. Not only that, people frequently had contracts with various lords, with competing lords, so to speak, as some sort of insurance policy. That is, if this guy does something to me, I also have another protector. And, in combination with these sorts of multiple alliances that existed, they typically agreed that if it were to come to a conflict between the two lords to which they had pledged their allegiance, then they would remain neutral. Peasants who were not associated directly with any particular lord in some sort of protection agreement, isolated peasants, usually chose the king as their protector. That is, someone slightly more removed, but they also received some sort of legal protection by associating themselves with the king directly.

There existed also so-called allodial owners, that is, people who were big landowners in their own right and who had no allegiances to anyone, and would meet the king on an even level so to speak. They might have less land than the king had, and fewer tenants and fewer soldiers working for them, but in dealings with the king they were his equals. The lords, on their territory, had complete jurisdiction over their territory, including over all those people who lived on that territory. That is, they were the judges over their own peasants, their warriors, their house personnel, etc. Intervening into the internal affairs of a lord was not permitted. In this sense, they had a similar status that, let’s say, embassies have nowadays, where the United States cannot simply go into the Embassy of China and then do whatever they want. In the Chinese Embassy, the Chinese rule themselves. The lords were in charge of their dominion, and they represented their tenants or vassals in external affairs. The king was typically a person who came from a particularly noble family, a family that was recognized as a family of great achievement, and was always chosen from this family, but was not hereditary in the sense that it was perfectly clear who would become the next king. It was all the other nobles, who were contractually connected with each other, who determined unanimously which of the members of the king’s family should become king.

Eventually, this type of principle that combined hereditary elements with elective elements disappeared, and either the hereditary element took over or the pure elective element took over. But in the initial states, it was a combination of these two elements, the king coming always out of the same family, but who from this family would become the king depended on the result of an election among the lords. These assemblies of lords that selected the king became, in a way, the precursors of what we today consider to be parliaments. But, of course, only nobles, that is, landlords themselves, not tenants, were in charge of electing the king.

The king’s main task consisted, with the agreement of his assembled nobles, in declaring cases of emergency, war or something like this, but only with the unanimous consent of the nobles assembled in this parliament. And, in addition, the king had the function of some sort of appeals court, that people who thought that injustice had been committed against them, including an injustice by their own lord, could appeal to the king for final justice. The early feudal kings traveled around frequently from town to town. They were sort of the wandering judges. There existed no such thing as capital cities. In the German case, for instance, there were places where regular court sessions were held, in Nierenberg, in Augsburg, in Ladenburg, in Frankfurt, in Prague, in Vienna and several other places. All of these places had an elevated status as places where one could seek justice, but no capital existed.

Also, the king could not tax. Taxes, in the modern sense, did not exist. The king lived off his own estate, just as all lords lived off their own estates. All that he could do in cases of war was to go to his various nobles and beg them, give me a little bit, whereby every noble was perfectly entitled to say no and nothing would happen to him. The task of the king was also, in addition, with the agreement of the nobles, to decide about cases of war, to establish on the outskirts of these loose associations of lords and nobles, so-called protection villages, where people were settled, selected due to their particular abilities as fighters, in order to protect, let’s say, Christendom from the Turks or something like this. They were called WereDörfer or fortified villages, especially because their task assisted in the defense against societies that were considered to be outside the society that was combined or integrated through these intricate systems of feudal contract relationships.

Not only did the right to resistance exist among the tenants against their landlords, very importantly, it was also possible that these tenants, if they felt oppressed by their landlord, could run away and simply associate and get protection from a neighboring lord, which was, of course, the best protection that you can have from being oppressed in the first place, knowing that all you have to do is run away and attach yourself to some other protector and thereby get rid of your previous lord. On this point, in particular, that is, the ability of people to run away and attach themselves to a different protector, I want to quote Herbert Spencer, who describes the situation in ancient Rome, which was very similar in its feudal structure to Europe during the Middle Ages. Rome was also a famous place for complete dominion of the master of the household over his tenants and servants, including his children and wife. Herbert Spencer writes about early Rome,

[W]hile coercive rule within the family and the group of related families was easy, there was difficulty in extending coercion over many such groups; fortified as they were [and again, these feudal landlords, of course, all had certain amounts of fortifications] against one another. Moreover, the stringency of government within each of the communities [that is, each of the clans,] constituting the primitive city, was diminished by facility of escape from one and admission into another. As we have seen among simple tribes, desertions take place when the rule is harsh; and we may infer that, in primitive Rome there was a check on exercise of force by the more powerful families in each settlement over the less powerful, caused by the fear that migration might weaken the settlement and strengthen an adjacent one. Thus the circumstances were such that when, for defense of the city, cooperation became needful, the heads of the clans included in its several divisions came to have substantially equal powers. The original senate was the collective body of clan elders; and “this assembly of elders was the ultimate holder of the ruling power:” it was “an assembly of Kings.”2

Now, let me emphasize this point again. Just as important for the successful development of Western Europe was the fact that there was separation between church and state, which was different from all other regions on the globe. So it was of utmost importance for the dynamic development of Western Europe that Western Europe was a political anarchy, that is to say, thousands of independent landlord nobles somehow connected together through contracts, but each being his own man, and the ease with which people could move from one jurisdiction to another, which tends to contribute, of course, to moderation on the part of each one of these rulers. Each one must be afraid that if I’m too draconian in my punishment of my own men, then they will attach themselves to somebody else and strengthen people who, in some situations, might become my enemy. In addition, one more element should be mentioned in order to characterize the feudal world, and that is the existence of cities. And these cities were typically founded either by bishops or by nobles, by lords or by associations of merchants and in some cases, of course, also by—as in the case of Switzerland, for instance—by Eidgenossenschaften, “oath fellowships” or confederations.

This is the structure that the initial founding cantons in Switzerland had, where all free men swore an oath that they would come to mutually assist each other in case of an attack against them. And these cities frequently had written law codes, that is, Magdeburg Law or Hamburg Law or Hanover Law or Lübeck Law, etc., so that people who moved to these cities knew what law code would apply to them, and when new cities were founded, the normal thing to do was to adopt one of the already existing law codes and maybe make a few amendments to it. That is, some law codes became the law codes, not just of one city, but of many, many cities, who adopted the initial example of a place that first took the initiative to write these laws down.

In this connection, let me make a little side remark. In English-speaking countries, America and England, there is a certain amount of pride in having the so-called common law, which is, in a way, noncodified law, or case law. The Continental tradition, as you know, has been for a long time different. There, we have had codified law taken from the Romans, especially from the East Romans who had codified this law for the first time in an extensive manner and then, of course, in modern times, the Napoleonic Code, which has been taken over by most Continental European states in one form or another with some modifications. And, as I said, Anglo-Saxons looked down on codified law and hailed their own noncodified common law. I want to just remark that, for instance, Max Weber has a very interesting observation regarding this. He sees the reason for the noncodification of the common law in the self-interest of the lawyers to make the law difficult to understand for the layman and thus make a lot of money. He emphasizes that codified law makes it possible for the layman on the street who can read to study the law book himself and go to court himself and point out, here, that this law is written down. So, maybe this excessive pride that the Anglo-Saxons have in their common law might be a little bit overdrawn.

In terms of punishment, as I said, compensation to the victim was the main principle; some system of paying fines for various types of offenses was worked out relatively quickly. And by and large, they accepted the principle of proportionality. If you killed somebody, then you had to pay more than if you cut off somebody’s arm. If you cut off somebody’s arm, the fine that was imposed on you was higher than if you cut off somebody’s toe, and so forth, but most of the punishments were indeed in the form of fines, either monetary fines or fines in the form of natural goods.

So now I should come to the modern world. Obviously, we cannot go back to this feudal system. My purpose was only to show that we do have historical examples where societies have developed relatively effective means of protecting themselves through systems of alliances. In the modern world, we would expect, of course, a slightly different setup and this setup would be composed mostly of three institutional devices. On the one hand, commercial insurance companies. On the other hand, freely financed police forces and freely financed arbitration and judging agencies. We can imagine that these three institutions would operate separately from each other, but be contractually aligned with the others, or we can imagine that these three institutions would be vertically integrated. That is to say, an insurance company could also have a police division and a judge division attached to it. It doesn’t really matter whether it is vertically integrated or we have independent institutions. The decisive element here would be, again, that the relationships between all of these institutions would be contractual and voluntary, similar to the situation that existed during the feudal era. And I want to explain, in particular, that through such a setup, we would gradually create something like the unification of law, just as the world becomes unified through one money, and the world becomes unified through a worldwide division of labor, so the world would also become integrated through a set of universal standards of law.

Now, how would this happen? I think the main impulse in that direction would come from the insurance companies. All institutions in the modern world, all firms, all companies, everybody having an enterprise, requires insurance. To operate without insurance is almost impossible in the modern world. You can only be a very small-scale entrepreneur to do it entirely on your own, without having some sort of insurance protection. Because of this, it would not be possible, as some people have argued, that it would be the case that all institutions, all places would lay down their own peculiar rules and laws. That is, the mall has the mall laws, the school has the school laws, the steel factory has the steel factory laws. At Edward’s house, the laws would be that if somebody comes in there whom he has not invited, there might be automatic shooting devices that kill the person who comes in, and things like this. Why would that not be the case? Because insurance companies would, of course, insist that many of these practices are simply not insurable. They would insist on a certain amount of uniformity of standards, which all of these insured companies (their clients) would have to adopt. They would eliminate arbitrary rules applying at this place or at that place and insist on rather general and generally known rules: on the one hand, in order to reduce general uncertainty, and on the other hand, because only if they lay down rather general rules will they be able to attract a large clientele, which is, of course, their desire.

Second, insurance companies will have inherent interest, a financial interest, in imposing on everyone who is insured by them a defensive behavioral code. The reason for this is that you can insure yourself only against risks over whose outcomes you have no personal control. I cannot insure myself, for instance, against the risk that will I provoke another person and he then smashes me in the face and then I go to my insurance company and say that he smashed me in the face and now you must defend me against him. The insurance company would say, “Look, you have to behave in an entirely defensive way, the attack must have been entirely unprovoked, only then will we defend you, but not if you have anything to do with the attack yourself.” I cannot insure myself against the risk of my deliberately burning down my own house. I can insure myself against the risk that my house burns down, but no insurance company would insure me and allow me to burn down my own house and then make payment for it. So, insurance companies will insist that in order for them to cover you for any type of contingency, you have to commit yourself to a fundamentally defensive form of behavior and conduct.

By their very nature, insurance companies want to minimize damage. Minimizing the risk of damage is the business they are in; otherwise, they have to pay up. What we would get is, insurance companies might offer a certain variety in the types of contracts that they offer. One insurance company might specialize in Catholic clients and impose certain types of punishment for committing adultery for example, something that other companies would not have in their repertoire. But, they cannot be fundamentally different in the type of codes that they would offer.

Moreover, because it is now possible that conflicts arise between members of different insurance agencies, as the contracts of these different insurance companies are slightly different, whenever there are conflicts between people being insured by different insurance agencies, the only peaceful resolution that is possible is to go to an independent third-party arbitrator. These might be agencies that offer such arbitration services, and they would be independent of both insurance companies. These independent arbitration agencies are competitors, and no arbitration agency can be sure that it will be chosen again. These independent arbitration agencies obviously have an interest in not losing their clients, that is, the two conflicting insurance companies, so they develop a set of laws that can be regarded as acceptable to everyone, regardless of which particular insurance company they deal with in most cases. That is to say, these independent arbitration agencies would create, in a process of competition, something like a universally valid international law through a process of competition, and this would lead to a situation where we have a unified law structure that is valid throughout the entire world, more or less.

And this completes the process of economic and social integration: integration through the division of labor, integration through money, and integration through international law that binds all societies together, however different their internal legal structure might be. This is what I think a natural order effectively defending the property rights of individuals would look like in the modern world.

• 1I still remember how impressed my children were when I took them to one of my Swiss friends and then he opened the closet and there was a big gun and enough ammunition to kill half of the German population.
• 2Herbert Spencer, Principles of Sociology, 2d ed. (New York: D. Appleton Co., 1916), vol. 2, pp. 378–79.