Kurt Bouwhuis, Mackinac Center Intern

This post will answer the question I posed in my last post, which was: Is the market capable of dissolving violence and addressing imbalances in power, or does the government need to step in?

Answer:  The market IS capable of dissolving violence and adjusting to the imbalances in power.  In the scenario I presented yesterday, the interior communities solved the issue of violence by establishing a system of credit.  The system of credit worked like this – the interior communities would initially not harvest any goods.  When the middlemen came to trade (with bigger guns), the individuals of the interior community would not have anything of value in their villages.  The interior community members would record the demands of the middlemen, and take their money in advance.  The middlemen would leave, and the villagers would go hide the money, and harvest the exact quantity of goods demanded.  At a later time, when the middlemen came back, the villagers would provide the middllemen with the goods they had already paid for.

At this point, the middlemen have no incentive to kill the interior community members.  The middlemen have already paid for the goods they are receiving, and there is nothing of value to steal.  Additionally, the middlemen do not want to go out and harvest the goods themselves, so they have an incentive to keep the interior community members alive.

Imagine the government alternative – Hiring policeman to stand on guard all day.  Under a system of policeman, there are still incentives for middlemen to attack the interior communities (if the potential loot was big enough).  There is also the possibility of bribes and corruption.  In either case, the police system diverts resources away from productive activities and may not even solve the problem entirely.

Kurt Bouwhuis, Mackinac Center Intern

Peter Leeson, professor at George Mason University, has conducted extensive research on pirates revealing some very interesting economic insights.  He recently published a new book on this very topic, titled The Invisible Hook.

I was recently reading through one of his papers, titled Trading with Bandits, where he presents an interesting dilemma faced by traders in Africa.  In the early to mid 1800′s, in upper Zambezi and Kasai, there existed settlers along the Angolan coast.  The settlers employed middlemen who were hired to trade and transport goods from the interior communities.  The interior communities were made up of many small tribes with no government oversight – only various tribal leaders who enforced informal rules.

The interior communities generally harvested ivory, beeswax, and wild rubber for trade.  The middlemen brought tobacco, gin, beads, shells, and brass, which were used as body ornaments, cloth, and firearms.  The middlemen were the sole suppliers of firearms to interior communities, which created a large incentive for plunder.  The interior communities were presented with a limited number of guns in trade, in order to create a large imbalance in weapons.  Within a short time, the middlemen began to resort to plunder, choosing to steal rather than trade.  This leaves us with an interesting question:

Is the market capable of dissolving violence and addressing imbalances in power, or does the government need to step in?  In tomorrows blog post, I will reveal the answer to this question.