The Common Law Company

Anyone who questions the “fact” that law and order is a necessary function of government is likely to be considered a ridiculous and uninformed radical by most observers. Bernard Herber, in a typical public finance textbook, writes, for example:

The (…) function (…) of providing internal stability in the form of law and order and the protection of property (…) could only be opposed by an avowed anarchist. As [law and order] are not a controversial function of the government (…) a long analysis [is] not required to try to reconstruct an economic defense that establishes the existence of a public sector for the purpose of allocating resources.

But while most intellectuals do not question the logic of the public domain of law and the maintenance of order, large parts of the population do. Polls indicate growing dissatisfaction with all aspects of public law enforcement in the United States, particularly with the courts and the sanctions system. More importantly, citizens are turning to the private sector in increasing numbers for services that are supposed “not a controversial function of government.” Private crime detection and prevention, arbitration, and mediation are growing sectors in the United States.

This study will use economic theory to compare institutions and incentives that influence public and private performance in the provision of the law and its application. Some critics may claim that law is not an appropriate object for “economic analysis” because it is not produced or allocated in exchange markets. It is true that economics has a lot to say about market institutions, but its relevance and scope are not so narrowly limited. The economic theory requires only that scarce resources have to be allocated among competing uses. It is clear that the enterprise of law—the use of police services, court time, and other inputs in the process of creating law and establishing order—requires scarce resources that must be allocated. Beyond that,

So using economic theory it can be convincingly shown that private sector (ie voluntary or market) institutions are capable of establishing strong incentives that lead to effective law creation and enforcement. The resulting legal constraints facilitate interaction and support social order by inducing cooperation and reducing violent confrontation. Public sector institutions can also be shown to create incentives that can lead to significant inefficiencies in the provision of the same functions. In fact, our modern reliance on the government to create law and order is not the historical norm. Public police forces were not imposed on the people until the middle of the 19th century in the United States and Great Britain, for example, Victims of crime played the role of accusers in England until near the end of the century and did not give way to public prosecution without a fight.The foundations of commercial law were developed by the European commercial community and applied through commercial courts.

To this day, international trade is largely “governed” by merchants, who create, arbitrate, and enforce their own law, and in the United States at least 75% of trade disputes are resolved through private arbitration or mediation with decisions based on custom and commercial practice (common law).5Arbitration services, especially for commercial disputes, have been in increasing use for some time, but in recent years we have witnessed the development of a new sector: private for-profit courts competing with public courts for a wide range of civil disputes. In addition, there are now more than twice as many private police as public police in the United States, hiring the most vigilant citizens, guards, and highly trained security experts.7Between 1964 and 1981, employment by private companies offering protection and detective services increased by 432.9% and the number of companies offering these services grew by 285.5% during the same period (see Table 9.3).

Individuals are also increasingly supplementing government protection with efforts of their own. 8 More and more citizens are purchasing firearms for personal protection, installing burglar alarms, and purchasing guard dogs. Citizens are putting bars on their windows, learning self-defense, bringing whistles and other noise-making devices, and buying self-protection devices. There is a growing business in providing bulletproof cars and security systems for the rich and powerful who fear being killed or kidnapped. There are also cheaper activities, such as neighborhood or property guards and patrols and escort groups. A Gallup poll indicated that in the early 1980s, 17% of respondents reported at least one of these voluntary crime prevention activities in their neighborhood.

People turn to the private sector when the police and public courts are presumably available because there is growing dissatisfaction with the public sector’s efforts to maintain social order. Citizen dissatisfaction appears, in part, due to a growing belief that the government is not adequately controlling crime. In 1982, the Figgie Report on Fear of CrimeI have noted that “most people view continuously rising crime rates and regard any decline as an aberration, a temporary ebb in the inexorably rising tide of theft, armed robbery, murder, and international terrorism.” The report also highlighted that the statistics underestimate the real level of crime. According to the report, it is estimated that 60% of all cases of personal robbery in which there is no contact between the thief and his victim are not counted and less than 50% of all assaults are counted, less than 60% of all home burglaries, less than 30% of family thefts, and only slightly more of all robberies and rapes. Thus, the Figgie ReportIt concluded: “These startling statistics are either a measure of the public’s lack of confidence in the police’s ability to solve crime or a more realistic assessment of what is possible.”After all, in 1980 fewer than 20% of reported crimes led to an arrest (down from 26% in 1960) and in at least one California county only 12% of those arrested ended up convicted as felons. The 1979 report on crime victims in the US Department of Justice indicates that approximately 10% of unreported crimes were not reported because people believed that the police “did not want to be bothered”.

Dissatisfaction with the apparatus of public criminal law extends to the courts as well. Since 1965, more and more people believe that the courts have not been tough enough in criminal cases, rising from 48.9% in 1965 to 84.9% in 1978 (see Table 1.1); from 1980 to 1986, this percentage remained fairly constant between 82% and 86%. A 1972 study indicated that 82% of respondents “somewhat” or “quite a bit” agreed that “recent Supreme Court rulings have made it more difficult to punish criminals.”