What makes markets, and especially advanced contracts, possible? Most social scientists, including a high percentage of libertarian ones, describe the world as fraught with prisoners’ dilemmas (the idea that collaborators would be better off working together, but they each have an incentive to cheat) that can only be solved by government. For example, Israel Kirzner suggests that markets need “governmental, extra-market enforcement” stating that that without “enforceability of contract… the market cannot operate.” Similarly Mancur Olson states that without “institutions that enforce contracts impartially” a society will “lose most of the gains from transactions (like those in the capital market) that require impartial third-party enforcement.”[1]
But in many cases government officials do not have the knowledge, incentive or ability to enforce contracts or property rights in a low cost way.[2] Consider parties contracting in third world countries where trials take more than a decade. Or consider parties in the first world making a contract where time is of the essence or a lot of money is at stake. Who wants to get large resources tied up in a trial that can take months or years? Or consider making a low value exchange where the cost of going to trial vastly exceeds the value of a transaction. Or consider making a transaction across political boundaries which makes establishing jurisdiction for a trial difficult. At a minimum using courts or government law enforcers requires time and resources, and as practical matter entire classes of contracts are effectively unenforceable.