A long-standing debate between libertarians and others concerns the extent to which a state is needed to enforce cooperative rules. Many libertarians argue that informal, self-sustaining agreements can achieve desirable outcomes even without the state acting as a third-party enforcer. See here for a particularly interesting version of this argument and various counter-arguments.

Bo Rothstein's fascinating paper on efficient institutions concludes with a great story from the TV series "The Sopranos," which speaks directly to this issue and is worth quoting at length.

In a state of rage, the mob leader himself, Tony Soprano, with a gun in his hand goes after a low level gang member that has betrayed him and kills him. Usually, he would of course have used an underling for an operation like this, but this time ... he is so overtaken by emotions that he forgets the golden rule that mafia bosses should never do any of the dirty work themselves. As it happens, he is seen by an “ordinary citizen” chasing after the victim. This eyewitness goes to the police, not knowing that it is the local mafia leader that he has seen. The “ordinary Joe” tells the police that he is just sick and tired of all the violence in his neighbourhood and that he as a law-abiding citizen wants to help the police to clean up the neighbourhood. When the police commissars show him a bunch of photos of known criminals, he directly identifies the perpetrator - still not knowing who the person he identifies is. After he has left the police station, the police commissars are in a state of joy since they now seem to have what they need to put Tony Soprano behind bars.

In the next scene, the eye-witness is sitting comfortably in what seems to be a middle-class home listening to classical music. A woman his age, probably his wife, is sitting close to him reading the newspaper. Suddenly she starts screaming and then shouts at him to read an article in the paper. The article makes it clear to this honest and law-abiding citizen that the person he has identified at the police station as the perpetrator is the well-known local mafia leader Tony Soprano. The law-abiding citizen then throws himself at the phone, calls the police commissar who’s direct number he has, and in a terrified voice says that he did not see anything and that he will not become a witness.

The interesting thing is the book our law-abiding citizen was reading before his wife showed him the newspaper article. An observant spectator has about one second to see that it is the philosopher Robert Nozick’s modern classic Anarchy, State and Utopia - an icon for all ultraliberal, anti-government and free-market proponents ever since it was published (Nozick 1974).

The message from the people behind the Sopranos show seems clear: In a “stateless” Robert Nozick type of society, where everything should be arranged by individual, freely entered contracts, markets will deteriorate into organized crime. The conclusion is again, that there can be a market for anything as long as there is not a market for everything. Or in other words, if everything is for sale, markets will not come close to what should count as social efficiency.

Who knew that the writers of the show were academics manque?

By the way, Rothstein's Quality of Government Institute maintains an extensive data base on institutional indicators across countries and over time.  It should be an important resource for people working on these topics.

UPDATE: Thank to Mike2 for posting a link to this YouTube video, which makes the point rather nicely.

Read more at Dani Rodrik's Weblog