Imperomics: the enforcement of decisions without the need for state coercion

Ask yourself what it ultimately means to enforce a contract, and you will think, almost by reflex, of courts, judgments and the force of the State. The intuition is so deeply rooted that we scarcely notice it as an intuition. We take for granted that enforcing what has been agreed is a function of the State, that without ius imperii no guarantee of compliance is possible.

The guarantee of compliance —ensuring that promises are honoured and that the decisions resolving disputes are enforced— is a problem as old as commerce itself. State coercion is one answer to that problem, dominant in our time, but not the only one that has been tried and, far less, the definition of the problem itself. I have called the study of that genus imperomics.

A genus and its dominant species

Let imperomics be understood as the science of contract-enforcement orders: the study of the architectures of incentives —economic, legal and technological— by which a community makes contracts effective and ensures that the resolutions settling its disputes are complied with.

The term is made up of two roots: Latin imperium, the magistrate's executive power to enforce his decisions, and Greek nomos, law understood as an order that emerges from the community. Both placed in the service of an economic problem: how conduct is coordinated so that what has been agreed is fulfilled without monopolizing force.

Under this definition, the State's ius imperii is the genus's currently dominant species, an imperomic order founded on the monopoly of coercion. But a species is not the genus. That in our time most contractual enforcement passes through state courts says much about recent history and little about the nature of the problem. The question the genus poses —how is compliance guaranteed?— admits of more than one answer, and history is full of alternatives.

Rome already separated the two heads

The distinction is no contemporary invention; it lies at the very root of Roman law, in the separation between iudicatio and imperium. Iudicatio —the power to declare the law, to determine who is right— belonged to the iudex privatus, a private citizen whom the parties chose to resolve their dispute: an arbiter, an arbitrator. Imperium —the power to enforce that declaration coercively— was a prerogative exclusive to public magistrates. The private arbitrator had the first but lacked the second.

Rome did not leave that gap without a bridge. In 242 BC it created the figure of the praetor peregrinus to settle disputes between citizens and foreigners. Barred from applying the ius civile, reserved to Romans, the peregrine praetor gradually distilled the ius gentium: a flexible commercial law, born of the practices of the merchants themselves, whose effectiveness depended not on any legislative act but on its superiority as a mechanism of resolution. That ius gentium is the direct ancestor of the medieval lex mercatoria.

The formula —the procedural instrument the praetor drafted as an instruction for the private judge— has an echo any arbitration practitioner will recognize: the Terms of Reference, which delimit the claims and the issues in dispute at the outset of modern arbitration.

What was still missing was enforcement. And here appears what I regard as the first imperomic mechanism in history: the stipulatio poenae (Digest 4.8, De receptis), a clause the parties agreed ex ante, undertaking to pay a penalty if they disregarded the award. It was not coercion but incentive: a definite cost that supplied the imperium the arbitrator lacked.

A justice system that enforced without a state

If Rome enunciated the logic, the Middle Ages carried it to its purest form. The lex mercatoria was no second-rate law awaiting the backing of political power: it was a fully autonomous and self-enforcing system of justice. The merchant courts —the Courts of the Staple in the Anglo-Saxon world, the Consulados del Mar in the Mediterranean— did not merely arbitrate commercial disputes; they enforced their own decisions through the most powerful coercive instrument a market economy knows: exclusion.

The merchant who ignored a ruling of the Consulado was neither imprisoned nor had his goods seized by a bailiff. He was, quite simply, expelled from the fair circuit. And that expulsion amounted to his commercial death, dependent on no political power. The deterrent efficacy of that mechanism surpassed, in practical terms, any threat of judicial enforcement.

The workings of that system have been modelled with the tools of game theory by Milgrom, North and Weingast (The Role of Institutions in the Revival of Trade, 1990), who demonstrated how a body of private judges, devoid of any state coercive power, sufficed to induce merchants to behave honestly, to sanction offenders, and to satisfy the judgments handed down against them. The key was not force but information: the private judge did not replace reputation but made it operative, transmitting to the relevant agents the fact of default so that mercantile ostracism could take effect. The defaulter, quite simply, ceased to be a merchant.

And in case anyone suspects that all this belongs to the past, it is worth looking at the diamond trade. As Lisa Bernstein documented (Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 1992), when a member of the exchange disregards an award of the sector's arbitral tribunal, his photograph is put on display in the club's rooms and the information is communicated to all the bourses of the worldwide federation, each obliged to enforce the awards of the others; readmission requires full restitution of the debt. The sanction is not prison or seizure: it is being put out of business, with a photograph hung in every bourse on the planet. Pure reputation, enforcement without the State.

How the State monopolized one of the forms

What happened, then, for enforcement without a judge to strike us today as almost unthinkable? History happened. And it happened, above all, on two dates.

The first is 1648. The Peace of Westphalia, by consolidating the sovereignty of nation-states, broke the earlier equilibrium. States claimed for themselves the monopoly of compulsory enforcement, undermined the powers of the merchant courts, and subordinated the lex mercatoria to judicial intervention. What had been an enforcement order of the commercial community's own came to depend on the permission of political power.

The second date is 1958, and it is more paradoxical, because it is usually celebrated as arbitration's great triumph. The New York Convention did indeed guarantee the international circulation of awards; but it did so at the price of codifying dependence: the recognition and enforcement of the award fall to the competent courts of the country where they are sought. International arbitration was thus definitively inscribed within procedural bicephaly: the split between the decision —the arbitrator, iudicatio— and the head that enforces —the state judge, imperium—.

The conceptual consequence is the one worth underscoring. The State's monopoly over enforcement is not a fact of nature or an absolute truth: it is a historical episode, with a start date. Between Westphalia and New York, between 1648 and 1958, one of the forms of guaranteeing compliance —public coercion— set itself up as the dominant one and pushed the others aside. The State did not invent the enforcement of contracts; it nationalized it.

Imperomics as an analytical category, not a slogan

I insist that imperomics is not a slogan against the State but an analytical category. Its usefulness lies precisely in returning the question to its engineering form: if guaranteeing compliance is a design problem, what incentive architectures make compliance the rational strategy?

The question has a tradition. Becker (Crime and Punishment: An Economic Approach, 1968) taught us to read deterrence as the product of the probability of detection and the severity of the sanction —pure economic calculation— so that a breach ceases to be profitable when its expected cost exceeds its benefit. Hayek (Law, Legislation and Liberty, 1973) showed that certain orders are not built from the top down but emerge from the decentralized interaction of agents responding to signals: reputation, like price, is one such signal, capable of aggregating dispersed information —about each agent's contractual reliability— with no central administrator. Leoni (Freedom and the Law, 1961) recalled that genuine law tends to arise from voluntary practice rather than from imposed legislation. And game theory ties the whole together: without architecture, contractual compliance has the structure of a prisoner's dilemma, in which defection may be the dominant move; but when the relationship is repeated indefinitely, under what Axelrod (The Evolution of Cooperation, 1984) called the shadow of the future, the equilibrium shifts and cooperation becomes the superior strategy even for the most self-interested agent.

Hence the medieval merchant and the diamond dealer were not naïve but good economists without knowing it. And hence, too, the same levers they used —collateral withheld in advance, a reputation that operates as an opportunity cost, and a reach that depends on no border— can be rebuilt today with the available technology. But I stop here deliberately: each of these levers deserves its own treatment, and to that I shall devote the coming posts.

Imperium, reinvented

Allow me to close where I began, with imperium. Rome's was personal, tied to the person of the magistrate; temporal, for it expired with the office; and monopolistic, an attribute exclusive to public power. What the genus allows us to imagine today is an imperium of the opposite nature: impersonal, because it is codified in a protocol whose genesis is the will of the parties; permanent, because it is inscribed immutably; and federated, because it depends on no central authority. It is the passage from imperium as the public monopoly of force to imperium as a protocol freely accepted in the exercise of party autonomy.

Monopolies, in history, rarely end by decree: they end when something better renders them irrelevant. The genus is older than the State and will probably outlive it as a framework of analysis: guaranteeing compliance will remain a design problem long after the monopoly of one of its forms has ceased to seem natural to us.

At IMPERA we work on these ideas. And the objection interests me as much as the agreement: if enforcement without a state worked for centuries and still survives today in some markets, what does the ius imperii contribute that no other species of the genus could? I look forward to reading you in the comments.