Celestial Anarchy: A Threat to Outer Space Commerce? Alexander W. Salter and Peter T. Leeson Thewealth-creatingpotentialofouterspacecommerceistremen- dous. Companies such as SpaceX are successfully providing private sector responses to public sector demands for transportation to the International Space Station. Planetary Resources and Deep Space Industriespromisetocreatewealthbyminingasteroidsforraremet- als and water. And Virgin Galactic and Space Adventures are pio- neeringthemarketforspacetourism. The world’s first commercial spaceport, Spaceport America, in NewMexico,whichcostnearly$209milliontobuild,isalreadyinuse bySpaceXandVirginGalactic.Inaddition,high-poweredinvestors, such as Elon Musk (creator of PayPal, now CEO of SpaceX), Larry Page (co-founder of Google, now also involved with Planetary Resources),andSirRichardBranson(chairmanoftheVirginGroup, the venture capital conglomerate behind Virgin Galactic), are pour- ing hundreds of millions of dollars of their own capital into outer spaceventures.1 CatoJournal,Vol.34,No.3(Fall2014).Copyright©CatoInstitute.Allrights reserved. AlexanderW.SalterisAssistantProfessorofEconomicsatBerryCollege.Heco- authoredthisarticlewhilehewasaDissertationFellowwiththeMercatusCenter at George Mason University. Peter T. Leeson is the Duncan Black Professor of EconomicsandLawandtheBB&TProfessorfortheStudyofCapitalismatGeorge MasonUniversity. 1SeeSolomon(2012)forahistoricaloverviewofcompaniescurrentlypioneering space-relatedcommercialactivities. 581 Cato Journal Yet an ominous feature of the celestial environment seems to threatentheabilityofouterspacecommercetoachieveitspotential: celestialanarchy.Although,terrestrially,governmentsenjoythesov- ereignty over their territories needed for the state to define and enforce property rights in those territories, celestially, things are quite different. In outer space, much as in international space, no governmenthassovereignty.Thisfactisenshrinedinthe1967Outer Space Treaty, signed by the spacefaring nations. Article II of the treaty prohibits signatory nations from extending territorial jurisdic- tiontocelestialbodies.2 In practice, at least, the same Article prevents even private citizens from using their sovereigns to define or enforce privately heldpropertyrightsincelestialbodies.3AsWhite(2002:84)points out,“incommonlawcountriessuchastheUnitedStates,legalthe- orydictatesthatthegovernmentmusthavesovereigntyoverterri- tory before it can confer title on its citizens. Consequently, traditional real property rights [in outer space] are inconsistent with this theory.” Theproblemcelestialanarchyseemstocreatehereisstraightfor- ward.Privatepartieswhohavepropertydisputeswhenoperatingin outer space need to settle their disputes in courts of law. But such courts are within the legal domains of national sovereigns. Enforcing private parties’ property rights in outer space therefore requiresadefactoconcessionofnationalsovereignty,runningafoul ofArticleII.4AsPop(2000:281)putsit,because“theOuterSpace Treatyprohibitsthenationalappropriationofouterspaceandceles- tial bodies, a State endorsement” of private parties’ property rights 2The full text of this treaty and list of signatories and parties are available at http://disarmament.un.org/treaties/t/outer_space.Becauseofthelackofsignato- ries among spacefaring nations, we don’t consider here the 1979 Moon Treaty (http://disarmament.un.org/treaties/t/moon). 3WhetherornottheOuterSpaceTreatyprecludesprivatecitizensfromholding propertyrightsincelestialbodiesinprincipleiscontested.Somescholarsargue thatsomeformofprivatepropertyrightsisreconcilablewiththerequirementsof the Outer Space Treaty (see, for instance, Groove 1969 and White 1997, 2000, 2003).OthersarguethattheTreatyprecludesallprivatepropertyrights(see,for instance,Pop2000andDunstan2002). 4This is why White (2002: 84), a defender of private property rights in outer space,arguesinfavorofa“quasi-territorial”jurisdictionfortheestablishmentof anykindofprivatepropertyrightsregime.Inthissensetheanalysisthatfollows hasimplicationsforcivillawnationsaswell. 582 Celestial Anarchy insuchbodies“wouldbeinterpretedasameansofnationalappro- priation,henceitwouldbeunlawful.” Economistshavelonghighlightedthenecessityofprivateproperty rightsforthrivingcommercialactivity(e.g.,Smith1776,Mises1949, Alchian and Demsetz 1973, North 1990). Without some means of enforcingclaimstomineandthine,individualshavelittleincentiveto riskinvestinginandgrowingcommercial enterprises. Thisisastrue forcelestialenterprisesasitisforterrestrialones.AsWhite(2000:2) notes,“Implementing[a]realpropertyregimewouldprovidegreater legal certainty to investors and entities participating in the develop- mentandsettlementofouterspace.”Celestialanarchythusappears toposeaseriousobstacletoflourishingouterspacecommerce. Butwhatifprivatepartiessidesteppedtheproblemposedbysov- ereigns’ inability to support celestial property rights by enforcing suchrightsprivately—thatis.,withoutrelianceonanygovernment? Pop(2000:281)summarizestheconventionalviewofthispossibility: “Appropriation of land can exist outside the sphere of sovereignty, but its survival is dependent upon endorsement from a sovereign entity.”5 In other words, it is widely believed that a purely private celestialpropertyrightsregimeisnotpossible. This article argues that conventional wisdom is wrong. Celestial anarchyisgenuine,buttheostensibleproblemitposesforthedevel- opmentofouterspacecommerceisnot.Privatepropertyrightscan anddosurvivewithouttheendorsementorinvolvementofanysov- ereign entity. This suggests that private parties can, if given the chance, enforce property rights in outer space. Economically, at least, celestial anarchy poses no obstacle to the flourishing and full developmentofcelestialenterprise. The conventional wisdom’s failure to grasp this fact stems from two sources: unfamiliarity with economic theory and unfamiliarity with economic reality. Economic theory demonstrates how private individuals can enforce property rights without reliance on govern- ment. And economic reality demonstrates how they in fact do so. There’s nothing special about this theory or its manifestations in practicethatwouldlimitittoterrestrialpropertyrights. Ourargumentdoesnotdenypotentialpoliticalproblemsassoci- ated with private individuals of particular nationalities claiming 5SeealsoCoffey(2009). 583 Cato Journal property rights in outer space when those claims run afoul of sov- ereigns’ interpretation of the Outer Space Treaty. It denies the alleged economic problem of them doing so, upon which the pre- vailing view that celestial anarchy threatens to undermine outer space commerce is based. In this sense, our article complements existingcontributionstotheliteratureongovernanceinouterspace thatdiscussmechanismsforachievingresourceusage(seeWeeden and Chow 2012, Cooper 2003, Milligan 2011, and Simberg 2012). Inourconcludingsection,webrieflyconsidertherelevanceofour analysisoftheeconomic(non-)problemofcelestialanarchyforthe politicalproblemsuchanarchymaypose. Enforcing Property Rights without a Sovereign in Theory Accordingtoconventionalwisdom,asovereignstate—amonopoly authority that all parties must submit to as the final arbiter of prop- erty disputes—is necessary to enforce and thus sustain a regime of property rights. To understand this claim it’s helpful to consider an analyticscenariothathasdonemuchworkforeconomistswhostudy thenatureofgovernance:thePrisoners’Dilemma.Figure1depicts thisscenario. AliceandBobareconsideringhowtobehavetowardoneanother in an environment without a sovereign. The rows and columns in Figure 1 depict the strategies that Alice and Bob, respectively, can pursueintheirinteractionwithoneanother.Insideeachrow-column box are Alice’s and Bob’s payoffs—that is, what each party earns by interacting with the other—depending on the strategy they pursue and the strategy the other party pursues. Alice’s payoff appears first ineachboxandBob’sappearssecond. Alice and Bob each have two strategies they may follow in their interaction with the other. They choose their strategies simultane- ously. Each party can “cooperate” by respecting the property rights the other party claims to have, say by trading with the other party honestly. Or they can “defect” by violating the property rights the other party claims to have by, say, by stealing what the other party claimsashisorherownortradingwithhimorherfraudulently. When both parties cooperate with each other, both capture gains fromtradeequaltoA20.Whenonepartydefectsbuttheotherparty cooperates, the defecting party benefits at the cooperating party’s expense.InthiscasethedefectingpartyearnsC2A,andthecoop- 584 Celestial Anarchy FIGURE 1 The Prisoners’ Dilemma Cooperate Defect Cooperate A, A B, C Defect C, B 0, 0 eratingpartyearnsB30.Whenbothpartiesdefect,bothpartiesearn 0: mutual theft is damaging to both parties, but not as damaging to either party as being “suckered”—i.e., respecting the other party’s propertyrightswhentheotherpartyviolatestheirpropertyrights. Withoutapropertyright-enforcingsovereigntokeeptheminline, howwillAliceandBobbehave?Examiningeachparty’spayoffunder eachofthepossiblescenariosinFigure1revealsthatbothAliceand Bobwilldefect.Thisisbecause,nomatterwhattheotherpartydoes, bothAliceandBobmaximizetheirownpayoffbyviolatingtheprop- ertyrightsoftheother. If Alice thinks Bob will cooperate, Alice wants to defect because she earns her highest payoff possible, C, in this scenario. If Alice thinksBobwilldefect,Aliceagainwantstodefectbecausesheearns 0inthisscenario,whichishigherthanwhatsheearnsifshecooper- atesandBobdefects,B.Bob,whosesituationissymmetric,reasons thesameway.Sohealwaysdefectstoo. Bothpartiesthereforeearn0,whichislessthanwhatbothcould earn if they could instead agree to respect each other’s property rights,A.Eachpartycanpromisetheotherthattheywillcooperate. Butwithoutasovereigntoenforcethatpromise,eachisledtobreak their word, tempted by the specter of earning C if the other party keeps his or her word, or of at least earning 0 instead of B if they expecttheotherpartytobreakhisorherword. This dilemma described by Figure 1 is a stylized version of that which conventional wisdom suggests must be the outcome under 585 Cato Journal celestial anarchy in arguing that enforceable property rights are unsustainable here. Consider what happens, however, if we modify the analytical situation that Alice and Bob confront in a small way that more closely resembles reality. Suppose that Alice and Bob interact, and thus have the opportunity to respect or violate one another’spropertyrights,notjustonce,butanindefinitenumberof times—the case of a repetitive game. Suppose that both parties defectontheotherpartyforallsubsequentinteractionsifheorshe defectsonhimorherevenonceandthatbothpartiestelltheother asmuch.NowhowwillAliceandBobbehavewithoutasovereignto keeptheminline? UnlessAliceor Bob isexcessivelyimpatient,bothwillcooperate. Where(cid:152)<(0,1)isthediscountratethatAliceandBobapplytopay- offs from interacting in the future (since earnings in the future are worth less than earnings today), for both parties, cooperation now yields:6 (1) (cid:129)R (cid:152)tA. tW0 Andforbothparties,defectingnowyieldsC.Recallingtherulefor solvinganinfinitegeometricseriesandusingsimplealgebratosolve for(cid:152)revealsthatcooperatingisnowmoreprofitablethandefecting forbothAliceandBobwhen: A^C (2) 2(cid:152). C AslongasAliceandBobarepatientenoughtosatisfythisinequal- ity (i.e., they don’t discount future payoffs too steeply), both will respect the other’s property rights despite the absence of a sover- eign.7 Simply permitting Alice and Bob to interact repeatedly and conditioning each party’s strategy choice on the strategy chosen by 6Alternatively,onecanthinkof(cid:152) astheprobabilitythatAliceandBob’sinterac- tioninaparticularperiodwillbetheirlast—thatis,theprobabilitywithwhichthe gamethey’replayingendseachperiod(orasaparameterthatreflectsAliceand Bob’sdiscountrateandtheprobabilitywithwhichthegamethey’replayingends eachperiod). 7Becauseouterspacecommercerequireslargeup-frontinvestmentsbeforenet benefitscanbesecured—andeventhenonlyafterrepeatedperiodsofcoopera- tiveinteractionwithfellowspaceentrepreneurs—the“spacebusiness”selectsfor individualswhoarepatient. 586 Celestial Anarchy the other party in the past reverses the result we found earlier. Instead of always violating one another’s property rights, Alice and Bobalwaysrespectoneanother’srights. Thereasonforthisresultiswhateconomistscallthe“discipline of continuous dealings.” The intuition that underlies it is simple. When Alice and Bob interact indefinitely rather than just once, thepossibilityofbeing“punished”bytheotherpartyinthefuture for defecting in the past emerges. Both parties know that if they violatetheotherparty’spropertyrightstoday,theotherpartywill defect when interacting with them tomorrow—and in every period after that—preventing the defecting party from earning positivepayoffseveragain.Sincethegainfromdefectingisaone- timegainbutthegainslostfromdefectingevenonceareforever, ifpartiesdon’tdiscountthefutureexcessively,theyearnmoreby always cooperating than by ever defecting. Property rights are self-enforcing. InFigure1thereareonlytwoparties.Butthelogicisthesame iftherearemorethantwo.Indeed,whentherearemorethantwo parties, reputations become possible, strengthening self- enforcing property rights still further. Suppose, for example, that in addition to Alice and Bob, there’s another party, Charlie. Now if, say, Alice violates Bob’s property rights, not only may Bob defect when interacting with Alice in the future, cutting her off from the gains of future cooperation with him, but Bob may tell Charlie that Alice is a property right violator, leading Charlie to defect on Alicein all his future interactionswith her as well.This makes the “punishment” that Alice suffers for defecting even stronger,whichinturnstrengthensherincentivetorespectBob’s and Charlie’s property rights. Thedisciplineofcontinuousdealingsillustratestheoreticallywhy a sovereign isn’t necessary to sustain enforceable property rights. Inwhatfollowswedrawoneconomicrealitytoillustratehowprivate partiesleverageself-enforcingpropertyrightswithoutasovereignin practice. Although there are many examples we could draw on for this purpose (see, for instance, Friedman 1979; Ellickson 1994; AndersonandHill2004;Leeson2007a,2007b,2009,2013),wefocus on one in particular because of its similarity in several important respects to the situation of celestial anarchy this article is interested in—namely,internationalanarchy. 587 Cato Journal Enforcing Property Rights without a Sovereign in Practice International anarchy refers to the fact that, although globally many sovereigns exist to define and enforce property rights among personsengagedincommerceineachoftheirdomesticdomains,no formalsupranationalsovereignexiststodefineandenforceproperty rights among persons engaged in international commerce— commerce between citizens hailing from different territories gov- ernedbydifferentnationalsovereigns.Norhassuchasovereignever existed.Inthissensethepropertyrightssituationthatpartiestointer- nationalcommerceconfrontissimilartothepropertyrightssituation thatprospectivepartiestoouterspacecommerceconfront. Yet international anarchy hasn’t prevented international com- mercefromflourishing.Intheabsenceofasupranationalsovereign that could create a sustainable property rights regime for interna- tionaltraders,internationaltradershavedevelopedaprivateregime of self-enforcing property rights for this this purpose instead. The result has been booming international commerce that generates nearlyaquarteroftheworld’swealthannually.Centraltothisregime ofself-enforcingpropertyrightsisthedisciplineofcontinuousdeal- ingsdescribedabove.8 TheMedievalLawMerchant Intheninthandtenthcenturiesaprofessionalclassofmerchants emerged across Europe. These merchants confronted the central obstacle of international anarchy pointed to above: the absence of a supranational sovereign that could protect international traders’ property rights, enabling the growth of international commerce. Giventhissituation,ifatraderfromItalyenteredacommercialcon- tractwithatraderfromSpain,howcouldtheircontract,andthusthe propertyrightsembodiedinthatagreement,beenforced? A trader who believed his counterparty had violated their agree- mentmightattempttoseekenforcementagainsthiscounterpartyin his nation’s courts. But such courts typically refused to adjudicate international cases on the grounds that they involved citizens from 8However, this isn’t the only mechanism of self-enforcing property rights that international traders rely on. For a discussion of a second mechanism—one rootedinsignaling—seeLeeson(2006a,2008a). 588 Celestial Anarchy other nations, over whom they had no jurisdiction. Even if one agreed to adjudicate such a case, since it lacked authority over the counterparty, who was from another country, it had no means of enforcing its decision. An Italian court, for example, couldn’t seize the assets of a merchant located in Spain. Further, on the basis of whichsovereign’slawshouldsuchacourtadjudicatethetraders’dis- agreement? The laws created and enforced by the government of ItalytogovernItaliancitizensdidn’t(anddon’t)applytoSpanishcit- izensgovernedbySpanishlaw. Inresponsetosuchobstaclestointernationalcommerce,medieval merchants resolved international commercial disputes privately on thebasisofmerchant-developedlawinprivate,merchant-developed courts. This system of self-enforcing property rights is called the medievallexmercatoria(lawmerchant).AsBenson(1989:645)notes in his discussion of the medieval law merchant, this system demon- stratesthatinternational“commerceandcommerciallawhavedevel- oped conterminously, without the aid . . . of the coercive power of nation-states.” AlthoughinitiallybasedonwhatknowledgeofRomancivillawhad beensalvagedafterthefalloftheRomanEmpire,themedievallaw merchant evolved as customs and practices common to many geo- graphic locales became standard practice for merchants engaged in internationalcommerce(Benson1989:648).Commonrulesenabled merchantstocapturemoreofthegainsfrominternationaltrade,fur- thercementingthemasacornerstoneofacceptablepracticesamong internationaltraders.9Bythe12thcentury,international“commercial law had developed to a level where alien merchants had substantial protectionindisputeswithlocalmerchants”(Benson1989:648). The private merchant courts that adjudicated property conflicts underthisbodyofprivatelawdevelopedtheirownrulesofevidence and employed experts to decide specialized matters involving inter- national commercial contracts. Compared to the national courts prevalent in the nascent sovereigns of the period, merchant courts were informal and reached decisions quickly—a feature valued highlybyinternationalmerchants(Benson1989:649–51).10 9This“snowballing”effectwherebythesuccessofleast-costnormsandbehaviors furtherentrenchestheircommonusageisahallmarkofspontaneoussocialinsti- tutions,suchasthecommonlaw,language,andeventheuseofmoney. 10SeealsoMilgrometal.(1990). 589 Cato Journal To enforce merchant court decisions, members of the interna- tionalcommercialcommunityleveragedthedisciplineofcontinuous dealings described earlier. Although these courts had no formal enforcement power, most traders complied with their decisions. Refusingtodosoresultedinthemembersoftheinternationaltrad- ing community blacklisting the uncooperative traders, cutting them off from the benefits of future trading opportunities with members of that community. The discipline of continuous dealings between internationaltradersrenderedcommercialcontractsbetweenthem, andthustraders’propertyrights,self-enforcing. TheModernLawMerchant Intheabsenceofasupranationalsovereigntoenforceandsustain propertyrightsbetweencontemporaryinternationaltraders,modern internationaltradeissimilarlygovernedprivately—byamodernlaw merchant. Given the difficulties, and for many years the impossibil- ity,ofusingnationalsovereignstoenforceinternationalcommercial disputes,contemporaryinternationaltradersrelyonprivateinterna- tional arbitration associations instead. Indeed, at least 90 percent of modern international commercial contracts contain clauses stipulat- ing the resolution of contractual disputes via private arbitration (Leeson2008b:68). Thesumsofmoneyatstakeintheseprivatecourtsareenormous. Forexample,in2001roughly1,500partiesfrom115countriesused the arbitration services of the International Chamber of Commerce (ICC), the largest of such organizations, in property conflicts that rangedinvaluefrom$50to$1billion.Over60percentofthesedis- putes were for amounts between $1 million and $1 billion (ICC 2002). Likewise, in 2001 another private international arbitration association,theInternationalCenterforDisputeResolution(ICDR), adjudicatedcontractsworth$10billioninvolvingpartiesfrom63dif- ferentcountries(ICDR2002). Whenforgingtheircontracts,partiestoprivateinternationalarbi- tration choose the law they want to apply to their agreement in the event of dispute. They may choose commercial law as embodied in the laws of various sovereigns. Or they may choose to have custom- arylaw,asithasevolvedanddevelopedunderthemodernlawmer- chant,togoverntheircontractsinstead. Like those of their medieval merchant-court counterparts, the decisions of private international arbitration associations are over- 590