Ironically, medieval Iceland is a good example of why "anarcho"-capitalism will not work, degenerating into de facto rule by the rich. It should be pointed out first that Iceland, nearly 1,000 years ago, was not a capitalistic system. In fact, like most cultures claimed by "anarcho"-capitalists as examples of their "utopia," it was a communal, not individualistic, society, based on artisan production, with extensive communal institutions as well as individual "ownership" (i.e. use) and a form of social self-administration, the thing -- both local and Iceland-wide -- which can be considered a "primitive" form of the anarchist communal assembly.
As William Ian Miller points out "[p]eople of a communitarian nature. . . have reason to be attracted [to Medieval Iceland]. . . the limited role of lordship, the active participation of large numbers of free people . . . in decision making within and without the homestead. The economy barely knew the existence of markets. Social relations preceded economic relations. The nexus of household, kin, Thing, even enmity, more than the nexus of cash, bound people to each other. The lack of extensive economic differentiation supported a weakly differentiated class system . . . [and material] deprivations were more evenly distributed than they would be once state institutions also had to be maintained." [Bloodtaking and Peacemaking: Feud, Law and Society in Saga Iceland, p. 306]
Kropotkin in Mutual Aid indicates that Norse society, from which the settlers in Iceland came, had various "mutual aid" institutions, including communal land ownership (based around what he called the "village community") and the thing (see also Kropotkin's The State: Its Historic Role for a discussion of the "village community"). It is reasonable to think that the first settlers in Iceland would have brought such institutions with them and Iceland did indeed have its equivalent of the commune or "village community," the Hreppar, which developed early in the country's history. Like the early local assemblies, it is not much discussed in the Sagas but is mentioned in the law book, the Grágás, and was composed of a minimum of twenty farms and had a five member commission. The Hreppar was self-governing and, among other things, was responsible for seeing that orphans and the poor within the area were fed and housed. The Hreppar also served as a property insurance agency and assisted in case of fire and losses due to diseased livestock. The Hreppar may have also have organised and controlled summer grazing lands (which in turn suggests "commons" -- i.e. common land -- of some kind).
Thus Icelandic society had a network of solidarity, based upon communal life. In practice this meant that "each commune was a mutual insurance company, or a miniature welfare state. And membership in the commune was not voluntary. Each farmer had to belong to the commune in which his farm was located and to contribute to its needs." [Gissurarson quoted by Birgit T. Runolfsson Solvason, Ordered Anarchy, State and Rent-Seeking: The Icelandic Commonwealth, 930-1262] However, unlike an anarchist society, the Icelandic Commonwealth did not allow farmers not to join its communes.
Therefore, the Icelandic Commonwealth can hardly be claimed in any significant way as an example of "anarcho"-capitalism in practice. This can also be seen from the early economy, where prices were subject to popular judgement at the skuldaping ("payment-thing") not supply and demand. [Kirsten Hastrup, Culture and History in Medieval Iceland, p. 125] Indeed, with its communal price setting system in local assemblies, the early Icelandic commonwealth was more similar to Guild Socialism (which was based upon guild's negotiating "just prices" for goods and services) than capitalism. Therefore Miller correctly argues that it would be wrong to impose capitalist ideas and assumptions onto Icelandic society:
"Inevitably the attempt was made to add early Iceland to the number of regions that socialised people in nuclear families within simple households. . . what the sources tell us about the shape of Icelandic householding must compel a different conclusion." [Op. Cit., p. 112]
In other words, Kropotkin's analysis of communal society is far closer to the reality of Medieval Iceland than David Friedman's attempt in The Machinery of Freedom to turn it into a capitalist utopia.
However, the communal nature of Icelandic society also co-existed (as in most such cultures) with hierarchical institutions, including some with capitalistic elements, namely private property and "private states" around the local godar. The godar were local chiefs who also took the role of religious leaders. As the Encyclopaedia Britannica explains, "a kind of local government was evolved [in Iceland] by which the people of a district who had most dealings together formed groups under the leadership of the most important or influential man in the district" (the godi). The godi "acted as judge and mediator" and "took a lead in communal activities" such as building places of worship. These "local assemblies. . . are heard of before the establishment of the althing" (the national thing). This althing led to co-operation between the local assemblies.
Therefore we see communal self-management in a basic form, plus co-operation between communities as well. These communistic, mutual-aid features exist in many non-capitalist cultures and are often essential for ensuring the people's continued freedom within those cultures (section B.2.5 on why the wealthy undermine these popular "folk-motes" in favour of centralisation). Usually, the existence of private property (and so inequality) soon led to the destruction of communal forms of self-management (with participation by all male members of the community as in Iceland), which are replaced by the rule of the rich.
While such developments are a commonplace in most "primitive" cultures, the Icelandic case has an unusual feature which explains the interest it provokes in "anarcho"-capitalist circles. This feature was that individuals could seek protection from any godi. As the Encyclopaedia Britannica puts it, "the extent of the godord [chieftancy] was not fixed by territorial boundaries. Those who were dissatisfied with their chief could attach themselves to another godi. . . As a result rivalry arose between the godar [chiefs]; as may be seen from the Icelandic Sagas." It is these Sagas on which David Friedman (in The Machinery of Freedom) bases his claim that Medieval Iceland is a working example of "anarcho" capitalism.
Hence we can see that artisans and farmers would seek the "protection" of a godi, providing their labour in return. These godi would be subject to "market forces," as dissatisfied individuals could affiliate themselves to other godi. This system, however, had an obvious (and fatal) flaw. As the Encyclopaedia Britannica points out:
"The position of the godi could be bought and sold, as well as inherited; consequently, with the passing of time, the godord for large areas of the country became concentrated in the hands of one man or a few men. This was the principal weakness of the old form of government: it led to a struggle of power and was the chief reason for the ending of the commonwealth and for the country's submission to the King of Norway."
It was the existence of these hierarchical elements in Icelandic society that explain its fall from anarchistic to statist society. As Kropotkin argued "from chieftainship sprang on the one hand the State and on the other private property." [Act for Yourselves, p. 85] Kropotkin's insight that chieftainship is a transitional system has been confirmed by anthropologists studying "primitive" societies. They have come to the conclusion that societies made up of chieftainships or chiefdoms are not states: "Chiefdoms are neither stateless nor state societies in the fullest sense of either term: they are on the borderline between the two. Having emerged out of stateless systems, they give the impression of being on their way to centralised states and exhibit characteristics of both." [Y. Cohen quoted by Birgit T. Runolfsson Solvason, Op. Cit.] Since the Commonwealth was made up of chiefdoms, this explains the contradictory nature of the society - it was in the process of transition, from anarchy to statism, from a communal economy to one based on private property.
The political transition within Icelandic society went hand in hand with an economic transition (both tendencies being mutually reinforcing). Initially, when Iceland was settled, large-scale farming based on extended households with kinsmen was the dominant economic mode. This semi-communal mode of production changed as the land was divided up (mostly through inheritance claims) between the 10th and 11th centuries. This new economic system based upon individual possession and artisan production was then slowly displaced by tenant farming, in which the farmer worked for a landlord, starting in the late 11th century. This economic system (based on a form of wage labour, i.e. capitalistic production) ensured that "great variants of property and power emerged." [Kirsten Hastrup, Culture and History in Medieval Iceland, pp. 172-173] During the 12th century wealth concentrated into fewer and fewer hands and by its end an elite of around 6 wealthy and powerful families had emerged.
During this evolution in ownership patterns and the concentration of wealth and power into the hands of a few, we should note that the godi's and wealthy landowners' attitude to profit making also changed, with market values starting to replace those associated with honour, kin, and so on. Social relations became replaced by economic relations and the nexus of household, kin and Thing was replaced by the nexus of cash and profit. The rise of capitalistic social relationships in production and values within society was also reflected in exchange, with the local marketplace, with its pricing "subject to popular judgement" being "subsumed under central markets." [Ibid., p. 225]
With a form of wage labour being dominant within society, it is not surprising that great differences in wealth started to appear. Also, as protection did not come free, it is not surprising that a godi tended to become rich also. This would enable him to enlist more warriors, which gave him even more social power (in Kropotkin's words, "the individual accumulation of wealth and power"). Powerful godi would be useful for wealthy landowners when disputes over land and rent appeared, and wealthy landowners would be useful for a godi when feeding his warriors. Production became the means of enriching the already wealthy, with concentrations of wealth producing concentrations of social and political power (and vice versa). Kropotkin's general summary of the collapse of "barbarian" society into statism seems applicable here - "after a hard fight with bad crops, inundations and pestilences, [farmers]. . . began to repay their debts, they fell into servile obligations towards the protector of the territory. Wealth undoubtedly did accumulate in this way, and power always follows wealth." [Mutual Aid, p. 131]
The transformation of possession into property and the resulting rise of hired labour was a key element in the accumulation of wealth and power, and the corresponding decline in liberty among the farmers. Moreover, with hired labour springs dependency -- the worker is now dependent on good relations with their landlord in order to have access to the land they need. With such reductions in the independence of part of Icelandic society, the undermining of self-management in the various Things was also likely as labourers could not vote freely as they could be subject to sanctions from their landlord for voting the "wrong" way. Thus hierarchy within the economy would spread into the rest of society, and in particular its social institutions, reinforcing the effects of the accumulation of wealth and power.
The resulting classification of Icelandic society played a key role in its move from relative equality and anarchy to a class society and statism. As Millar points out:
"as long as the social organisation of the economy did not allow for people to maintain retinues, the basic egalitarian assumptions of the honour system. . . were reflected reasonably well in reality. . . the mentality of hierarchy never fully extricated itself from the egalitarian ethos of a frontier society created and recreated by juridically equal farmers. Much of the egalitarian ethic maintained itself even though it accorded less and less with economic realities. . . by the end of the commonwealth period certain assumptions about class privilege and expectations of deference were already well enough established to have become part of the lexicon of self-congratulation and self-justification." [Op. Cit., pp. 33-4]
This process in turn accelerated the destruction of communal life and the emergence of statism, focused around the godord. In effect, the godi and wealthy farmers became rulers of the country and "the old form of government became modified in the course of time." This change from a communalistic, anarchistic society to a statist, propertarian one can also be seen from this quote from an article on Iceland by Hallberg Hallmundsson in the Encyclopaedia Americana, which identifies wealth concentration in fewer and fewer hands as having been responsible for undermining Icelandic society:
This process, wherein the concentration of wealth leads to the destruction of communal life and so the anarchistic aspects of a given society, can be seen elsewhere, for example, in the history of the United States after the Revolution or in the degeneration of the free cities of Medieval Europe. Peter Kropotkin, in his classic work Mutual Aid, documents this process in some detail, in many cultures and time periods. However, that this process occurred in a society which is used by "anarcho"-capitalists as an example of their system in action reinforces the anarchist analysis of the statist nature of "anarcho"-capitalism and the deep flaws in its theory, as discussed in section F.6.
"During the 12th century, wealth and power began to accumulate in the hands of a few chiefs, and by 1220, six prominent families ruled the entire country. It was the internecine power struggle among these families, shrewdly exploited by King Haakon IV of Norway, that finally brought the old republic to an end."
As Miller argues, "[i]t is not the have-nots, after all, who invented the state. The first steps toward state formation in Iceland were made by churchmen. . . and by the big men content with imitating Norwegian royal style. Early state formation, I would guess, tended to involve redistributions, not from rich to poor, but from poor to rich, from weak to strong." [Op. Cit., p. 306]
David Friedman is aware of how the Icelandic Republic degenerated and its causes. He states in a footnote in his 1979 essay "Private Creation and Enforcement of Law: A Historical Case" that the "question of why the system eventually broke down is both interesting and difficult. I believe that two of the proximate causes were increased concentration of wealth, and hence power, and the introduction into Iceland of a foreign ideology -- kingship. The former meant that in many areas all or most of the godord were held by one family and the latter that by the end of the Sturlung period the chieftains were no longer fighting over the traditional quarrels of who owed what to whom, but over who should eventually rule Iceland. The ultimate reasons for those changes are beyond the scope of this paper."
However, from an anarchist point of view, the "foreign" ideology of kingship would be the product of changing socio-economic conditions that were expressed in the increasing concentration of wealth and not its cause.
The settlers of Iceland were well aware of the "ideology" of kingship for the 300 years during which the Republic existed. However, only the concentration of wealth allowed would-be Kings the opportunity to develop and act and the creation of boss-worker social relationships on the land made the poor subject to, and familiar with, the concept of authority. Such familiarity would spread into all aspects of life and, combined with the existence of "prosperous" (and so powerful) godi to enforce the appropriate servile responses, ensured the end of the relative equality that fostered Iceland's anarchistic tendencies in the first place.
In addition, as private property is a monopoly of rulership over a given area, the conflict between chieftains for power was, at its most basic, a conflict of who would own Iceland, and so rule it. The attempt to ignore the facts that private property creates rulership (i.e. a monopoly of government over a given area) and that monarchies are privately owned states does Friedman's case no good. In other words, the system of private property has a built in tendency to produce both the ideology and fact of Kingship - the power structures implied by Kingship are reflected in the social relations which are produced by private property.
Friedman is also aware that an "objection [to his system] is that the rich (or powerful) could commit crimes with impunity, since nobody would be able to enforce judgement against them. Where power is sufficiently concentrated this might be true; this was one of the problems which led to the eventual breakdown of the Icelandic legal system in the thirteenth century. But so long as power was reasonably dispersed, as it seem to have been for the first two centuries after the system was established, this was a less serious problem." [Op. Cit.]
Which is quite ironic. Firstly, because the first two centuries of Icelandic society was marked by non-capitalist economic relations (communal pricing and family/individual possession of land). Only when capitalistic social relationships developed (hired labour and property replacing possession and market values replacing social ones) in the 12th century did power become concentrated, leading to the breakdown of the system in the 13th century.
Secondly, because Friedman is claiming that "anarcho"-capitalism will only work if there is an approximate equality within society! But this state of affairs is one most "anarcho"-capitalists claim is impossible and undesirable!
They claim there will always be rich and poor. But inequality in wealth will also become inequality of power. When "actually existing" capitalism has become more free market the rich have got richer and the poor poorer. Apparently, according to the "anarcho"-capitalists, in an even "purer" capitalism this process will be reversed! It is ironic that an ideology that denounces egalitarianism as a revolt against nature implicitly requires an egalitarian society in order to work.
In reality, wealth concentration is a fact of life in any system based upon hierarchy and private property. Friedman is aware of the reasons why "anarcho"-capitalism will become rule by the rich but prefers to believe that "pure" capitalism will produce an egalitarian society! In the case of the commonwealth of Iceland this did not happen - the rise in private property was accompanied by a rise in inequality and this lead to the breakdown of the Republic into statism.
In short, Medieval Iceland nicely illustrates David Weick's comments (as quoted in section F.6.3) that "when private wealth is uncontrolled, then a police-judicial complex enjoying a clientele of wealthy corporations whose motto is self-interest is hardly an innocuous social force controllable by the possibility of forming or affiliating with competing 'companies.'" This is to say that "free market" justice soon results in rule by the rich, and being able to affiliate with "competing" "defence companies" is insufficient to stop or change that process.
This is simply because any defence-judicial system does not exist in a social vacuum. The concentration of wealth -- a natural process under the "free market" (particularly one marked by private property and wage labour) -- has an impact on the surrounding society. Private property, i.e. monopolisation of the means of production, allows the monopolists to become a ruling elite by exploiting, and so accumulating vastly more wealth than, the workers. This elite then uses its wealth to control the coercive mechanisms of society (military, police, "private security forces," etc.), which it employs to protect its monopoly and thus its ability to accumulate ever more wealth and power. Thus, private property, far from increasing the freedom of the individual, has always been the necessary precondition for the rise of the state and rule by the rich. Medieval Iceland is a classic example of this process at work.