A few weeks ago the failing Russian economy made news in the U.S. when some stock market analysts suggested that recent declines in the Dow were due to Russia's woes. Whether the drop in the Dow was because of Russia's problems or because U.S. firms' earnings were below expected levels remains to be seen. No matter what is awakening the Wall Street Bear from its hibernation, the distress of the Russian Bear is worth examining.

Markets are supposed to work better than central planning, but that does not appear to be the case in Russia. The Russian economy just isn't working, despite their attempts at market reforms. What could be the problem? I don't know, but I do have my suspicions.

Markets work well within a system of defined and understood property rights. By "property rights" I mean a system of rules that gives members of that society an understanding of who gets to do what under various circumstances. Property rights can be thought of as the "rules of the game." For instance, in the NFL, a fumble recovered in the end zone before the last two minutes of the half is a touchdown no matter who on the offense recovers it. However, if the fumble is recovered in the half's last two minutes by anyone other than the fumbler, there is no score. The rule lets folks know who gets what under various circumstances.

Property rights are the economy's rules. If you know the rules, you know what to expect in "the game." What if you didn't know the rules? Imagine playing bourée without knowing the rules. I know I wouldn't agree to play.

In the U.S. we have property rights governed by a legal system that has evolved over several centuries. The Bolshevik Revolution tore down ordinary property rights and killed the legal framework for a market economy. A legal framework of criminal law, contract law and tort law cannot be born from nothingness. If people do not know the rules of the market game or suspect that others are making them up as they go along, people refuse to play the game.

While some contracts need an enforcement body to guard people against non-performance and fraud, some contracts are made that can be termed "self-enforcing." A self-enforcing contract is one that the future losses from breaking the agreement outweigh the profits from breaking the agreement.

Still, to enter any contract involves trust. If there is little trust in a society, markets may have a difficult time functioning. To save, people have to trust. Buying a product or service requires trust. To hire, people have to trust. To invest or lend, people have to trust, in fact, the extension of credit is an act of trust.

The Russian people, after more than 70 years of Soviet rule, after decades of KGB terror, after years of family members and neighbors being encouraged to inform on one another, have a difficult time trusting others, especially those they do not know. Trust among Russians is in short supply. Contrast this with the U.S. or many other countries, where workers know they will be paid, where credit is extended very easily.

Trust and a stable set of rules, or property rights, are both necessary for a well functioning economy. Rules and trust guide our expectations of what others will do and how they will respond to our actions. A market system, our economy, is not self-contained. It exists within a legal structure that punishes those who break promises. Contracts, whether ordinary exchanges or even marriage, require that promises be kept, and trust, after all, is a belief that others will keep their word.

Russia may have other problems. I make no claims to be an expert on the Russian economy. A market system has to be contained within a legal system where people understand the rules. For so long the legal system in Russia was gave face to the nightmare of a legal system that Kafka depicted in The Trial, where a defendant is on trial, and he doesn't even know the charges against him.

However difficult the road ahead is for the Russians to establish a legal system where people know the rules and that engenders trust among them, the road behind leads to permanent despair. What they had before was no economy. It was a prison.