Suppose there is an island with 8 people on it, who live together peacefully. Now A arrives on the island who hasn't yet learned the advantages of economic cooperation.

A makes a trade with B: A’s bag of sugar for a pair of primitive shoes from B. After A has left, B finds out that the bag contains mostly sand. B has been defrauded.

A number of consequences ensue:

B writes up an account of what happened and gives it to the others on the island. The others on the island now know to be wary of A. They have a high certainty of the truthfulness of this claim, because B stakes his reputation on it, and B has always been a trusted member of the society.

The others on the island now no longer give A any leeway. This means that they will not give him a loan or do him any favors. If A wants to trade with anyone he will have to pay upfront in full.

A will have to pay much higher prices because it is riskier for people to deal with a criminal.

A will not be hired because it is too risky to let him have any responsibilities. He may end up costing people more than he can deliver. Or he is only given work for very low pay, as the demand for his labor is extremely low.

He will be encouraged by everyone to pay B back.

A can restore his reputation if he pays back B and demonstrates that he can be trusted again. This can take a while, but all signs of goodwill will allow him more benefits from the society. For example, if he pays back B whatever he can and agrees on a payment plan for the remainder, B can announce this resolution publicly and that way A can get back on the road to recovery.

You can see that in this society, through the use of reputation and sharing of experiences, prevention of crime and resolution of incidents are the main goals.

Alternatively, B could consider getting his property back by force. There are risks involved in using force, but he may think it is worth it. B has to consider the consequences for his own reputation. If he acts unreasonable he may end up being treated differently himself by the rest of society.

In either of these cases, this society has no ruler. But it does have rules: