The Private Production of Defense

Lucas’ post reminded me of a piece that I wrote for his website ThinkIR, in 2013. Most of it I re-used in my book Degrees of Freedom (2015). Of course it is also a piece on its own, that readers of NoL may find of interest. Thanks Lucas!

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It is fun to think about the almost unthinkable. Therefore this contribution is about the idea that no state is needed to provide military security against foreign attack. In modern times the idea goes back to at least the French-Belgian economist Gustave de Molinari and his 1849 pamphlet The Production of Security. The most prominent current defender of this idea is the German economist Hans-Herman Hoppe, a leading anarcho-capitalist thinker, in his essay The Private Production of Defense (also see The Myth of National Defense, which was edited by Hoppe).

Hoppe rightly notices (p.1) that the legitimacy of the modern state is strongly related to the belief in collective security. Following Rothbard in The Ethics of Liberty, he argues that states will always expand, due to the governmental monopoly to tax its inhabitants. This also applies to governments that only have the limited task of protection against aggression and administrating and justice. The only proper solution is therefore to abolish the state altogether, in order to ensure true liberty and individual justice. Consequently, this also means that the provision of security needs to be privatized, as Hoppe does not expect the world to turn into a peaceful utopia (pp. 1- 5).

So how would this work? Basically, to regard the production of security as an insurance, where the expenditures for defense are to be paid by premiums paid by individuals (pp.5-8). The insured people can choose from competing insurance firms, just like in other parts of the insurance market. This is not as improbable at it may seem at first sight. Importantly, insurance companies are already used to deal with risk and other real world dangers. There are already many private security companies in existence, also at the battlefield. The cost of defense in relation to other parts of the insurance market appears large, but do not discount the idea beforehand. For example: Dutch defense expenditure in 2013 is around 7 billion Euro, less than 1% of GDP, while annual turnover of the two largest insurers is around 20 billion. Of course Hoppe would point out that the 7 billion in current defense expenditures needs to be returned to the taxpayers, hence widening the premium base. Presumably, this would work the same in other countries with smaller economies and/or smaller financial sectors (but see the remarks below).

A world without states, but with private security insurance is less war prone, Hoppe argues (p.11-12). Insurers will have an interest in keeping costs down, and will therefore only make unprovoked attacks insurable. People who provoke, or have known to provoke violence in the past, will be excluded from the insurance. After a while, the number of uninsured people will be small. They will face big defense insurance companies if they violate somebody’s property, making this unlikely to happen often, in contrast to interstate war. Yet in my view here Hoppe relies too much on his stated view on human nature: man as rational animal.

A related main defect of the essay is its focus on the role of insurers and their (economic) incentives. This is fine, but the argument quickly loses any of the convincing power it has when Hoppe turns to an analysis of international war. Or more precise, a violent conflict between a free territory, defended by one or more insurance companies, and a state, financed by compulsory taxation. He simply asserts (p. 14) that the state would be in a disadvantage because it is less efficient and that its leaders would lose their legitimacy, because they necessarily fail to convince the population of the justification of an attack on the inherently peaceful free territory.

Yet if an attack would still happen, Hoppe continues, the state-led army of specialists would not only face the defense force of the insurance company (or several insurers and re-insurers cooperating), but also an armed population (p.15). Without much analysis he simply asserts the companies will always be more efficient and also capable to counter all attacks by any state, perform counter-operations in the state territory and be able to kill its leaders, while making sure to minimize any collateral damage. All because they have to justify their insurance fees.

That is as far as Hoppe goes in his argument. He offers no further analysis or other scenario’s, no additional arguments, does not provide any international political analysis, none whatsoever. Only the fact that the insurance companies are private suffices for Hoppe as they must be more efficient and thus able to overcome all possible attack. That is too simplistic, as just three examples illuminate.

Hoppe overlooks some important geopolitical aspects. Take size of territory and population for instance. How likely is it really that a small free territory, say the size of Luxembourg, or The Netherlands for that matter, would be able to raise enough insurance premiums to enable a good defense structure to counter attacks by much larger states? There is a difference between collecting enough money to match current defense expenditures and ensuring defense against all possible attacks, especially given the anarcho-capitalist dislike of international alliances such as NATO.

Apparently Hoppe thinks all necessary technology is either invented by the research and development people of the insurance company, or freely available at the market. This is improbable as far as the state-side of the argument concerns, given today’s relative secrecy in military procurement. Also, the cooperation between insurance companies may fail in this respect. If one company has a superior weapon system, it will be a ground for competition with the other insurer(s). The superiority of one company may quickly make it a monopolist. It may become a threat to its insured, just like states may be threats to their taxpayers. Once the armed forces of the private insurer are in full operation it only takes a powerful CEO with his or her own agenda to turn things sour. Just the fact of private financing does not make much difference.

Also, does economic efficiency always trump state inefficiency? The history of warfare is full of examples where the supposedly superior army loses unexpectedly. So if the state deals a decisive blow it effectively robs the remains of the insurance company, and it’s successors, of its premium paying clients.

To conclude, for liberty loving people the prospect of stateless private security may be tantalizing. However, the quality of the argument as presented by Hoppe thus far is poor and unconvincing. His theoretical arguments largely stem from economics and overlook other relevant facts and arguments, including those from IR. Hoppe’s private production of defense remains a fairy tale.


Links:
Molinari:
http://mises.org/document/2716/The-Production-of-Security

Hoppe:
http://mises.org/document/1221/The-Private-Production-of-Defense

http://mises.org/document/1092/Myth-of-National-Defense-The-Essays-on-the-Theory-and-History-of-Security-Production

Rothbard:
http://mises.org/document/1179/The-Ethics-of-Liberty

Nightcap

  1. Let’s have more audience-free debates Fred Kaplan, Slate
  2. Why the Natives usually sided with the British Jeffrey Ostler, Atlantic
  3. The case for shortening medical education Jain & Orr, Niskanen
  4. What’s buried in the coronavirus relief package? Billy Binion, Reason

A Small Reason Why I Don’t Want Big Government

Santa Cruz, California is really Silicon Valley Beach. It’s the closest; the next one is quite far. That’s in addition to drawing visitors from deep into the Central Valley of California, and a surprising number of European visitors.

One attractive beach close to its municipal wharf has only two (2) toilets. On Labor Day weekend Sunday, one of the two toilets was out of order. I estimate there were between 500 and a thousand people on that particular beach.

The day before, Labor Day weekend Saturday, the same toilet was already out of order. It was still out of order on Monday, Labor Day itself.

It was only a few months ago that the City of Santa Cruz joined a class action suit by a number of government entities against major oil companies for causing climate change. The first judge to look at the suit send the plaintiffs packing, of course.

So, this city of 60,000 wants to stop global warming but it does not have the ability to place two working toilets at the disposal of hundred of visitors who leave thousands of dollars in its coffers. The city cannot afford to hire a competent plumber on an emergency basis to fix the problem immediately. It does not have the timeX2 that would be required. Make it timeX3 on the outside. The total would come to $500 tops. Make it $1,000. It does not change anything.

The same happened last year or the year before. Surprise!

This is pathetic. We are governed by morons. Their gross incompetence is not natural, I am guessing. It’s learned stupidity. Our fault. We vote them in – with big help from UC Santa Cruz undergraduates who don’t care one way or the other, just want to feel good by electing “progressives.”

No one told our City Manager that Labor Day weekend, and its crowds, were coming. How was he supposed to know?

Nightcap

  1. Stop trying to use monetary policy for your ideological whims Joakim Book, Adam Smith Institute
  2. The lighthouse never justified state intervention Vincent Geloso, Adam Smith Institute
  3. California lawmakers haven’t learned their lesson on rent control Ethan Blevins, the Hill
  4. Ideas were not enough Mark Koyama, Aeon

(Yes, these are all Notewriters contributing op-eds to professional outlets. Fear not! They’re still around.)

Free Immigration is not a Classical Liberal Right

My eye caught this article, which stands in a long tradition among libertarians.

It is the kind of fairy tale theory that gives liberal thought a bad name in general, and classical liberal thought in particular, as it is often confused with libertarianism in the US.

My problem with arguments like these is that they make logical sense, but are practically non-sensical at the same time. I am more than willing to admit that in the ideal libertarian world free immigration indeed is a right. Yet I do not think arguments like these help us to get that libertarian ideal one inch closer. On the contrary, I am afraid it only fosters disdain and outright disbelief, even among potential supporters.

The main problem of course is that there is no ideal libertarian world. Yet libertarians all too often do not seem to care about that. They rather continue to argue about what fairy tales makes the most logical sense, rather than using their sometimes brilliant minds to come up with ideas and theories to actually foster a more liberal world. Let alone a classical liberal or a libertarian world.

To make a case for free immigration on the basis of rights is to deny the property rights of current populations. Roughly, that argument goes like this: in this world most immigrants will make some claim to these existing property rights once they arrive in their host country. Higher taxation to pay for the immigration system is one thing, but also think of housing, claims to health and medical systems, social welfare programs, schools, roads, et cetera. The majority of the current population has put money into (these) public goods, certainly in Europe, and thus property rights were created. These  should be protected and can only consensually be changed.

Also, there are more intangible effects, think for example of the change in culture and social cohesion, certainly before the new arrivals are fully integrated. Hayek warned against precisely these destabilizing effects of large groups of immigrants entering a relatively homogenous territory, drawing on his own Viennese experience in the interwar years. He openly supported Margaret Thatcher to this end in a letter to The Times on February 11, 1978, which were followed by further explanations in the same newspaper in the weeks thereafter.

This is not to say we should all build (or rather attempt to build) walls, or close off borders completely. Some form of immigration is indeed called for, if only out of humanitarian perspective. That is something completely different than free immigration though.

Is Free-Riding for Union Negotiations a Myth?

As the US Supreme Court is considering the case of Janus v. AFSCME on mandatory deductions for the purposes of union negotiations, I think it is time to truly question the argument underlying mandatory deductions: free-riding. Normally, the argument is that union members fight hard to get advantageous conditions. After taking the risks associated with striking and expending resources to this end, non-members could simply get the job and the benefits associated with prior negotiations and not contribute to the “public good” of negotiation. This is an often-used argument.  I come from Quebec in Canada where closed shop unionism (i.e. you are forced to join the union to get the job) still exists and mandatory dues are more stringently enforced than in the United States. There, one of the most repeated defense of the closed shop system and of the mandatory dues is the free-riding argument. As such, the free-riding argument is an often-used communication line.

That is, in essence, the free-riding argument. While it appears axiomatically true, I do not believe that it is actually a relevant problem. However, before I proceed, let me state that I have a prior in favor of consent and I only sign off on “forcing” people when the case is clear and clean-cut (I am what you could call a radical “contractarian”).

So, is free-riding a problem? The answer is in the negative (in my opinion) as the free-riding argument entails that unionism provides a public good. One of the main feature of a public good is an inability to exclude non-payers.  Think about the often-used example of lighthouses in public economics: the lighthouse provides a light that everyone can see and yet the owner of the lighthouse would have a very hard time to collect dues (although Ronald Coase in 1974 and Rosolino Candela and myself more recently have emitted doubts about the example).  However, why would a union be unable to exclude? After all, it is very easy to contractually “pre-exclude” non-payers. A non-member could obtain only 50% or 75% or 80% of the benefits negotiated of the union. Only upon joining would he be able to acquire the full benefits of the union.

As such, “excludability” is feasible. In fact, there are precedents that could serve as a framework for using this exclusion mechanism. Consider the example of “orphan clauses” which were very popular in my neck of the wood in the 1990s and early 2000s. Basically, these clauses “create differences in treatment, based solely on the hiring date, in some of the employment conditions of workers who perform the same tasks“. These existed for police forces, firefighters and other public sector workers.  Now, this was a political tool for placating older union members while controlling public spending. As such, it is not an example of exclusion for negotiation purposes. Nevertheless, such contracts could switch the “date of employment” for the “union status” in determining differences in treatment.

Another mechanism for exclusion is social ostracism. This may seem callous, but social ostracism is actually well rooted in evolutionary psychology. It also works really well in contexts of continuous dealings (see also this example by Avner Greif which has been the object of debates with Sheilagh Ogilvie and Jessica Goldberg)  Workplace relations between workers are continuous relations and shirkers can be ostracized easily.  The best example is the “water dispenser gossip” where co-workers will spread rumors about other workers and their behavior. All that is needed is an individual marginally inclined towards the union (who could even get special treatment from the union for being the ostracism-producer) who will generate the ostracism. As such, the free-riding argument has a solution in that second channel.

In fact, ostracism and contractual exclusion can be combined as they are in no way mutually exclusive. These two channels are the reason why I do not adhere to the “free-riding” argument as valid justification of compulsory payment for financing unions.

Physical Goods, Immaterial Goods, and Public Goods

Public goods in economics have been a contentious theoretical issue since Paul Samuelson introduced the concept in 1954. The main sources of contention are what real world things are public goods, and who should provide them. In this post I propose a new way of looking at goods that will shed light on why public goods have posed such a problem. In particular, I propose that there is an important distinction between physical goods and immaterial goods; that public goods can only be immaterial goods; and that this unique feature of public goods does not preclude the market to provide the “socially optimal level.

Introduction

Economists define a public good as something that is “non-rival” (meaning that one person’s consumption does not affect another person’s), and “non-excludable” (meaning that one person cannot stop another person from consuming the good.) Public goods are often contrasted with private goods, which are rival and excludable.

The implications are that public goods cannot be provided by a free market, because no one would have to pay for such a good, and so there would be so incentive to produce it. Therefore, the argument goes, the government ought to provide public goods.

Features_of_goods

An example of a private good is an apple. Imagine a world with just you, me, and an apple. If I take a bite out of the apple, there is now less apple for you to consume. That means it’s rival. If I put the apple in a locker to which only I know the combination, then again you are prevented from consuming the apple. This makes it excludable.  Continue reading