capitalism

Anarchism 11
defense. The easiest way to grasp the anarcho-capitalist
position is to start with the minimal state and then imagine
what would happen if the free market absorbed its remaining
functions.
A government police force supported by taxes would be
replaced by police firms supported by paying customers.
When disputes arose, police firms would turn to private
courts for adjudication. Private courts, in turn, would strive
to attract more subscribers by crafting judge-made law to
prevent disputes from arising in the first place. Many rulings
would be enforced by ostracism, bonding, or other
nonviolent means. However, for violent offenders with few
liquid resources, it would probably be necessary to have a
private prison industry to extract restitution.
Anarcho-capitalism is often dismissed as utopian, but
Rothbard rejects the charge: “In contrast to such utopians as
Marxists or left-wing anarchists ...libertarians do not
assume that the ushering in of the purely free society of
their dreams will also bring with it a new, magically transformed
Libertarian Man.” Indeed, anarcho-capitalists are
deeply concerned about what economists call incentive
compatibility: Would private firms in a defense services
industry find it in their self-interest to behave as described?
Anarcho-capitalists predictably identify competition and
reputation as the mechanisms that link selfish motives and
socially beneficial results. Why would police firms do a
good job for a reasonable price? If they fail, consumers
would switch to a competitor. If Client A of Firm X accuses
Client B of Firm Y and infringing his rights and B denies
the charge, what would happen? A shoot-out between X and
Y is possible, but unlikely. It would be more profitable for
both sides to negotiate rather than fight. After all, the
policemen work voluntarily and would have to be paid far
more if bloodshed were a daily occurrence. In fact, business
leaders would predict that such problems would likely
occur and write contracts to handle them before they arose.
Why would police agencies turn to a judge instead of
defending their clients to the death? Agencies pursuing this
strategy would counterproductively attract the high-risk
clients. Why would judges give honest rulings instead of
selling themselves to the highest bidder? A judge with a
reputation for corruption would find it difficult to attract
clients. How would one extract restitution from an indigent
criminal? Convicted criminals would be sold to private
prisons as indentured servants and released after they paid
off their debt. Why would private prisons treat inmates
humanely? Because a safe and healthy indentured servant is
a productive indentured servant.
Even many libertarians find anarcho-capitalism outlandish
and frightening. Therefore, it is worth pointing out
that the market already plays a larger role in the defense
services industry than is generally recognized. There are
currently more security guards in the United States than
government police. In many respects, private arbitration
now resolves more disputes than the public courts. The
market has created an array of nonviolent punishments—
from credit reports to bonding to eBay feedback ratings—
to deter offenses the government fails to prosecute. Despite
the private sector’s large current role in the defense services
industry, dangerous side effects have yet to materialize.
Even libertarians are often given to hasty rejection of
anarcho-capitalism. Ayn Rand, to take the most famous
example, asserted that warfare would erupt as soon as the
client of one police firm became embroiled with the client
of another police firm. She did not explain why profitmaximizing
businesses would prefer bloodshed to arbitration.
The young Roy Childs won notoriety in libertarian circles
by pointing out the internal inconsistencies of her
critique of anarchism in his “Open Letter to Ayn Rand.”
Critics are on firmer ground when they doubt the ability
of the free market to repel foreign invaders. How would it
be in anyone’s financial interest to shoulder this burden?
Standard economics suggests that defense is a public good;
competing firms would free ride off the efforts of others,
leading to a suboptimal supply. Austrian economists like
Murray Rothbard unconvincingly reject this conclusion on
methodological grounds. David Friedman has a less ideological
response. Friedman agrees that defense against foreign
invaders is a public good. However, the total cost
of this public good is only a fraction of the current level
of charitable giving. It is not unrealistic to suggest that
national defense could be funded by redirecting existing
charitable impulses. Many would also add that even if a
tax-funded minimal government is better equipped to repel
foreign aggressors, it also is more likely to engage in foreign
aggression, provoke foreign attacks, or stage a coup
d’état against domestic liberty.
Libertarians are normally skeptical about the extent and
effectiveness of business conspiracies to push prices above
the competitive level. These conspiracies are plagued by an
array of difficulties—most fundamentally, new entry.
However, this risk seems markedly greater in the market for
defense services. A cartel of defense firms might collude to
raise prices and then short-circuit the market’s usual checks
by threatening to attack new entrants who dare to undermine
the agreement.
Is this possible? Yes, but is it likely? That depends on
the equilibrium number of firms in the industry. As David
Friedman puts it, “If there are only two or three agencies in
the entire area now covered by the United States, a conspiracy
among them may be practical. If there are 10,000, then
when any group of them starts acting like a government,
their customers will hire someone else to protect them
against their protectors.” The number of firms, in turn,
depends on the level of demand and the extent of scale
economies. If demand is low and scale economies are substantial,
there might only be a couple of rival police firms,
just as a small town sustains only a couple of grocery