Bryan Caplan  

Anarcho-Capitalism and Statist Lock-In

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When I teach undergraduate industrial organization and graduate public finance, I finish with the economics of anarchy - or, more specifically, of anarcho-capitalism.

To call anarcho-capitalism a controversial proposal is gross understatement. But the most common objection voiced by the economically literate is that anarcho-capitalism would quickly decay into monopoly, whether through war or merger. And it's a short step from a monopoly defense firm back to government.

The standard anarcho-capitalist rebuttal is to compare the scale economies in the market for defense services to demand, and see how many firms the market has room for. If there is only room for three firms, it's plausible that they might merge to monopoly and become the new government. If there is room for ten thousand firms, it's totally implausible. As David Friedman wrote in The Machinery of Freedom:

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 start acting like a government, their customers will hire someone else to protect them against their protectors.

...My own guess is that the number will be nearer 10,000 than 3. If the performance of present-day police forces is any indication, a protection agency protecting as many as one million people is far above optimum size.

But there is a simple rejoinder to Friedman, which one of my best students hit upon: If scale economies are really this weak, why have states emerged and remained stable for thousands of years?

It's an awkward question, but I've got an answer:

Thousands of years ago, demand for defense services was very small relative to scale economies. In any locality, the market only had room for one defense firm. The result was just what the skeptics would predict: Private monopolies quickly turned into governments.

As economic growth progressed, of course, the market for defense services got bigger, making room for more and more firms. The problem, however, is that if you've got government in an area, it has the power and the incentive to prevent new entry by competing defense firms. Thus, if market conditions initially favor monopoly, monopoly can easily endure due to "lock-in," or "path-dependence."

This remains true even if current conditions are totally different from the initial conditions. Initially, there was room for one firm; now, for 10,000 firms. But the one firm that got on top isn't going to let the market respond to changing conditions. It's going to use its advantageous starting point to terrify potential entrants away.

Thus, my answer to the student's challenge is that scale economies are weak now, but things used to be very different. States emerged at a time when markets were too small to sustain more firms. Over time, the economic rationale for monopoly has grown weaker and weaker. Competition could work now, if you gave it a chance. But the state doesn't care about economic rationales. As long as it can credibly threaten to put new entrants in jail, its monopoly endures.


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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/409
The author at In Lehmann's Terms in a related article titled AnCapistan or Wal-Martathon writes:
    Over at EconLog, Bryan Caplan indulges in one of my own personal favorite pastimes -- trying to work out the bugs in anarcho-capitalist theory:Thousands of years ago, demand for defense services was very small relative to scale economies. In any [Tracked on December 12, 2005 11:46 PM]
COMMENTS (17 to date)
Patri Friedman writes:

Rather than a rebuttal, I have an alternative solution, which is to try ancap in a place where the incentive structure is different - see Dynamic Geography. A different incentive structure should lead to a different equilibrium governing system, and the particular features of this incentive structure seem likely to give rise to efficient governments.

Mike Linksvayer writes:

I'm sympathetic to anarchocapitalism, but your answer sounds weak. Lock in (if that's what it is) has been incredibly persistent across many parallel instances. If the economic rationale for monopoly has grown weaker over a long time period, and is still getting weaker, I'd think we'd have more, more significant, and more recent outliers than commonwealth Iceland.

Also, while states have predominated for thousands of years, states lasting more than a few centuries are rare. Plenty of churn, though of course often transition involves taking of the apparatus of an existing state.

I suspect the answer lies in the nature of the state, which is more a predatory gang than a defense provider. Decentralized theft and extortion is more costly than centralized theft and extortion, as the top of the centralized version (the state) cares about the Laffer curve.

Perhaps I'm just saying something about scale economies in slightly different terms.

David Friedman writes:

I have webbed a more recent discussion of the economy of scale issue--scroll down to "The Stability Problem" for the relevant part of the paper. The central point is that economies of scale probably go to larger sizes for violent conflict than for rights enforcement. The implications for anarcho-capitalism depends on which product you expect rights enforcement agencies to be primarily producing.

[Corrected URL: Do We Need a Government?--Editor]

Another way to look at the problem is to ask: how would you start Ancap, Inc.?

The biggest problem such an company would face would be protecting its clients from the U.S. government. For example, what could a defense agency do to protect me against the U.S. government if I wanted to, say, smoke pot?

Just as it would be difficult to compete against Microsoft head on, I don't think you would want to compete directly with the U.S. government at first - the U.S. government would squash you like a bug.

Rather, you want to grow big and strong in areas that could be repurposed as part of integrated defense agency, but would not be noticed by the U.S. government until it was too late.

For example, you could start an arbitration business, a real estate business, and a private security business as subsidiaries under an umbrella corporation. All are standard, well-established business models in the U.S., and wouldn't arouse suspicions.

Once those businesses were profitable, you could use the profits and expertise derived from those businesses to take on, not the U.S. government, but smaller, basket case governments, such as Haiti. The "customers" of the Haitian government are likely to be more unhappy with their government than U.S. citizens, and therefore open to novel alternatives. (I'm uncertain about this proposition, but it seems plausible.) Given the relative poverty of Haiti, you would also have a lot more leverage to influence Haitian politics in your favor.

Only after you've built up wealth and expertise in taking over protection services from multiple basket case governments, would you then take on a more formidable rival such as the U.S. government.

Would such a scenario work? I don't know. But trying to come up with scenarios for how a practical ancap protection agency (APA) could emerge will help reveal why one hasn't emerged to date. It will likely take a lot of time, capital, and expertise, and, at least in the U.S. it's unclear that potential customers perceive a need for anything better.

I think the answer has to do with competition. For "defense firms" there are two forms of competition. One is for customers and money. The other is physical confrontation (i.e. war). The economies of scale might tip to decentralization for economic efficiency of protection, but in war numbers are everything. War is a defining characteristic of human civilization and that I think explains the growth of governments.

John S Bolton writes:

Anarchocapitalism is contradictory; civil war between mafiosi, as in Somalia, is about freedom for aggression. In Somalia, the specified conditions obtained, favorable to anarchocapitalism, if such could arise spontaneously at all, yet states have appeared in the areas of "Somalia" which have stabilized territorially. Periods in history where people could shop for governments by emigrating, with a large number of choices, have not resulted in market pressure towards anarchocapitalism, and not least because such a condition is objectively impossible. Law, as such, is a sovereign principle of counteraggression, and without law there is no legal claim to property, and thus no capitalism to allow for any anarchocapitalism.

John S Bolton writes:

Places where there is competition for protective services, and no state effectively controls that region, actually exist, and are fled from. Millions have died in the eastern Congo, where refugees from Rwanda and elsewhere set up competing protective services, over against each other, with the nominal central government nowhere to be found. The people die, are killed, or flee from the contested areas most resembling the postulated anarchocapitalist conditions. On free competition for protective services, the rivals kill each other and their potential customers, or drive them out of the disputed region altogether, to such extent that no stable 'anarchocapitalist' region has ever or will ever emerge. There is competition of such destructive nature that the product in its complete form can never appear.

rakehell writes:

Mercenaries don't fight well compared to the citizen soldiers of the nation-state.

Bill Stepp writes:

Your student is quite wrong in saying that states are stable. I would recommend that he look at maps of the world over time. He'd see that state boundaries are more fluid than he thinks, and that the names of many states are a lot different than they were a century ago.

Randy writes:

I think this debate was settled by Napolean. At his rise, both Italy and Germany bordered on anarchocapitalist states, and both were easily conquered by the nation-state of France. Lesson learned. The anarchocapitalist state is simply not strong enough to survive in a world of nation-states. Both Italy and Germany transformed themselves into nation-states shortly thereafter.

A side point; What is the purpose of social security? To provide for people in old age, etc., certainly. But also to solidify the idea of the nation state, and to provide funds necessary to maintain its power. Remember that social security originated in Germany under Bismark, and in the United States while Roosevelt was preparing to fight Hitler.

Bill Newman writes:

I think this argument requires a lot of optimism. The best optimistic rationale I can think of is related to (your colleague, I believe) Robin Hanson's exponential modes observations in, e.g., http://www.futurebrief.com/robinhanson001.asp.

Arguably, I think, the state of the art in government could tend to change about as fast as the state of the art in the exponential growth constants for economics. In particular, for the post-printing press period where we have enough records to analyze things in detail, notice how the change to nation states and especially to democracy seems to have made 1500AD state of the art obsolete, in military fields as well as everything else. This was nearly invisible in 1600, and even in 1750 it was not widely appreciated, but by 1850 it was pretty noticeable.

Hanson points out that we could be due for a change in economic growth rates soon. I think the best chance for an argument against the natural dominance of nation states is a parallel argument that we are due or overdue for a change in governmental state of the art.

The military problem seems the hardest. But I dimly remember that David Friedman has argued that war is coming to be dominated by technology and money more and more. This change came much earlier to naval war, but more recently has probably arrived on land as well. In the 1950s a very poor country like China could drive the armies of rich countries out of northern Korea. Such an outcome seems less likely now, except to the extent that China is less desperately poor now. If all war is now dominated by wealth and innovation as thoroughly as naval war was centuries ago, vaguely anarchic capitalism might be much stronger than it was in the Korean War era. Ask me again after the next round of high intensity warfare, if I am still around.:-|

Rafal Smigrodzki writes:

I am not convinced by Bryan's explanation, for the same reasons as some other commenters above but I do have my own candidate: political culture.

Political culture, the set of common beliefs about what is right, and what is possible, defines the boundaries of government. Very much in the way of a self-fulfilling prophecy, universal lack of belief in e.g. democracy precludes its functioning. For a given political system to exist you need a critical mass of believers to be present among the population (in addition to stabilizing feedback loops, usually in the form of institutions and customs).

The number of anarchocapitalists today is ridiculously small: we are a minority even among libertarians. The political culture needed for stable anarchocapitalism to function would require a belief in the superiority of anarchocapitalism, coupled with the willingness to maintain, through ostracism and other means, the primary public good of anarchocapitalism - the absence of a prevailing security provider. To be willing to expend resources on this public good (and on punishment of defectors, a secondary public good), a sufficient number of citizens would have to want it, and to want it they need to know its value - not only in terms of such imponderables as the feeling of being free (so important to most of the current crop of ancappers) but also in terms of its likely economic outcomes. What's more, these citizens would have to also know the right way of enforcing this public good - and this entails feedback loops capable of preventing many very long term forms of decay, methods of verification of correct and incorrect action, in short, a large body of knowledge and skills that are absent today.

On a more optimistic note - serfs were the majority of European populations as little as 600 years ago but since then their political culture progressed well beyond feudalism. With the Flynn effect and assorted technological breakthroughs the transition to anarchocapitalism could take less time.

Rafal

Barkley Rosser writes:

Does not anarchocap need someone to enforce contracts and property rights to work? Otherwise you simply have Somali-style warlordism. Of course, The Economist does report that Somalia has the lowest cell phone signup rates in Africa.

James writes:

Barkley,

What you are attacking is an invalid quantifier exchange on the ancap position. Ancapists believe that for every contract there should be one enforcer of that contract. Ancapists don't believe that there should be one enforcer for every contract.

So in ancapland, I would pay someone to enforce my contracts. The stock response is that my enforcer may defect, but then so could the state if I rely on it for contract enforcement.

paul writes:

Actually anarchy exists now on a macro scale. There is no one world government but rather lots of "competing" governments most of which peacefully co-exist. is it stable? I don't know what to compare it to. Perhaps in the future when trading becomes more "ethereal" the terrestrial boundaries of the current states will become more liquid and competition will increase as switching cost fall. One can only hope...

Steve Miller writes:
Bill Stepp writes: Your student is quite wrong in saying that states are stable. I would recommend that he look at maps of the world over time. He'd see that state boundaries are more fluid than he thinks, and that the names of many states are a lot different than they were a century ago.

If that's what he meant, that individual state regimes are stable, then yeah, it's a silly view. But if the student meant that the state (statism, really) is stable, then that's very true. Anarchy is the exception to a rather consistent rule. When one state is overthrown, it is replaced in short or no time by another state. Borders and names change because regimes change, not because the state disappears.

Poppytop writes:

"Thousands of years ago, demand for defense services was very small relative to scale economies. In any locality, the market only had room for one defense firm. The result was just what the skeptics would predict: Private monopolies quickly turned into governments." - this is bullshit.

States are plantaions and the people are their slaves. Thousands of years ago, people were living peacefully in tribes, and some outside village ransacked them, and enslaved the people. In order to make the people more efficient slaves, they promised them protection from outside invaders. That is where states come from. NOT the demand for defense services bla bla bla.

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