Arnold Kling  

Privatizing Defense vs. Socializing Medicine

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Tim Noah writes,


Suppose the national defense of the United States were relegated to the private sector. Instead of the publicly funded Army, Navy, Air Force, and Marines, the country would be defended by private militias funded mainly by insurance companies. In the event of foreign attack on U.S. soil, the militias would defend those citizens in the affected areas who'd paid defense insurance premiums through their places of work (or, if self-employed, as individuals).

The best-armed troops would defend the wealthiest and most hawkish segments of the population, who would have paid the highest premiums.

The less-wealthy and more dovish customers who'd chosen a less-generous policy would likewise be defended against attack, but they could expect to pay heavily out of pocket because their insurance would only cover costs for weapons and manpower above a fairly high deductible.


Noah's point is that privatized medicine is absurd. If we believe in privatized medicine, then why don't we believe in privatized defense?

The standard textbook economic answer is that while defense and health care are both good for people, only defense is a public good. When I consume health care services, essentially all of the benefit accrues to me, and unknown strangers get almost no benefit. If I were to buy a missile defense system for the United States, most of the beneficiaries would be unknown strangers. As a result, the textbook argument goes, private individuals have too little incentive to provide defense. They have plenty of incentive to obtain health care. That is why defense is a public good and health care is not.

So Noah is making an unpersuasive argument for socialized medicine. But is he making a good argument for privatizing defense? Anarcho-capitalists, feel free to chime in.

Thanks to reader Ananda Gupta for the pointer.


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CATEGORIES: Public Goods



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The author at amcgltd in a related article titled Private Use Only writes:
    While it hasn't come up recently in any of my own arguments, the whole "why don't we have privately funded defenses?" question seems to be ably put down here. So all of you who were sharpening that particular argumentative... [Tracked on March 7, 2007 12:38 PM]
COMMENTS (37 to date)
Fazal Majid writes:

Some areas of medecine, like vaccinations or fighting epidemics, are public goods.

flix writes:
Private individuals have too little incentive to provide defense
?

Rubbish. Do private individuals have too little incentive to provide fire insurance? In the age of WMDs war insurance makes much more sense than the "War on Terror". For example, as the president of an insurance company, would you have invested more in assassinating Saddam or invading Iraq?

flix writes:

Plus the dichotomy between public goods-private goods is a false one. The existance of a public good does in no way preclude its private provision.

Read "The Voluntary City"

Plus there is a positive externality: the rich have more to lose (in monetary terms) and therefore have an incentive to prevent war despite any free-riders. Uninsured property would devaluate faster if the risk of war increases, so there is a direct incentive not to free-ride.

Donut writes:

I don't have any clear idea if a private militia is better or not, but I can tell you what the difference between health and defense is - the use of force.

Force probably has a special place in human interactions - it can be used to compel people to do things that they would not otherwise do. We give the "use of force" powers to the government in the hope that these powers will be used sparingly and for the common good. I think that the US has a pretty good record in the 20th century of not abusing these powers - especially in comparison with other nations. (yes, it is not perfect, but nothing man creates will ever be perfect).

If use-of-force decisions become private, what stops Coke from hiring a militia and taking out Pepsi? I think "Snow Crash", with its picture of warring businesses in a government-less environment shows a possible outcome of privatizing force.

I don't see these kinds of issues being prevalent when I go get a prescription for my heart meds...

Brandon Berg writes:

The reason this argument is absurd is that it totally ignores the main argument for increasing out-of-pocket health care costs: that people use too much expensive health care when the marginal cost of care is very low. High-deductible plans are intended to counter this effect. Yet here Noah assumes that insurance will have no effect whatsoever on the consumption of military services.

Also, Noah doesn't seem to understand the economics of insurance. Wealthy people have an incentive to purchase cheap, high-deductible plans rather than expensive, low-deductible plans. The difference is, on average, a net win for insurers, so anyone who can afford a high deductible should go with catastrophic coverage.

James writes:

The textbook answer confuses the issue by failing to distinguish between ends (which are always private) and means (which are sometimes public).

To see the point here, take an example that nearly all economists agree is private, such as bread. Merita could sell bread as a public good, by giving it away to all Americans for a week once they receive contributions totaling their production costs plus some markup. The very same good, bread, would be a public good rather than a private good simply due to means of delivery. Private firms tend to be interested in making profits, and selling private goods tends to be more profitable than selling public goods, so they generally find means of delivery that make their goods private.

A missile defense system that blew up missiles pointed toward any place in America would be a public good. A missile defense system that only blew up missiles pointed toward the homes of subscribers would be a private good. An insurance policy that would cover me for damages committed by foreign aggressors and with a premium related to the value of my assets and my risk factors would also be a private good. A company offering such a policy might find it cost effective to provide physical security services in addition to claims coverage, or not. But absent a market in such services it is impossible to see if they would be cost effective or not. And given the tendency of insurers to link premiums to the cost of serving claims, the fee structure would probably minimize the extent to which the hawks and paranoids are subsidized by the doves.

Noah's objection seems to be that people would make the tradeoff between defense and other stuff that they deem optimal by their own lights. How is that a problem?

In any case it's a less than clever trick to assume that defense must be provided in ways that make it public and then argue that defense is, in itself, a public good.

On the other hand,

flix writes:
what stops Coke from hiring a militia and taking out Pepsi?

Substitute Coke and Pepsi for germany and france and you'll understand a bit about history. Change them to US and Korea/Iran....

The diference is that coke customers would be living right next to pepsi customers, which might preclude the use of indiscriminate bombing. Also consumer goodwill usually prices quite high for corporations...

but the real answer is: NOTHING (except perhaps their rational self-interest) just the same as for STATES.

James writes:

Disregard the other hand.

bob writes:

Read MINERVA
or The Probability Broach
or The Ungoverned

James writes:

Donut,

If Coke had to finance the violence themselves, they would probably be more hesitant than most governments, which can force others to finance their violence. There are no guarantees, but the difference in incentives hardly points to the desirability of nationalized militaries.

joe writes:

I find it extremely funny the way people often warn "in the absence of a state you would just be in thrall to the local mafia boss!!!"

What do you think the State IS? How do you think it came to be?

f writes:

Can you imagine GOP.inc's shares taking a hit with every soldier and civilian killed in Iraq? and GW Bush's stock options becoming worthless if he is unable to prevent war with Iran?
can you imagine being able to cancel your policy with USAF right NOW if you thought they weren't doing a good job of protecting you?

Just imagine what it would be like living on the border and being able to change your nationality/residence every time you want.... Or being able to pick and choose which govrt. provides you with which services...

Martin writes:

Arnold,

This guy has a serious dose of government worship.

I might be wrong, but if one thinks of three of history's most successful forms of government (Roman Imperial, British Imperial and American), all had/have armies yet none had socialised medicine.

Noah clearly all thinks all activities should be performed by government, whereas good government should always know its limits.

If he really wants to know about socialised medicine, well, he can try this little story about socialised medicine, British Post-Imperial style.

I live in Scotland, suffer from Tourette Syndrome and, due to a bad and very prolonged flare-up, have been waiting for an appointment with a National Health Service neurologist since October 2006.

My NHS general practitioner is a good guy who knows what he's doing - so good, in fact, that retaining his services is a major factor in determining whether or not I move house in the future, because if I move he might not be able to retain me on his books.

Socialised medicine has only purpose - it must be free at the point of use. It does not matter how long it takes for patients to access services; it does not matter whether the hospital they enter is clean; as long as it's free at the point of use, it's doing its job.

That factor alone does not not an efficient healthcare provider make. There are times when it works very well indeed - when my mother suffered a supernova heart attack almost immediately after heart surgery, the NHS was able to get a cardiology professor out his bed at 04.00 hours to come and operate on her.

However such examples are more often than not a consequence of the professional commitment of those who work within the system, rather than anything to do with the structure of the system itself.

R.S. Porter writes:

Do I get to be the token Anarcho-Capitalist?

As soon as anyone says "public good" they've already lost the argument in my view.

I saw the same column earlier today and had much the same thoughts, my post is here:
http://amateureconblog.blogspot.com/2007/03/would-you-privatize-defense.html

ronaprhys writes:

Flix,

You seem to be ignoring a few basic aspects of waging a successful war, be it defensive or offensive. First, there has to be a coherent strategy that all parties are agreeing to and working towards. Secondly, you can't the more well-defended (as would happen if it was primarily privately financed) areas be areas that aren't as useful to keeping the war machine running. In a privatized system, the folks with the most money would be instructing their troops to defend what matters to them the most (not that the rich don't do this to an extent anyway, however, the generals can, will, and do happily ignore that if necessary), which may or may not be in the best interest of the rest of the country.

ronaprhys writes:

And your comparison to fire insurance isn't particularly valid. Insurance isn't meant to be preventative or a deterrent, whereas a military presence can be both.

Another difference between the states and corporations argument that you put forth is that governments can be either unelected or overthrown by the people. In a corporation, that can occur if it's publically-funded, but only by a very small group of people. The public at large doesn't have much a say in it at all. To be fair, they didn't have much of a say a few hundred years ago, however, they did manage to change governments a few times anyway, no?

flix writes:
Insurance isn't meant to be preventative or a deterrent, whereas a military presence can be both.

Having to pay claims does seem to be an incentive to prevention.

governments can be either unelected or overthrown by the people

Corporations can be "unelected" much more easily and are in fact much more often. If you look at the SP500 of 50 years ago you'll probably only recognize a dozen names. The public at large has a very large say in whether Toyota or Ford do well.

flix writes:

more importantly, you can unelect coke or pepsi every single day. you can unelect your insurance company in a matter of days. How often, and at what cost, can you "unelect"/overthrow your king/dictator?


a privatized system, the folks with the most money would be instructing their troops to defend what matters to them the most

This is the most common fallacy about markets. it is not the rich that determine consumption and production. Poorer consumers often outbid richer ones. You can be poorer than your neighbour but spend more on guns, or on you car, because you CARE more than him about a particular product. The largest companies are not the ones that cater to a few rich clients, but those that provide for millions of consumers.

As to the need to centralize command in war, that just makes it easier to surrender. Two words: Guerrilla. Nukes.

joe writes:

A standing army is never a defensive force.

The only country currently enjoying 500 yrs of peace has pursued a very clear, easy to emulate policy: Well-armed neutrality.
Swiss foreign policy used to be america's (jeffersonian) foreign policy.

If it hadn't been for W. Wilson's imperialism it is quite likely that the 20th cent. would have seen a lot less bloodshed.

Wild Pegasus writes:

The best-armed troops would defend the wealthiest and most hawkish segments of the population, who would have paid the highest premiums.

The less-wealthy and more dovish customers who'd chosen a less-generous policy would likewise be defended against attack

The less well-off tend to live in areas least likely to be invaded. Which do you want, West Virginia or New York City?

- Josh

Wouldn't a privatized defense mean George Soros with the Bomb?

flix writes:
George Soros with the Bomb?

That is scary.
Then again, so is the other George...

Matt writes:

Charge New World Order fee.

Our forward defense is a New World Order strategy, designed to protect international banking and trade.

Liberals can accept a mix of private and public military institutions for the international defense of trade, but libertarians want the users of international trade security to pay for it.

We currently charge China, for example, a 3% fee on dollar reserves in exchange for hegomony serices we provide. But we collect that fee in external dollar deflation when it should properly be collected as a port tax of, say 4%.

This is another case of some remaining residual of libertarianism in Arnold which is fighting his nanny conservative tendencies; constant rationalization between the two opposite tendencies.

There is no difference between international trade defense and medicine; they both are supplied with a mix of private and public sector establishments. Both are improperly priced.

Matt writes:

By the way, Arnold must have picked national Missile Defense just to irritate me. I worked the issue for Lockheed Martin, and the entire 500 billion effort at national missile defense is an utter failure, with a realistic probability of shooting down anything at .1%.

Also a bad choice for Arnold, for much of NMD is designed for nations pissed off about out New World order military services business, not with our domestic defense.

ronaprhys writes:

flix writes:
Having to pay claims does seem to be an incentive to prevention. Actually, it's more the inconvenience and or immediate fines than the premiums themselves in most instances. Mostly because the total out of pocket expenses are significantly lower than the actual pay-out when they're used.

Corporations can be "unelected" much more easily and are in fact much more often. If you look at the SP500 of 50 years ago you'll probably only recognize a dozen names. The public at large has a very large say in whether Toyota or Ford do well. Apples and oranges. This isn't electing or unelecting leaders here, it's whether or not a company survives.

more importantly, you can unelect coke or pepsi every single day. you can unelect your insurance company in a matter of days. How often, and at what cost, can you "unelect"/overthrow your king/dictator? Again, an innaccurate comparison. A single person can make a choice one way or the other, but it takes a very large number to actually change how the stockholders react to current leadership. Additionally, if it's good for the bottom line, the stockholders may or may not chose to unelect warhawk leaders. The simple fact is that unelecting either is a very costly and time-consuming process. But then again, this all started when you compared more or less feudal systems to modern times, which is also inaccurate.

a privatized system, the folks with the most money would be instructing their troops to defend what matters to them the most [my comment left in due to relevance]

This is the most common fallacy about markets. it is not the rich that determine consumption and production. Poorer consumers often outbid richer ones. You can be poorer than your neighbour but spend more on guns, or on you car, because you CARE more than him about a particular product. The largest companies are not the ones that cater to a few rich clients, but those that provide for millions of consumers.

Wrong on two counts. First, I never specified the rich. I specified the group with the most money. There is a reference in there to the rich having an undue influence over our current government, but that doesn't change my point. Secondly, you have to look at the specific market to show what group controls it. To make a blanket statement like that over-generalizes a granular market.

Two words: Guerrilla. Nukes. Yes, because the best strategy in war are to let the attacking force occupy your territory and hope that your guerilla effort will get rid of them and that they won't just turn into an incredibly brutal dictator and kill everyone. Way to think that one through. And you second it with large bombs? In fact, large bombs that if used will likely also cause them to be used on you? MAD? Another stellar example of solid thought.

A centralized command and common strategy allows for a much more efficient use of resources and gives a greater chance for success. And yes, it can make surrender easier if that's the best option.

I honestly don't mean to be overly sarcastic, but your responses don't show that you understand the dynamics of the situation.

ronaprhys writes:

joe writes:
A standing army is never a defensive force.

The only country currently enjoying 500 yrs of peace has pursued a very clear, easy to emulate policy: Well-armed neutrality.
Swiss foreign policy used to be america's (jeffersonian) foreign policy.

If it hadn't been for W. Wilson's imperialism it is quite likely that the 20th cent. would have seen a lot less bloodshed.

Posted March 8, 2007 05:19 AM

Well, Switzerland's terrain never had anything to do with that, now did it? And how about their being bankers for literally anyone, regardless of how inhumane they were? Is that a good thing? On top of that, do you really advocate issuing most every single person weapons?

What I'm trying to say here is you're making an incorrect comparison. Our situations and demographics, are in fact, different. There are similarities, to be sure, but there are key differences that have led to this neutrality that you leave out in your point.

And as to Wilson, do you mean we would've seen a lot less of our blood shed, or non-American blood shed. Because it seems to me that Europe and Asia have never played well with others, or themselves. Had we completely stayed out, they likely would've still happily went to war without us. And it may or may not have been longer and bloodier.

Wild Pegasus writes:
The best-armed troops would defend the wealthiest and most hawkish segments of the population, who would have paid the highest premiums.

The less-wealthy and more dovish customers who'd chosen a less-generous policy would likewise be defended against attack

The less well-off tend to live in areas least likely to be invaded. Which do you want, West Virginia or New York City?

- Josh

Posted March 8, 2007 11:06 AM

But that only takes into account the US. And invading NYC, as much fun as it might originally sound, doesn't actually get you much in a material sense. It might temporarily paralyze the economic situation and make it harder to get goods in, but it doesn't get to natural resources and manufacturing. That's what you're after in a war. Given that those have a tendency to be located in poorer areas, the original post still has merit.

flix writes:
1.Well, Switzerland's terrain never had anything to do with that, now did it?

2. Yes, because the best strategy in war are to let the attacking force occupy your territory and hope that your guerilla effort will get rid of them...
3. And you second it with large bombs?

I'll be brief: Atlantic, Pacific. Guerrilla, Submarines, airplanes. Tactical nukes.
If you spend a few seconds thinking, you might actually see it, I'm not gonna spell it all out.

The alternative of course is the imperialism you're already committed to. Unless you can explain how having bases in over 150 countries is going to keep you OUT of wars...

flix writes:
Corporations can be "unelected" much more easily and are in fact much more often. Apples and oranges. This isn't electing or unelecting leaders here, it's whether or not a company survives.

Try something, just for one minute suspend disbelief and try to forget about your glorious leaders, just imagine the GOP and the Dems as corporations.
What would that make the USA?

ronaprhys writes:

flix writes:

I'll be brief: Atlantic, Pacific. Guerrilla, Submarines, airplanes. Tactical nukes.
If you spend a few seconds thinking, you might actually see it, I'm not gonna spell it all out.

The alternative of course is the imperialism you're already committed to. Unless you can explain how having bases in over 150 countries is going to keep you OUT of wars...

Yes, I know about the Atlantic and the Pacific, and their role in potentially keeping us out of wars. In fact, I understand that this is a key item in keeping the last few major wars off of our soil. That being said, you seem to have ignored my points that comparing Switzerland isn't particularly valid - unless you want us to stay completely neutral, support anyone for money regardless of the morality of their actions, and basically ignore protecting any trade interests.

And while I certainly understand the role of tactical nukes and different delivery methods, are you actually suggesting that the best way to defend ourselves is to privatize the use of nukes? So that any tinpot dictator or other country that tries anything with us gets nuked?

Good job of ignoring my comments about guerilla warfare as well. Nice to see that you're selective in what you respond to.

Try something, just for one minute suspend disbelief and try to forget about your glorious leaders, just imagine the GOP and the Dems as corporations.
What would that make the USA?

What particular political allegiance do I support? Wouldn't you need to know that prior to making statements about my political beliefs?

But, to your point: I can imagine that the major political parties have similarities to major corporations. It's not that hard, but reality also dictates that they've got certain specific differences as well. Ones that make the comparison, while interesting for certain discussions, invalid.

And your response doesn't make your apples and oranges comparison successful, either.

flix writes:
Good job of ignoring my comments about guerilla warfare as well. Nice to see that you're selective in what you respond to.

I admit it, I don't respond to everything, a matter of time and dislike for long posts.

However I thought that precisely the part I was answering was the one about guerrillas and not being invaded, by mentioning natural borders, a fleet and an airforce. There is also a big precedent in the battle of Britain.

On the subject of isolationism, I realise you don't think that the choice is so clear-cut, but if you had to choose, what would it be: world empire or total neutrality?

flix writes:
What particular political allegiance do I support? Wouldn't you need to know that prior to making statements about my political beliefs?


There are some indicators, I can't be certain wheteher it's Coke or Pepsi , however you have made it abundantly clear that it is cola-flavoured.

ronaprhys writes:

To be honest, I don't think you can choose on something like that. If you put them on a bell curve or some other continuum, I would probably be more on the isolationalism side, but there'd be definite exceptions to my thinking. Personally, I think we should leave other countries alone militarily - for the most part. The exceptions should be reserved different sorts of situations, but even then each situation should be judged on it's own merits rather than by using some arbitrary rule or precedent.

1 - to stop genocides. Before someone asks why we aren't in [random country of their choosing with genocide or other unpleasantness occuring], we're not the only country in the world that could help here. This isn't the USA that needs to respond to everything.
2 - To prevent a country from annexing other countries.
3 - When there's the ability to get in and out relatively quickly.
4 - Related to the above, there need to be clear objectives.
5 - To prevent a definite and immediate threat to ourselves and our allies
6 - To enforce treaty obligations and surrender document conditions
7 - When failure to do so would have a worse economic/social impact on the rest of the world.

The list isn't meant to be inclusive, but until then using trade and other sanctions would be the way to go, if not plain ignoring the country.

Just my $0.02.

Susan writes:

Making health care a public good would hurt those who can afford a higher standard of care. If health care was a public good anything higher than the minimal standard could not be offered due to the fact that it is not fair that everyone cannot afford it. The rich can afford any kind of health care that they need or want, but should the poor be punished because they don't have the money for the health care they need? This situation is seen daily when people come in and cannot afford their needed procedure. Either side of the coin is unfair but there are ways to find help to receive the health care that is needed.

Kelly writes:

I think it is very important to realize that defense is a public good, and that it would only do the country and economy harm if defense were privatized. This would lead to a poorly defended country with only a few groups of people properly defended. However, I personally do not think that socializing health care would be a bad idea. This would allow all people to have equal health opportunities, no matter what the individual's income level may be.

flix writes:

ronaprhys


As I said, locked in to empire. It's unavoidable. Remember that the roman republic initially only wanted to help its allies in Gaul, only wanted to secure grain shipments from Egypt, only wanted to defend Greece from the macedonian tyrant...

flix writes:
This would allow all people to have equal health opportunities, no matter what the individual's income level may be.

Dear Kelly, or Susan,
Please tell me a single country where this has happened. I happen to live in a country with socialised medicine and not only is there a gap between rich and poor, there is also a huge gap between those with connections and those without them. I have been to hospitals in most european countries and the rationing of healthcare is a fact, and guess what? there is no need to ration the exceptional, only the widespread illnesses... so who do you think gets shafted? (hint: not the rich)

BTW if you think you can really create equal opportunities in healthcare, our dear friend Hugo Chavez has recently suggested nationalising supermarkets and grocery stores. Will that guarantee equal access to food?

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