Protection Agency Cartels and Organizational Innovation

Every liberal worthy of the label is a philosophical anarchist. The presumption of liberty – i.e. the notion that everything is permissible unless shown otherwise, with the burden of proof resting with those who would restrict liberty – means that we should only resort to politics after all peaceful means of solving social conflict have been exhausted. Force will always be required to stop bad people raping and killing, but I think it’s an open question whether force against the innocent (taxation) is required to fund protection against the guilty.

Market anarchists such as the Tannehills and David Friedman have argued that it is not. They imagine private protection agencies and courts voluntarily competing for customers on the open market. The current monopoly on violence would be replaced by many firms filling diverse market niches and being forced to respond to customer needs. As in any other market, they say, competition will do a far better job of satisfying customer preferences than a coercive monopoly.

If these arguments are correct, it’s pretty hard to see how anyone valuing individual preferences above all else could support government. Anarchy won’t be utopia, but it will make people far freer than they are under government.

Many anarchists will claim that since markets work better than government for every good they’ve been tried, we must conclude that they’ll also work well for policing and court services. While there’s definitely some merit in this argument, I think we need to be very careful when comparing the market for organized violence with other markets.

Tyler Cowen and Dan Sutter have had me convinced for some time that orderly anarchy is unstable and would result in something very similar to a highly predatory government. To avoid perpetual war, competing protection agencies will need some way of resolving disputes when customers of different agencies come into conflict.

Suppose Alice is a customer of Agency A and Bob is a customer of Agency B. Since agencies compete partially on the basis of offering different rules tailored to customer preferences, some things viewed as a crime by Agency A will be deemed permissible by Agency B. What happens when Alice demands compensation for some action Bob has performed which she has paid Agency A to protect her against? In a world without interagency arbitration, Agency A will punish Bob. Bob will demand that Agency B protect him from this, and the two agencies will go to war. We end up with Hobbesian anarchy.

Of course, this would be very expensive for everyone concerned, and there is a strong incentive to provide for peaceful means of dispute resolution. This is where private arbitration firms come in. To avoid conflict, protection agencies will agree to be bound by the decisions of independent courts whenever conflicts arise.

Arbitration is a natural monopoly, since it’s very important to customers of protection agencies that they be able to resolve disputes with customers of other agencies. This requires considerable cooperation between competing protection agencies, including the ability to exclude or otherwise punish agencies not playing by the rules. The capabilities required of competing firms to cooperate (“cooperative efficacy”) to avoid Hobbesian anarchy – communication, ability to punish defectors, etc – are the very same things required to form a profit-maximizing cartel capable of excluding market entrants and ignoring customer preferences. From the customer’s point of view, it would be hard to distinguish this from an extremely predatory state.

So: if protection agencies can’t cooperate, we end up with chaos. If they can, we end up with a de facto state. Orderly libertarian anarchy is not a stable equilibrium.

Bryan Caplan and Ed Stringham point out that refusing to deal with harmful outlaw agencies (e.g. those allowing murder, or always willing to defend their customer with violence without concern to their guilt or innocence) is a self-enforcing constraint. The arbitration network can declare such agencies rogue, and it is in every other agency’s interest not to deal with them. It will remain profitable, however, to continue dealing with agencies which behave decently but refuse to abide by the rules of the cartel.

It therefore requires more cooperative efficacy to enforce a cartel arrangement than it does to exclude genuinely rogue agencies: there is a zone of stable libertarian anarchy between Hobbesian anarchy and despotic government. Cowen and Sutter admit that such a zone exists, but insist that it is a narrow one. We have no reason to think that this is where we’ll end up and should not wish to experiment with anarchy.

As far as the argument has gone so far, I basically agree with Cowen and Sutter. I don’t think the debate has gone far enough, however. Stringham and Hummel attempt to reply to Cowen and Sutter by arguing that ideology can change the payoffs facing protection agencies: positive material payoffs would be outweighed by negative psychic payoffs of cartelization if only those running protection agencies would internalize the libertarian worldview. That may be so, but I’d feel very uncomfortable if the only barrier between me and a despotic cartel was ideological.

The place the debate needs to go, in my view, is looking at forms of organization other than a simple subscription service protection agencies might take to pre-commit to not cartelizing. Cowen mentions this at the end of his 1992 paper “Law as a Public Good,” (not on the web, but available in Stringham’s excellent volume Anarchy and the Law) but doesn’t go into any detail and the idea has not been pursued by anyone else.

Cartelization is a market failure, and like any market failure provides incentives for its own solution (see Coase on the lighthouse, for example). A firm which can guarantee its customers that it won’t enslave them in the future will receive more custom than one which cannot make such a guarantee. This would generally require forward-looking consumers, but there don’t seem to be any collective action problems to overcome. If we ever get to the situation where the state has withered away, I would bet on people being reasonably far-sighted in their choice of protection agency.

Of course, just because there’s an incentive to provide something doesn’t mean it can actually be provided. Anyone inventing a perpetual motion machine would become very rich. Unfortunately, such a machine seems to be a physical impossibility. I don’t see any reason, however, to suppose that credible commitment to non-cartelization is impossible, and there are some plausible candidates for how it might be achieved.

This post is getting long, so I’ll leave discussion of the particular ways firms might pre-commit for another day (Update: see here). By the way, this detailed overview of public choice theory and anarchism by Powell and Stringham is great stuff for anyone wanting a broad understanding of the literature.