Customer-Owned Protection Agencies

I suggested yesterday that protection agencies which credibly commit to not joining any nascent cartel are likely to attract more customers than those which don’t, potentially nullifying Cowen and Sutter’s critique of market anarchism. One obvious possibility is customer ownership of protection agencies. Cowen makes this suggestion in the final paragraph of his 1992 paper:

In the above scenarios, the network becomes a government because network shareholders are able to exploit successfully conflicts between network profit maximization and the interests of network consumers. If consumers are sufficiently far-sighted, they may prefer dealing with agencies that precommit to never becoming collusive or coercive. Consumers may attempt to control the network by owning the member firms; under this scenario, the protection agencies would become mutuals or cooperatives. Protection agencies could then be bound by democratic procedures, according to consumer vote. Collusion could not occur unless approved by agency customers (shareholders).

He expands a little in a footnote:

In mutuals, the corporation’s customers are also its owners. A mutual life insurance company, for instance, is owned by its policyholders, who serve as residual claimants. If the company makes money, the profits are refunded in the form of lower premiums; conversely, losses imply higher premiums. (Not all of the mutual’s profits are rebated to customers, however, as managers retain perks for themselves.) In so far as mutual shareholders succeed in controlling their company, their dual roles as owners and customers diminish conflicts of interest. Policies that deliberately defraud customers, for instance, would not be approved by mutual shareholders. Shareholders of traditional corporations, in contrast, will maximize profits at the expense of consumer interests, when possible. Cooperatives and nonprofit organizations are other possible organization forms for protection agencies. Although these forms differ from mutuals with respect to many details, they also eschew direct profit-maximization and allow managers to maximize the flow of perks, although subject to different institutional constraints.

Customer ownership of protection agencies is probably the simplest and most effective way of avoiding a despotic cartel emerging from libertarian anarchy. The problem with such arrangements, though, is that they introduce many of the same problems which currently plague democratic politics.

Customer-shareholders need some way of making sure management acts in their best interests. The most obvious way of doing this, as Cowen suggests, is to have shareholders periodically vote for the CEO, or directly vote whenever particularly important decisions arise. As in any firm, this won’t entirely prevent managers from exploiting their position, but it will place fairly tight limits on the extent of corruption.

Whenever a moderately large group of people vote to decide some course of action, no individual is faced with a genuine choice of which path to take. They can express their preference, but, except in the case of an otherwise tied election, the outcome will be unrelated to their choice. This means that nobody has an incentive to think carefully about their decision, and have every incentive to vote expressively and indulge their irrational biases. This has been well-documented with respect to ordinary democratic politics, but is relevant to any large-group voting situation.

This doesn’t seem to be particularly important in ordinary shareholder voting (though as far as I know, nobody has looked into it and I can imagine it having some effect), presumably because voting rights are allocating by the share rather than the person – giving those with the most at stake the most say – and because the activities of corporations don’t tap into expressive preferences or cognitive biases to the same extent as democratic politics.

Unfortunately, collective choice within customer-owned protection agencies more closely resembles political than shareholder voting in this respect. While customers with more expensive premiums may be given extra votes, the inequality of voting power will be nowhere near that of an ordinary corporation. Further, law enforcement and the definition of rights seem like areas in which expressive preferences are likely to dominate.

Expressive shareholders will not only make protection agencies run inefficiently, they will also be more likely to violate the rights of others and engage in destructive conflict. People are more bigoted and bloodthirsty when freed of cost considerations. These are problems we live with under democratic rule today, however, and it’s hard to see why they would get worse under anarchy. While anarchy with customer-owned protection agencies will be far from perfect, it should be considerably better than centralized government.

Protection agencies will initially behave like lots of little governments, with all the inefficiency and bigotry we see in politics today. The crucial difference, though, is the option of exit. A thousand nations will bloom and efficient protection agencies – those managing to minimize the harm of foolish voters and corrupt managers – will gain more customers than inefficient ones. This could result in many small agencies which give each customer a significant voice, or agencies with supermajority rules and other limits on strict majoritarianism. Of course, the potential for innovation will be lower than in a market with entrepreneurs making profit-seeking decisions. People will flock to efficient agencies, but agencies’ decision rules will be unresponsive to consumer demand.

There may be ways for an ordinary shareholder firm to credibly commit to avoid a cartel, and the market would provide every incentive entrepreneurial discovery. I can’t think of any entirely plausible way, but that doesn’t mean one doesn’t exist. We might see a customer-ownership equilibrium eventually give way to a shareholder equilibrium once commitment mechanisms are devised.

I do have some niggling concerns over collective action problems (one shareholder-only firm would be more efficient than its competitors, would have no peers with which to form a cartel, and would therefore be attractive to customers when all other firms are customer-owned), but it seems that customer-owned anarchy would be preferable to the status quo, and would improve over time.

This is why I am now a tentative anarchist.

2 Responses

  1. Brad,
    It is encouraging that more people like yourself are willing to widen their search for truth beyond the fences of conventional wisdom. Your articles (linked by http://www.strike-the-root.com/ ) are well reasoned and bespeak a genuine desire to find answers to some of life’s more vexing problems. Toward this pursuit, I invite you to look at the work of Stefan Molyneux, a philosopher and author, one of whose books is linked here:

    As a believer in the free market ideas of letting the consumer set the value of products in the economy, his site: http://www.freedomainradio.com/ has much in the way of insightful content including over 1000 podcasts and videos created over the span of several years and is offered to all for voluntary donation.. A lively community has sprung up on the message boards and there is a live audio chat hosted weekly.

    I see the shortcomings of a culture that sees coercion as the only tool for maintaining an orderly society and the concept of a stable anarchy holds much promise. I am curious what you think of Mr. Molyneux’s ideas toward this end.

    Thank you for creating your blog.

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