How to protect your nation/community/society against foreign invasion is one of the hard questions posed in front of the anaracho-capitalists. As the most common solution to this problem it is suggested that protection against foreign invasion be implemented with the help of a combination/fusion of private insurance and private defense companies. With this solution private property owners buy private property insurance and the insurance companies in turn make sure their clients are secured against foreign invasion by employing private defense companies to fend off the aggressors. A separate and somehow different view is the one offered by D. Friedman. In it militia forces, derived voluntarily from the general population are led by a small elite of professional soldiers, who are paid from voluntary donations.

The problems with the above views could be summarized as ethical and economic ones. I will review them in turn.

1. Ethical problems

In both solutions it is the private property owners who pay for the army one way or another. Whether this is achieved through paid insurance or through “voluntary” donations is irrelevant to the fact that the money is obtained under the threat of being conquered. What I mean is that people pay for insurance not because they enjoy having an army or wishing to make money but because of the credible treat. In such a way the suggested insurance protection market is a non-free market, since people act under the threat of physical aggression. Markets in which one or both of the sides act under initiated aggression or threat thereof are not free by definition. In the same way, the “voluntary”payments for the professional part of the army, as suggested by D.Friedman, are not voluntary at all, because of the simple reason that if you do not pay, you suffer. In addition the latter solution does not employ market means and as such is not a market solution at all, but a non-market one.

Under the suggested systems the army services are a public good. However, when a good is a public one, one can not exclude potential clients what leads us to the “free rider” problem, namely people who try not to pay but still obtain the above service. So, there will always be people who get something for nothing and in this way get ahead of the rest.

2. Economic problems

2.1. The general economic problem

The general economic problem is that if the society spends money/resources on protection then it can not use this money productively, i.e. for investment/growth or to satisfy its pressing needs. In effect money which can used to make one’s life better will be used just to make sure that what we have is not lost. In short, growth will be lower, since resources are diverted from productive use.

2.2. Specific economic problems

2.2.1.  David Firedman’s approach

In the voluntary militia and professional army approach suggested by Friedman one obtains money to pay the professional part of the army through donations. Since donations do not represent a market mechanism it will be impossible to determine how to use the particular funds, how much to pay for the specific parts of the service, what exactly this service must be and how it must be organized. This is the general problem of lack of knowledge characterizing all non-market-based systems. The problem can be exemplified with the contemporary police service: it is impossible to know what its organization must be, how much money must be spent on it and how this money must be allocated. Friedman’s solution is plagued by the same problems.

2.2.2. Insurance/defense company fusion approach

The insurance/defense company solution has a distinct and very specific problem. It stems from the fact that what is suggested is a fusion between the general economic fields of insurance and police protection.

Let us first see how the insurance branch of the economy normally functions. An insurance company typically offers compensation for occurrences such as: natural disasters (earthquakes, hurricanes, floods, etc.), loss of productive ability (health insurance), loss of property (robberies, car insurance), etc. What is common among all of the mentioned cases is that from the point of view of the insurance company these occurrences are unknown. They can be predicted by using statistical means but can not be controlled by the company itself. In short: an insurance company has no control and can not have control over earthquakes for instance. It can estimate the probability of having one and bet against its clients on its happening/not happening.

What the anarcho-capitalist insurance/defense company approach suggests is a fusion between insurance and defense. I.e. an insurance company insures against some event and at the same time protects you from it by using its defense branch. As an example, one can insure oneself against theft and the insurance/defense company will try to prevent it from happening. What this however suggests is that the insurance company obtain control over the particular insurable event. In such a way it will be able to exert control over its happening/probability. Once this control is available there is not doubt that it will be used in the best interest of the particular company.

What is typically suggested in the relevant literature is that this control will have a positive outcome for company’s clients because the insurance company will try to minimize its costs. As an example, if you are insured against robbery the company will try to protect you, so that it does not have to pay you compensation in case you are robbed. What seems to have been overlooked in this simplistic view is the fact that companies on the market try to maximize their profits in the first place. Minimizing their costs is part of the profit motive, but it is not the whole one. Another part is maximizing their sales revenues. In particular, an insurance company would like to win customers who are highly motivated to insure themselves and thus willing to pay a high price for the company’s service. What however motivates people to insure themselves against aggression in general? This is the fear of being robbed/mugged/killed/etc. If this fear is high then people will be motivated to pay a lot for insurance services. However if the same fear is low then people will not be willing to pay much to protect themselves from aggression. Thus, from the point of view of the insurance company it is better when its clients are afraid. Their legitimate concerns over their security will translate into bigger insurance sales. People however are afraid only if robberies/murders/etc. happen from time to time to them or to their neighbors. From such a standpoint the lack of crime/aggression in a society will be the worst thing that can happen to such an insurance company. If crime does not happen people will not insure themselves against it, so no clients and consequently no revenues for the insurance companies. Note that if one has no clients one can not minimize costs in the mentioned way because these cost exist only if clients exist. From all of the above it follows that it is in the best interest of any insurance company that crime/aggression happens. However in the anarcho-capitalist suggestion it is the insurance company which is able to control the occurrence of these crimes, since it is given the control over them. There is no doubt that this control will be used in the interest of the company, which however may not be the one of its clients. So, crime may be allowed to happen because this will be beneficial to the owners of the company. Examples of such a crime can be found in some of the former eastern block countries after the 1989 changes from socialist to capitalist economy. In the early years of the change the said fusion of insurance/defense (extortion) companies existed. As an example, unless one insured oneself against car theft one’s car was guaranteed to disappear. However if one was insured the likelihood of such an occurrence decreased dramatically. It must be noted that such a situation can happen because of the fusion of the insurance and executive functions. If such a fusion does not exist the mentioned problems will not be present. And the reason is that the insurance company will not be able to control the particular insured event the same way as it can not control if an earthquake occurs.

In conclusion: from the suggested solution of joining insurance and defense companies so that foreign aggression be fought against significant problems will arise. The fusion of two separate and originally independent branches of the economy will have adverse consequences for the society.

3. The true free-market approach

How could we organize a defense system which is a free-market based one and at the same time has none of the above ethical and economic problems?

In a free market people act because they strive to obtain a profit, i.e. they wish to gain from their actions, not because they are forced to do something by physical violence or threat thereof. Thus, we let the national defense be organized in the same way, namely, by allowing people and companies to profit from the defense itself. The latter sounds similar to the anarcho-capitalist ideas, but there is one significant difference, namely, who pays the bill for defense. And this must logically be the one who has initiated the aggression, i.e. the intruder himself. In this way we avoid entirely the ethical problems I mentioned. Using the above idea private property owners will not pay for their protection and the defense services will not be a public good, since it will not be the private property owners who will avail themselves of these services. The defense services will be provided to the aggressor and he will pay for them. The public will get the byproduct, which in this case is their freedom from being conquered. At the same time the suggested system does not unnecessarily and artificially join two distinct and separate branches of the economy as in the mentioned fusion of insurance and defense companies. In this way both of the specific economic problems will be avoided.

How can we achieve the above in practice? By allowing the companies which carry out the defense to get compensated from the property of the aggressor when they successfully defeat him. In particular, if a defense company manages to capture some property of the aggressor (land, houses, money, arms, even hostages (the aggressor himself)) it will have the right to keep a part of it for itself. The rest of the taken property will go towards compensating the private property owners who have suffered from the particular foreign aggression.

4. Conclusions and open questions

Important problems associated with the most popular anarcho-capitalist national-defense organization approach were discussed. A short blueprint of the way defense services can be organized on a free market without private property owners paying for them was suggested. The suggestion is not complete and leaves many points open. In particular: How exactly can the private property owners be compensated for their losses (restitution)? What is the market mechanism for the private protection companies to be compensated ?