Prague Conference on Political Economy,  March 17-18, 2017

How to protect your nation/community/society against foreign invasion is one of the hard questions posed in front of the supporters of anarcho-capitalism. Several solutions to this problem have been offered, which are stateless and market based by their nature. The aim of the present article is to offer another alternative for defense against foreign aggression, which is also stateless and market-based while at the same time critically opposing the existing ones. For this purpose, comparisons from a normative point of view only will be drawn between the suggested organization for defense and the options offered by anarcho-capitalism. It will be demonstrated that the suggested way for defense against foreign aggression conforms fully to the free-market principles.

1. Overview

There are two typical ways for providing protection against foreign aggression offered in anarcho-capitalist literature. 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 [Tannehil], [Rothbard], [Hoppe]. 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 David Friedman [Friedman]. It suggests that militia forces derived voluntarily from the general population are led by a small elite of professional soldiers paid from voluntary donations. In what follows, both systems will be critically evaluated and contrasted with the suggested system from an ethical and economic perspective.

2. Ethical problems

I. In the most wide-spread anarcho-capitalist suggestion how to deal with foreign aggression, people/companies would buy insurance to protect themselves. While this resembles very closely the way people buy insurance to protect themselves from natural disasters (earthquakes, floods, etc.), there is one significant difference – that is, why they do it. In both cases, i.e. natural disasters and foreign aggression, people would act because they are afraid that they may lose what they have. However, only in the latter case would there be any aggression initiated. Earthquakes and floods cannot initiate aggression since they are not human beings and thus it is impossible to choose whether to happen or not. They are a force of nature. As a comparison, however, foreign aggression is not a force of nature and as such it is avoidable if the potential aggressor decides not to wage war. What I want to stress is that when people insure themselves against natural disasters, they act out of fear but not due to initiated aggression. In the case of foreign interference, people would insure themselves again out of fear. However, this time this fear will be caused by initiated aggression. Since people would take part in this market out of fear of initiated aggression, this market would not be a free one. A free market is a market in which none of the transacting sides acts under initiated aggression or a threat thereof. What this shows is that the anarcho-capitalist suggestion how to defend an anarchist society against foreign aggression is not a free-market one, i.e. it contradicts the basic way the free market operates.

II. The ethical argument above applies to the “voluntary” solution suggested by David Friedman as well. While this solution appears to function without force being initiated since funds would be voluntarily donated, this is not so in fact. The reason is that if people do not “voluntarily” pay, they would suffer, i.e. the threat of initiated aggression would be the motivating factor for people to donate funds. It will not be just simple fear that will motivate them to donate, but a fear of initiated aggression.

III. The national defense in anarcho-capitalism is a public good in general [Murphy], [Friedman]. As such, there may be people who get protection without paying for it, i.e. the free-rider problem will be present. The latter is practicably unavoidable for the simple reason that even if everyone wished to pay for defense (which is unlikely to happen in practice), not everyone could afford it. Thus, there will always be people who get a service (protection) paid by other people, i.e. people who obtain something at somebody else’s expense. The latter is an ethical problem as well as an economic one.

3. Ethical solutions

In order to avoid the aforementioned problems, i.e. acting out of fear for initiated aggression and the free rider problem, one must organize the anarchist society in a different way. From an ethical perspective, the one who must pay for defense against foreign aggression must be the very aggressor. After all, he is the one who has caused the problem, not private property owners suffering from his actions. It is the aggressor who must logically pay, not his victims.

In view of the above, the ethically clean solution would be that the defense forces of the particular anarchist society get paid by the aggressor himself. So in case of war the defense companies will have the right to be compensated from the property/resources of the aggressor. This would guarantee that private property owners would not pay for protection if they do not wish, and also that the public goods problem can be avoided entirely. Note that one does not expect that the aggressor’s economy will suffer major damage due to war, i.e. resources will be available to indemnify the attacked country. At the same time the public goods problem will be avoided entirely, since it will not be the private property owners in the particular society who will obtain a service, but the aggressor himself. The public will get the byproduct, which in this case is their freedom from being conquered.

Thus, a new type of market is suggested, where the aggressor himself is on the one side, and on the other – the particular defense company. Since national defense is a sub-case of the more general problem of defense against any aggression, one could use the same arguments as given in [Ninov] in order to justify the existence of such a market. What needs repeated emphasis is that such a market would be a free one, since neither the defense company, nor the aggressor will act under initiated aggression. The defense companies’ actions will be justified as a response/defense against initiated aggression and will be motivated by the prospect of making a profit.

Let us stress again the basic differences between anarcho-capitalism and the suggested system of defense. In anarcho-capitalism, it is private property owners who are the clients of the defense companies, and in the same time the ones who pay for their services. In the suggested system, the client of the defense companies is the very aggressor, and he is the one to pay for their services. From another point view, while in anarcho-capitalism it is the particular private property owner who is responsible for his own protection, in the suggested system this right belongs to everybody, so to speak. Every company or individual has the right to take part in the national defense in a search for profit.

4. Economic considerations

4.1. The public goods problem

 As already mentioned, while the public goods problem is present under anarcho-capitalism, it is entirely absent in the suggested system because of its different organization. In the suggested system, private property owners will not have to pay for their protection. The latter will be done by private companies/investors looking to earn a profit.

4.2. Problems of Incentives/Motivation

4.2.1. Insurance/defense company approach

I. The insurance/defense company solution has a distinct and very specific problem. It is a general one which applies not only to national defense, but to defense from any initiated aggression. 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 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 cannot be controlled by the company itself. In short: an insurance company has no control and cannot have control over earthquakes for instance. It can only 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. What this however suggests is that the insurance company will obtain control over the particular insurable event. This way, it will be able to exert control over its happening/probability. Once this control is available, there is no 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 the company’s clients because the insurance company will try to minimize its costs [Tannehil]. 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. But what motivates people to insure themselves against aggression in general? This is the fear of being robbed/mugged/killed/etc. If this fear is high, people will be motivated to pay a lot for insurance services. However, if the same fear is low, 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 cannot minimize costs in the mentioned way because these costs exist only if clients exist. All of the above means 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, but this interest 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 it cannot control the occurrence of an earthquake. Thus, from the suggested solution of joining insurance and defense companies so that foreign aggression is fought against, significant problems will arise. The fusion of two separate and originally independent branches of economy will have adverse consequences for society.

From an incentive/motivation point of view, the defense companies have two self-opposing motives: on one hand, to stop the crime because only then will they be employed and paid by their clients; on the other hand, they will be motivated not to prevent the crime, because only then will their clients be afraid and therefore willing to pay for their services. The above is a classical situation of a conflict of interests.

In contrast, in the suggested system such a problem does not exist. The interests of the defense companies will be one-sided, namely to win the war only. And what is more, the interest of any defense company will be to capture a bigger part of the enemy’s resources than the competing companies.

II. Under anarcho-capitalism, every private defense company gets paid by the private property owners it defends. Thus, if we accept that it will be driven by the same market incentives as any other company on a free market, we must acknowledge that the defense company will care primarily about the interests of its clients, not about those of its non-clients. In effect, there will be many different companies which protect different clients in the same country. Thus, if the clients of company A are being attacked, this is a problem for company A only, but not for company B, C, D, etc. The rest of the companies need not join company A in its fight against the aggressor. They do not have the direct incentive to do so because they will not be paid for this. To put it in another way, the interests of the defense companies under anarcho-capitalism are different; they do not coincide because they serve different pools of clients. Due to this fact, if an anarcho-capitalist society is attacked, only the companies whose clients are affected will have the incentive to defend them. The ones whose clients are not attacked will not have the motivation to undertake any counter-action. It is even an ethical question whether such a company has the right to take part in a joint defense if its clients are not under attack, i.e. if the company should have the right to wage war in such circumstances. After all, if the clients of the particular company have not been affected, then what could justify an attack (aggression) against the invader? From an ethical point of view, this would look exactly as an initiation of force over the alleged aggressor. What is more, the “free rider” problem will be present. It would be extremely profitable for a company to let the others carry the burden of defense while it sits on the sidelines. Due to the obvious threat (war) it could raise its prices while doing nothing in the meantime.

Let us now contrast the above with the suggested system. There will again be many defense companies, but since their client will be the aggressor himself, they will be highly motivated to fight the aggressor together or independently in a search of profit. It would not matter who exactly is attacked as long as he/she belongs to the particular society. They may unite if they deem such a strategy more successful or alternatively undertake a guerrilla tactic alone. In any case, their interests are the same (to fight the same aggressor) and their decisions will be made based on the best option to earn a profit.

4.2.2. David Friedman’s approach

In the voluntary militia and professional army approach suggested by D. Friedman, one obtains money to pay the professional part of the army through donations. Getting money from donations however is not a market mechanism. As such, it lacks the traditional free-market incentives. In particular, the money which will be obtained will have to be distributed/managed by other people, not by the original owners of the particular funds. Basically, the organization which will make use of the particular funds will have to manage money which does not belong to it. The problem is that if it loses or mismanages this money, it will not have lost personal funds. In comparison, a businessman in the same situation loses his own money if he uses it incorrectly. The situation is similar to the usage of public funds by the government nowadays. Since money from taxes does not belong to the government itself, the motivation to use it efficiently is low or entirely missing. The same problem will be present in Friedman’s suggestion.

In the suggested system however the money to organize the defense will come directly from big investors who will either organize their own defense companies or invest in existing ones, thus becoming owners in them. So, if they lose, they will lose their own money what motivates them to use it as efficiently as possible. Thus, the motivation of the defense companies in the suggested system will correspond exactly to the one existing on the free market.

4.3. Problems of Knowledge

4.3.1. Insurance/defense company approach

Under anarcho-capitalism, the insurance/defense companies will be dependent on private property owners for their money. I.e. if private property owners think that a danger is imminent, they will be willing to spend more money on insurance against foreign aggression, but if they do not think so, they will spend less. The real problem is that the individuals are not always willing or able to objectively assess the situation. If the whole society is to spend more, it must be convinced somehow that the threat is real and imminent. Thus, a whole propaganda network must be organized somehow to handle the latter problem. I.e. an organization for collecting, processing and distributing information will need to be established, so that this particular market can work somehow.

While such an undertaking can be organized by a government very well, because the government is a centrally run organization with almost unlimited funding, this will not be the case in an anarchist society. We should not expect that such an advertising campaign will have more success than it is usual on the free market. Let us take as an example the closely related situation of the traditional insurance companies in their function as insurers against natural disasters. Experience says that they are not able to convince all or even most of the people that having an insurance against earthquakes or floods is meaningful. In a free market however, this failure to insure themselves will be borne personally, i.e. just the people who refuse to protect themselves against the particular natural disaster which has happened will suffer. The ones who have prudently insured themselves will be OK. Thus, the inability to convince people will not be a joint problem. This will not be the case with the war effort however. A failure to convince at least most of the people will be fatal for all of the society because the consequences will be borne jointly. The suggested way for spreading information and convincing people (advertising) however is not guaranteed to succeed because there is no existing market mechanism to ensure its success. If there had been one, it would have already been used by the free market.

As a comparison: In the suggested system, what the general public knows, believes or is convinced of will be irrelevant. The defense companies will collect the relevant data, estimate the level of risk themselves and since they do not rely on the general public for money, they will do the necessary investment (arms, soldiers, etc.) themselves out of private funds. They will be funded by big investors willing to take the risk and looking for profit. The information about the level of risk of foreign invasion will be gathered and used only by people motivated to profit from it as is typically the case on a free market. The result will be that the necessary preparations will closely match the level of risk because a market mechanism for this will be in place.

4.3.2. David Friedman’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.

Let us give an example how the market normally functions. In a market situation, when a consumer spends some money to buy a particular good/service he transfers information by paying for it. He expresses his willingness to buy the particular thing along with his abilities to pay for it. The seller/producer of the particular good/service sold obtains this information and uses it to better adjust to the preferences of the consumer. Thus, the producer/seller is informed by the market what he must produce, how it must be produced and what the optimal structure for production must be.

In the case of donations however, most of this information is simply missing. The person who donates the money simply expresses his preference that the money be used for a particular purpose, but he does not say how. In such a way, the organization that obtains the money from donations is in the dark about how to use the donated funds. It will be clear that the money must be used for the cause that they have been donated for, but the question of how is left unanswered. The consequence from the above is that the particular organization will have to make its decisions alone. It will however have to make decisions about a group need. And how does one evaluate a group need? One cannot simply average over the needs of his clients in the particular society. All needs are specific and thus individual ones. In effect, the decisions about how to protect the particular private property owners will be simply arbitrary.

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. In the case of the police, money comes from taxes, but the situation is absolutely the same from an informational point of view. No info is given to the police how to use these funds. Friedman’s solution is plagued by the same problems.

5. Organization of the system

 5.1. Prerequisites

 A necessary and sufficient condition for the suggested system to function is the existence of a pre-established, monopolistic body of law governing a certain land area, whose sole intent is to ensure the protection of private property. The justification of the latter requirement can be found in [Ninov].

5.2. Overall structure of the system

Similarly to the case of anarcho-capitalism, there will be many competing defense companies looking to profit from the act of foreign aggression. These companies will be funded by private investors looking to profit from the war and in particular from the aggressor himself. The companies need not be local ones only, i.e. belonging to the particular society being attacked but can operate on an international level. The opportunity to earn a profit will be the force to attract them to serve the defense. The society being attacked will offer them a moral justification for taking a part in the war and will provide them with the services necessary for profiting from it, in particular with court decisions about the transfer of resources obtained by the aggressor. The number and size of the companies involved will be determined by the opportunity for profit, i.e. the system will adjust it size and organization to the aggressor so that he be defeated.

5.3. Compensation of the defense companies

A typical problem is how the defense companies will be compensated for their effort in fighting and defeating the enemy. This requires a preliminary discussion. The problem is the following: For a market to work, the goods/services exchanged must be privately owned. A government as such, however, is not a private entity. So, when a country attacks a particular society, there is no clear-cut private “villain”, so to speak. As a result, it is not clear who exactly must compensate the defense companies when the attacking country has been defeated. Should this compensation be imposed on the whole country itself, i.e. through taxation? Or probably the soldiers who have taken part in the offensive must be held financially responsible? Or the politicians who have sent them? A simple and straightforward way to handle the particular problem will be to apply the laws of the particular libertarian society in order to resolve the issue. This way, the following could happen: If during the war hostages or any private property have been appropriated (it could consist of private companies, plants, infrastructure, personal belongings/funds), the owner of this property will be considered responsible for compensating the defense companies. All that belongs to the state will be considered unowned and thus subjected to direct sale/appropriation. The latter could include: war machinery, state-owned buildings, state infrastructure, etc. With the latter in mind, we could sketch how the compensation of the defense companies could be organized. In particular, if private property has been captured, it will be subjected to a court procedure to determine how it must be used for compensating the defense company. Both sides, namely the particular defense company and the property owner whose property has been appropriated, will have to choose a judge to decide how to settle the issue. The procedure will be practically the same as suggested in [Ninov] for the case when dealing with common criminals. As to the state property being appropriated: as it will be considered unowned, it will simply have to be recognized as property of the particular defense company that has appropriated it. Actually, it is up to the particular society to decide how to proceed in such a situation. There may be alternative ways to deal with the problem. When something is not private, no particular rules apply to it. Taking all said under consideration, one can organize a way for the defense companies to be compensated for their effort.

5.4. Restitution

What is harder to do is to find a way to compensate private property owners who have suffered damage due to the war, i.e. to organize restitution. And the reason is that it is not always clear who exactly has damaged what. As an example: an army attacks a particular city and razes many homes. Who exactly is to blame for razing the home of citizen X? If the particular army has been a private one, then one knows who is to blame and keep responsible, i.e. the army’s owners/investors with all of their property/funds. Thus, the procedure for indemnification mentioned above could be used. However, if the army is organized by the government, who is to blame? Every soldier separately? All soldiers together? The politicians who sent them? The attacking country as a whole?

Please note that this specific problem is not limited to the suggested system. It is an integral part of anarcho-capitalism. In anarcho-capitalism, an insurance company is supposed to have the right to be indemnified for its expenses for capturing a particular criminal by the criminal himself. Since, however, national defense will be a sub-case of this more general case of protection against any aggression then one must expect that national defense companies under anarcho-capitalism must also be compensated by the defeated opponent. What this means is that the mentioned problem is a common one to both systems. The author was not able to find relevant information sources how this will be achieved under anarcho-capitalism. This is a problem in a search of a solution.

6. Conclusions

 A new system for organizing national defense has been offered. The proposed system is an anarchic and a free market-based one. However, it differs significantly from the one suggested by anarcho-capitalism. There, it will be the aggressor himself who will pay for the defense services, not the private property owners. Thus, the service will be provided to the aggressor himself, avoiding entirely the public goods problem by which the standard anarcho-capitalist proposal is plagued. The proposed system will ensure the defense of its citizens against foreign aggression for free, since they will not pay for it.