The Free Market and Naval Defense

 

Introduction

Shortly after I shared the Unbiased America post concerning naval defense and free trade I messaged UA. The sole reason I messaged them was to point out the admin (ML) was being very rude to some of the commenters. This resulted in a small back and forth where I promised I would write within the week a post on my page replying to their messages.

The first message UA sent back that was about the topic of naval defense hardly defended (ML)’s position. To quote (ML):

“Joking aside. I did respond to people’s points, just not politely. The answers to this question are always predictable and the same. ‘Private companies can do it’. Well no, they can’t. People are so used to the way things are they can’t even fathom a world without US Navy Supremecy [sic], so they disregard history and global political common sense in an effort to cling to ideology.”

He simply said that private companies cannot do it, and that the reason people cannot see this is because they cannot imagine a world where the US Navy does not reign supreme. He then throws in the “my opponents are just clinging to their ideology” jab, which does not address the content of the claim that private firms can provide defense.

I followed up saying all he really said was that “They can’t” and that I could say “They can” and we would be on even ground.

Will, (WR), came back with a message, and this will be the message that I will reply to in this post. I will break it into sections and address each issue.

AmsterdamJackFightDoddscropThe History of Private Naval Defense

“(WR) name a nation where private companies protected state interests and survived and produced the standard or [sic] living we have here in the US. “

First, it must be pointed out that because X has not happened in the past does not mean X will not happen or cannot happen.

Second, my claim is that the free market, i.e., a private law society, can produce “national” defense, and that such a society can provide the optimal amount, and quality, of defense. My claim is not that the free market can provide defense for “state interests.”

Furthermore, there is an example that lasted for centuries of “private companies protect[ing] state interests and surviv[ing]…” It is called “privateering,” and it lasted from the 12th century to the 19th century.

During times of war businessmen would go to the state and get an official declaration saying that they were allowed to plunder ships of enemy nations, yet were not pirates. The first permit of this kind, a letter of marque and reprisal, was given in Tuscany. These ships’ owners and investors kept a portion of the spoils.

The ships would have multiple investors and large crews. They were less outfitted than navy ships, yet in many years privateers captured or destroyed more enemy nation ships than did the navy of their nation (Hoppe, p. 265-270).

The incentives at work encouraged there to be more privateers during times of less commercial prosperity, which was oftentimes caused by enemy nations blockading or taking ships. Since there was less money to be found in trade during times of decreased commercial prosperity, privateering looked as a more promising line of work. Additionally, maritime insurance rates would spike when enemy ships were taking commercial ships and their goods, thus causing a slowing down of trade. This also made privateering look better for sailors and investors.

Ultimately, privateers were brought down by state edict. Anderson and Gifford explain:

[Privateering was] less wasteful than other forms of naval “combat” because it did not destroy, but merely reassigned ownership rights to, property. . . The extinction of privateering was at least partly the result of rent seeking by established government bureaucracies. . . Privateering was not a market that can be shown to have “failed”; rather it was one that was eliminated through political means. (Anderson and Gifford, p.119)

Privateers greatly helped many nations over the centuries by discouraging opposing nations from raiding ships, i.e., private individuals provided a national defense service.

Did privateering “survive”? It did in the sense that this was going on for centuries until states put a stop to it. Of course, if it is meant in the sense that it never ended, then, no, privateering did not survive. Also, did it produce “the standard or [sic] living we have here in the US”? Yes, in an indirect way privateering did, as it greatly aided the U.S. during the Revolutionary War and in the War of 1812. As Larry J. Sechrest wrote in an essay in The Myth of National Defense:

“Historian Faye M. Kert offers the judgment that ‘without the presence of the American privateers in the Revolutionary War and the War of 1812, the United States would never have been able to hold off the British Navy’.” ( p. 247)

Also, to prove that the free market can provide naval defense, why is it necessary for the country that they defended have the same standard of living as present-day U.S.?

However, what the privateers very often did was not in accordance with the private property ethic, and as such what they did cannot be said to be justified. I am simply pointing out these historical facts to address Will’s argument.

Corruption

“There were private interests in the AoC and commerce was most affected.”

Honestly, I do not know what the AoC is, but I do not need to know to reply to this and what I believe to be the implicit claim in it.

It might be that there was corruption, etc. in the AoC, but corruption and business interests taking priority over consumer interests is a signature mark of a regulated market.

The claim that is implicit in this statement, or so I think, is that business interests would get in the way of providing defense. The problem with this is that in a free market businesses would have to bend down to the consumer’s tastes and wishes. It would be the businesses’ interests to act according to the preferences of their clients.

Let us suppose that naval defense Agency X does decide to put consumer interests second to their personal interests. This would result in the company being less competitive against other agencies because other agencies are better serving the clients, and it might compromise the agency’s purpose, to protect the clients and/or their goods.

If it does compromise that purpose, then word will get out and Agency X will see, ceteris paribus, a drop in clients and, correspondingly, a drop in profits. This harm to their reputation might even put them out of business.

We can see the incentives in a free market for naval defense align with consumers’ interests regarding corruption and putting personal interests over consumer interests.

Anybody could also point out that political interests might stop naval defense from being provided. The incentives against this are weaker than in a free market since state agents, especially those not elected, are not nearly as responsive to consumers as private firms.

People must wait years to vote other people in, vote them out, or keep them in office; the market allows people to “vote” every day when they purchase goods and services. Additionally, politicians cannot be contractually bound to any specific, definite terms or transfers of property titles, but private firms can be held to specific terms and transfers of property titles. In short, private firms must be more responsive to customers when it comes to naval defense (and any market for that matter) if they wish to remain in existence.

The Problems With Public Goods Theory

“You’re not grasping how incentives would work or not work with companies hiring private security, what’s to stop them from waring [sic] with each other of business interests?”

I.

Before I directly address the question, it must be established who or what types of firms would most likely provide protection in a private law society. The answer is insurance companies. There are two main reasons as to why this is true.

(1) The insurance companies have strong incentives to keep down damage claims by their clients. Protecting clients would bring down the amount of damage claims by their clients, ceteris paribus, and thus would decrease costs. Insurance companies would be greatly incentivized to provide efficient protection. If they fail to protect a client, then they would have to reimburse the client for the damage.

(2) Any firm that provides defense/security would need a large amount of capital. Many insurance companies operate at an international level, so they would have the appropriate capital for defense/security. In addition, as Hoppe noted:

“all insurance companies are connected through a network of contractual agreements of mutual assistance and arbitration as well as a system of international reinsurance agencies, representing a combined economic power which dwarfs that of most existing governments.” [1, p. 347]

Furthermore, defense is insurable, to some extent. Insurance agencies cannot cover, profitably, risks that are largely due to an individual’s choices. It can provide insurance for events that are accidental from the insurer’s and the client’s point of view, such as unprovoked aggression. Provoked aggression cannot be covered since the aggression may have never occurred if the victim had not provoked it.

Now that it is established who might provide defense and that defense is insurable, to a certain extent, I can now address Will’s question.

The incentive that first comes to mind when talking about defense insurance agencies(DIAs) and them warring against each other is that it is simply contradictory to their explicit purpose, unless one of them has become an aggressive firm, and the clients would likely see it as such. There would be no point in buying defense and insurance if the risk of property damage increases as a result of buying the service.

Two other incentives to discourage DIAs from settling conflicts via violence are (1) violence is expensive and (2) violence is uncertain. It would simply be less costly and less risky to have pre-arranged agreements concerning DIAs and disputes between them.

Moreover, the insured would want to make sure that there would be no inter-DIA conflict as well. The DIAs would make agreements concerning future situations where there is disagreement between them, i.e., they would find common ground and agree to abide by certain rules and procedures in cases of disputes.

DIAs would likely also have insurance via reinsurance agencies as they do today in our complex markets. These reinsurance companies would discourage physical conflicts between DIAs because of the possibility of damage claims. Just like DIAs would either provide no insurance or provide insurance at much higher rates to aggressive people, people who associate with aggressors, and provocateurs, so would reinsurance agencies when dealing with DIAs that fall within any of those 3 groups.

If an agency did decide to use violence instead of arbitration to settle a dispute, unless in an extreme situation where they are using defensive force against an unprovoked aggressor firm, then they would have to pay out of pocket for damages to their property while their enemy or enemies get reimbursed by their reinsurance agencies. Plus, the reinsurance agencies of the defending DIAs would have financial interest in putting down this “rogue” DIA.

DIAs would also be discouraged to settle disputes using violence because other DIAs would respond by restricting their clients from associating with the aggressive DIA’s customers as they are associates of aggressors which increases the risk of property damage. This would have a two-pronged effect. At least a few, if not many or most, customers of the aggressive DIA would probably start resenting the criminal DIA because the customers would be shunned by other DIAs’ customers as a result of the aggressive DIA’s actions. Those clients would very likely switch to other DIAs, thus increasing the other DIAs’ profits and decreasing the rogue’s profits. Even if the rogue firm stopped and denounced what they did, few former clients would come back.

To add one more, DIAs would be discouraged from engaging in violence to settle disputes because it would increase the likelihood of property damage for their clients, especially if the other DIA(s) respond violently, thus increasing damage claims and increasing costs.

To turn the question around, “what’s to stop [states] from waring [sic] with each other [for political] interests?” Obviously, states often engage in war and are able to do so largely because of their ability to tax.

Before moving on to the next question, it is worth pointing out that the agreements among DIAs concerning dispute resolution and their procedures, rules, etc. would result in less conflict than what is found in a state society, ceteris paribus.

Hoppe explains that this “system would allow for systematically increased variability and flexibility of law. Rather than imposing a uniform set of standards onto everyone (as under statist conditions), insurance agencies could and would compete against each other, not just via price but in particular also through product differentiation and development.

DIAs with differing legal rules would be able to exist side-by-side as a result of this system. “That is, no one would be forced to live under ‘foreign’ law; and hence, a prominent source of conflict would be eliminated.” (Hoppe, p.139)

Correspondingly, competition regarding these agreements about property rules, procedures, etc. for inter-DIA disputes would encourage the continued improvement of such agreements so that it would include the greatest consensus regarding property rules, court procedures, etc. This would directly decrease conflict in a stateless society.

II.

“How would a nation state solve the free-rider problem.”

 To clarify, if Will meant state as in the agency that has the monopolies over ultimate decision making and taxation, then I do not support such an agency. If not, and he simply meant a private law society, then let me go on to address the question.

There is a lot to unpack in this short sentence because it is most likely alluding to the fact that Will believes “national” defense is a public good. As such, I will critique the public goods theory and prove it false, thus resolving the free-rider “problem.”

Public goods are generally defined as goods that are non-excludable and have non-rivalrous consumption; rather, an owner can’t exclude non-payers from the enjoyment of the good and that the enjoyment of the good by one extra person has no marginal cost.

There is great debate and disagreement about what is and what is not a public good; however, national defense is always considered one of them.

There are many issues with the public goods theory, and I will start with non-excludability and non-rivalrous consumption.

Proponents of the public goods theory claim that these good’s enjoyment cannot be kept away from non-payers. For example, suppose Person A has a rose garden in their front yard. The neighbors, i.e., non-payers, enjoy looking at it and the owner cannot exclude them from enjoying the view. (A rose garden would be considered a public good since it has non- excludability and non-rivalrous consumption.) This non-excludability disappears if the owner erects a fence around the rose garden, however.

Let’s take a different good that most public goods theorists would be more likely to point to as a public good: roads. There is an obvious problem here considering that gates, toll booths, etc. could be installed to exclude non- payers.

National defense is probably considered the most obvious case of a public good. If the military defends the country from a missile attack, then clearly, according to public goods theorists, the enjoyment of this good cannot be excluded and everybody could enjoy it without adding additional costs.

The problem here is that “national defense” is considered a lump good by public goods theorists, and not looked at as a market which employs scarce resources. If some person or group enjoys defense as a result of the use of a scarce resource, e.g., an air-to-air missile, then it necessarily has the corresponding effect of depriving some other person or group from having protection from that specific AAM.

As Rothbard writes, “A ring of defense bases around New York, for example, cuts down the amount possibly available around San Francisco.” (p. 885)

Furthermore, there are numerous ways DIAs could exclude non-payers. For example, they could have a map with their clients marked so that they could specifically protect their clients. Instead of providing man power, guns, etc. for the provision of defense of some community without any customers, the DIAs could exclude that community and instead protect the communities its customers live in.

Regarding non-excludability there are many methods as to how a private firm or person could exclude non-payers, even when it comes to goods that initially seem non-excludable. According to the public goods theorists’ own framework this moves most, if not all, public goods to the classification of a “semi-public good.”

III.

Moving on to non-rivalrous consumption, this requirement has a fundamental issue: costs are subjective.

As Hoppe notes in his book The Economics and Ethics of Private Property (EEPP):

“For how could any outside observer determine whether or not the admittance of an additional free rider at no charge would not indeed lead to a subtraction in the consumption of a good to others? Clearly there is no way that he could objectively do so.” (p. 9-10)

Additional consumption might affect one’s enjoyment of the good, such as an additional movie-goer or driver. Maybe that additional consumer is somebody whom they despise, and thus causes what was enjoyment of a movie to dislike of a movie. It could be proposed that we ask every consumer if an additional consumer would affect them, but two difficulties arise. If even one person says that it would negatively affect their enjoyment, then the good would not be subject to non-rivalrous consumption. The other difficulty is that people lie, and there is no way to positively determine what they prefer unless they act upon their preference.

Furthermore, some consumers might change their minds over time. If we followed the method of asking consumers, then we would have to continuously ask every consumer if an additional consumer would affect their consumption. We would all be dead before this task was ever completed.

I have proven as useless the criterions of non-excludability and non- rivalrous consumption, and I will now move on to other arguments defending the public goods theory.

IV.

The next argument that I shall address is the externalities argument. The argument goes that private firms will front all of the costs of a good but there will be non-payers benefiting from certain goods, i.e., public goods, resulting in the non-production or under-production of a good that is more highly valued than what the market reflects.

Of course, this is an efficiency argument and thus is “irrelevant” as Hoppe puts it in EEPP:

“Ultimately, all efficiency arguments are irrelevant because there simply exists no nonarbitrary way of measuring, weighing, and aggregating individual utilities or disutilities that result from some given allocation of property rights.” (p.11)

Putting this aside, let me address the other issues with the externalities argument.

Even if the state were to provide the public goods, it could not be assured the “correct” amount of production would be produced under the state.

The state could finance these public goods and actually decrease the amount of investment/production in total because private investment/production could decrease as a result of individuals being crowded out or that they see they can get the goods without financing them. Additionally, the state could overproduce the public goods as well.

In any case, there is no objective way to ascertain whether the state produced the optimal amount or optimal quality of public goods. As such, one could never truly say that the state fixed the “underproduction” of public goods.

In trying to prove a deficient production of public goods in a free market “[s]uch a view completely misconceives the way in which economic science asserts that free-market action is ever optimal. It is optimal, not from the standpoint of the personal ethical views of an economist, but from the standpoint of free, voluntary actions of all participants and in satisfying the freely expressed needs of the consumers. Government interference, therefore, will necessarily and always move away from such an optimum.” (Rothbard, p.887)

Starting from the fact that when the state provides public goods it must take the money to finance the goods from alternative uses, it leads us to “the only relevant and appropriate question [of] whether or not these alternative uses to which the money could be put (that is, the private goods which could have been acquired but now cannot be bought because the money is being spent on public goods instead) are more valuable—more urgent—than the public goods.” [Hoppe; EEPP, p.13-14]

It is quite obvious that from the viewpoint of consumers the alternative uses were more valuable. This is proven because if the consumers were left to their own devices then they would have bought other goods that were not the public goods. The public goods are of second importance, at best, to the consumers.

The last argument that I will address that advocates for public goods is the free-rider argument. The argument goes as so: Person A will want Good X, but realizes that if they hold off on financing the good that some other person will come along and finance it where they can enjoy its benefits for free, but if everybody follows this logic then the good will never be produced.

The market fixes this issue by internalizing externalities. For example, a road might be unprofitable if anybody can access it freely, but it may become profitable once the entrepreneur charges a fee for accessing the road.

As another example we could consider free riders of defense services. DIAs could simply refuse to retaliate or defend against aggressors that are attacking non-clients. This would immediately solve the free-rider problem. The DIAs would not be paying an extra cost to protect non-payers, and non- payers wouldn’t enjoy defense services free-of-charge.

Entrepreneurs would, and do, strive to find ways to internalize externalities and thus reduce or eliminate free riders.

Ironically, the free-rider argument, if true, would prove that a state would never come into existence. As Block notes:

“If I start a government, then according to this argument, it will benefit you; if you begin one, I will free-ride on it. Therefore neither of us, that is, no one, will undertake this task. In other words, we can use an argument, ostensibly proving the state necessary, to prove that, according to it, this institution could not arise.” (Hoppe, p.306-307)

The most damning argument against public goods is that there can be no objective distinction between public goods and private goods.

Per Hoppe:

“For something to be a good it must be recognized and treated as scarce by someone. Something is not a good as such, that is to say; goods are goods only in the eyes of the beholder. Nothing is a good unless at least one person subjectively evaluates it as such. But then, when goods are never goods-as-such—when no physico-chemical analysis can identify something as an economic good—there is clearly no fixed, objective criterion for classifying goods as either private or public. They can never be private or public goods as such.” (EEPP, p. 8)

For example, goods that appear to be public goods, such as rose gardens or the exterior of a house, become private goods when third parties stop caring about them and treating them as goods. Also, seemingly private goods like underwear or a tub become public goods once people start caring for them.

VII.

There is one more thing to be said about the public goods theory: even if all of their economic arguments are conceded, it does not follow that the state should provide public goods. A norm must be smuggled in their reasoning to justify state action; however, public goods theorists never layout a whole ethical framework to justify this norm. (The only exception to my knowledge is public goods theorist David Friedman who is an anarchist and does not smuggle this norm into his reasoning.)

As a result, their arguments do not even prescribe what they want: the state providing public goods.

Free Market Naval Defense

I have completely and systematically disproven the public goods theory. Now I shall direct my attention to how naval defense might be provided in a free market.

As with defense on land, defense on the water would be provided by DIAs as well. These DIAs could put policies in place that would decrease the risk of being attacked on the seas and would lower costs.

Such a policy might be that there are certain trade routes ships should take in order to traverse the seas if they are wanting to be effectively protected (or maybe protected at all). This stops a DIA from having to spread themselves thin and as a result they can provide more effective protection.

Additionally, in order to decrease costs DIAs could come to agreements so that they would pick certain trade routes that they all could help protect. This might be in the form of all DIAs protecting one route, letting the DIAs protect a route(s) that they have a comparative advantage defending, or any mixture that can be imagined.

It might be objected that non-paying ships could take these routes and free ride off of the defense services. Again, the free rider “problem” could be resolved in many ways. One such way could be that the DIAs could give identification, e.g., a piece of technology that emits a certain frequency to identify the ship as a customer, to their clients and simply refuse to help non-payers.

Moreover, if the oceans were privatized, then the DIAs could homestead or contractually gain the rights to the routes and then exclude non-payers from the protected routes.

I’ll repeat myself, entrepreneurs would, and do, strive to find ways to internalize externalities and thus reduce or eliminate free riders.

Ideology, Propaganda, and War

As a final point it must be noted that ideology and propaganda have a huge role in helping states wage war or invade other regions. Public opinion is vital for any state, and as such it would be difficult to wage war against or invade a free society. There is no central agency, i.e., state, that the states could point at and blame for something, but rather only private firms and private individuals. It would be difficult to get public support for aggression against a free society.

Citations:

Anderson and Gifford, “Privateering and the Private Production of Naval Power.

Hoppe, Hans-Hermann ”Myth of National Defense: Essays on The Theory and History of Security Production.https://mises.org/library/myth-national-defense-essays-theory-and-history- security-production

Hoppe, Hans-Hermann, “Economics and Ethics of Private Property.https://mises.org/l…/economics-and-ethics-private-property-0

Rothbard, Murray, “Man, Economy, and State.https://mises.org/li…/man-economy-and-state-power-and-market

This article was edited for grammar, style, and spelling, but not for content. The views expressed are that of the author, , exclusively, and do not reflect that of BeingLibertarian.com or Being Libertarian LLC

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