Over at EconLog, Bryan Caplan indulges in one of my own personal favorite pastimes -- trying to work out the bugs in anarcho-capitalist theory:
Thousands of years ago, demand for defense services was very small relative to scale economies. In any locality, the market only had room for one defense firm. The result was just what the skeptics would predict: Private monopolies quickly turned into governments.
As economic growth progressed, of course, the market for defense services got bigger, making room for more and more firms. The problem, however, is that if you've got government in an area, it has the power and the incentive to prevent new entry by competing defense firms. Thus, if market conditions initially favor monopoly, monopoly can easily endure due to "lock-in," or "path-dependence."
This remains true even if current conditions are totally different from the initial conditions. Initially, there was room for one firm; now, for 10,000 firms. But the one firm that got on top isn't going to let the market respond to changing conditions. It's going to use its advantageous starting point to terrify potential entrants away.
Thus, my answer to the student's challenge is that scale economies are weak now, but things used to be very different. States emerged at a time when markets were too small to sustain more firms. Over time, the economic rationale for monopoly has grown weaker and weaker. Competition could work now, if you gave it a chance. But the state doesn't care about economic rationales. As long as it can credibly threaten to put new entrants in jail, its monopoly endures.
Much as I'd like to be convinced, I have my doubts about this picture. Bryan seems to imply that the advantages of scale diminish as the market for a particular category of goods and services expands. I'm not the doctor of economics he is, so perhaps there's something in the theory that I'm neglecting, but I don't instinctively see any reason why this should be so.
Indeed, drawing from another -- admittedly quite different -- market, it would seem we have a rather powerful empirical counter-example: Wal-Mart. No, it's not a perfect comparison. Wal-Mart is far from a monopoly, and there are relatively few markets it participates in that could rightly be termed oligopolies. But the advantages of scale that it brings to the table nonetheless prevail in large and small markets alike. And, indeed, the rise of Wal-Mart has accompanied the maturation of many small markets that nonetheless moved in the opposite direction -- rising demand for retail services was diverted from a plurality of small players toward dominance by one large one.
Now, perhaps there exists some tipping point higher up on the scale, such that when a market expands beyond some given size, scale once again recedes as a significant advantage. Or perhaps scale simply does not confer the same sorts of advantages upon defense organizations that it does upon Wal-Mart. There are certainly reasons to believe it may not -- defense services, after all, are not widgets whose production hinges directly upon being able to maximize efficiencies of labor or overhead -- but I think there are equally plausible reasons to suggest the advantages might be even greater.
Take the hypothetical that there is some AnCap society where 10,000 discrete firms offer defense and basic civil justice services for profit. Asking the most obvious question of such a market, how would a dispute between clients of competing firms be adjudicated fairly?
The usual AnCap response is that, because the costs of conflict are high, cooperative mechanisms would naturally evolve between defense firms to agree to common standards for dispute resolution. Because these standards would need to be both binding and acceptable to both parties, a natural equilibrium would arise, as arbitrators that showed themselves the most even-handed would draw the most business.
Tyler Cowen has argued, in effect, that this is letting the devil in the back door. If cooperation provides advantages in earning market share, then the anti-competitive genie is out of the bottle, and it's very difficult to get him back in again. Defense firms that may collude to SERVE the public may also collude against the public, by locking out new competitors from their cooperative venture. And since the boundaries between firms are ultimately just a measure of their transactions costs, the lower those costs, the more likely it is that you are witnessing the reemergence of the monopoly state.
I think that's a powerful argument, though Bryan has already authored a fairly compelling response to it. But there's an altogether different argument that has always given me the most fits.
What I've always felt was the weakest link in the AnCap chain lies in the assumption that defense firms are likely to cooperate to resolve inter-agency disputes in the first place. Why would any consumer of defense services -- who has paid good money to have a firm serve as his ultimate fiduciary, securing his life and person -- tolerate such a thing? I could imagine a defense firm -- at most -- advising that it is in the client's best interest to cooperate, much like a defense attorney might persuade a client to cop a plea.
But in the case that the client was unwilling, how could a defense firm agree to turn over their client without completely violating the terms of their relationship? Who would actually patronize a firm that conceded it would give you up at precisely the moment you need them most? Yes, it would be expensive to fend off attacks from all sides -- but isn't that precisely why you're paying the agency, because they are presumably better able to do so than you are?
In this case, it would seem that scale is terribly crucial, because the firm that is best able to defend its clients against all comers is the one that can best provide the service in question. The corollary of that, of course, is that scale is just as crucial to the other side of the equation -- the firm that is best able to overcome others' defenses such that they can secure restitution for an aggrieved party is likely going to be the one most in demand.
And, contrary to Bryan's initial assertion, it would strike me that the larger the market and the greater the demand for defense services, the more important it would become that your personal defense agency possess the scale both to fight for you, and defend you against others looking to fight for themselves.
Obviously, the problem with this system is that it is inherently unstable. It would require a perpetual ramping up of forces until you were ultimately left with a Leviathan state.
But, then, isn't that exactly what has already happened?
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