The Private Provision of National Defense

The Private Provision of National Defense

for

The Association of Private Enterprise

Education Annual Conference

Las Vegas, NV

April 13 - 15, 2014

Theme: Liberty and Security: Tensions, Risks, and Challenges

Abstract

In economic theory, particularly public economics, national defense is ubiquitously presented as the prime public good that requires governmental provision. This doctrine asserts that a private firm cannot provide large-scale defense, because, defense being non-rival and non-excludable, private enterprise has no way to compel the beneficiaries to avoid being free riders. This proposition overlooks several facts. First, territorial defense is excludable, as foreigners are excluded, and individuals within the territory can be excluded. Second, this market-failure doctrine overlooks the possibility of contractual governance. Third, the claim of free-ridership treats public goods as though they were provided in ether rather than in the real-world of time and space, in which residents are not free riders due to their need to pay for their presence in scarce locations. Integrating these propositions, this paper refutes the prevailing market-failure doctrine for national defense and presents a theory of the private-sector provision of large-scale territorial defense.

1. National defense as an excludable collective good

Suppose there is a large country such as the USA, and there is a threat of attack by foreign countries or foreign terrorists. The national defense would consist of weapons and soldiers which would both stop in-coming attacks and engage in a counter-attack. It is assumed that a successful defense is possible, and that it can provide safety from external attack to all persons in the territory. One more person in the territory would not detract from the defense of the other persons, hence the territorial defense is non-rival.

There are critics of national defense (Hoppe, 2003a) who claim that government does not in practice provide adequate defense, that in attempting to provide it they become tyrants (Molinari, 1849), and that private local defense firms would be adequate. Michael Suede (2012a) argues that national defense may not be necessary, because “the cost of an invasion far outweighs any possible gains that could come from seizing resources in a violent fashion.” If that were really the case, one would think that there would not have been the perpetuals invasions of the past several thousand years. Suede (2012b) also argues that is people want national defense, insurance companies could fund national defense; but he seems to overlook the free-rider problem.

Hans Hoppe (2003b, p. 2) points out that “the U.S. government did not only fail to prevent the disaster of September 11, it actually contributed to the likelihood of such an event.” Hoppe states that the 9/11 attack was also a governmental failure because “the government prohibited airlines and pilots from protecting their own property by force of arms.” However, while there has been government failure in the provision of defense, the argument here is not whether private defense is better or worse than governmentally provided defense, but rather the focus is on whether and how a private-sector military defense is economically feasible.

Unfortunately, much of the free-market literature on private defense constitutes wishful thinking. Some libertarians argue that in a free market private protection firms could compete to provide defense, and that rogue agencies that turn to force would be shunned by customers and “put down by other defense agencies... The bottom line is that it is never more profitable to act outside of the principles of the free market” (Deckert, 2012, p. 14). This “never” is rather sweeping. If the rogue militia is armed to the teeth, and acts like organized crime, imposing protection rackets and extortion, it might have more gains from coercion than from competition, and genuine protective agencies may not be able to stop it.

Without disputing anarchist propositions, this paper assumes that a single nation-wide defense is possible and necessary. Based on these premises, the paper examines the public finances of its private provision.

The conventional doctrine of market failure for public goods claims that national defense is, in addition to being non-rival, also non-excludable. A good is non-excludable if depriving any person of the good is physically impossible. A non-excludable good is available to all the persons of the world who either cannot avoid being impacted by the good, or who seek to use it. But national defense protects only the persons within the territory being defended. For example, those outside the territory of Brazil are not protected by Brazilian national defense.

Since the USA belongs to NATO and other international defense treaty organizations, the USA is indeed helping to defend some citizens abroad. But then NATO and other alliances can be considered the super government that is providing the defense. Any defense implies that there are entities outside the defense domain that are threats and hence not being defended. For the purpose of the theory of private-sector defense, the issue of multi-state alliances is set aside, and the analysis focuses on the territorial defense of a single country. The United States and other countries provide limited protection to their citizens who live abroad; this too is set aside.

The protection of persons within the territory and not those outside the territory implies that defense is excludable, as those outside are excluded from the defense service. Even though there is a large area within which persons cannot choose to be excluded, the collective good is still excludable, since there is no logical size or boundary of area at which a collective good switches from being excludable to non-excludable. If a theater is excludable, so is a country.

Besides persons outside the perimeter of defense, those inside the boundary may also be excluded. Many illegal immigrants are deported, hence excluded from the defended territory. Some persons within the country are excluded by policy, as they are regarded as enemies to be eliminated, or persons who are outside the domain of protection, and who may be killed either by private persons or by the state.

Criminals who are perceived as threats are killed by the army and police in the name of defense. Thus defense itself excludes domestic persons who are regarded as threats to safety. Until the late 1800s, American Indians were regarded by the US government and much of the population as outside the domain of protected persons, and many were deliberately killed. Even recently, the Waco, Texas, siege and destruction of the Branch Davidians in 1993, in which 76 persons were killed, was a case of the government designating a group of citizens to be attacked rather than defended. Thus even domestically, national defense is excludable.

2. Large-scale contractual governance and collective goods

The market-failure doctrine for public goods presumes that the alternatives are either provision by private firms in a market, and provision by government. This dichotomy overlooks the possibility of private-sector contractual governance. The possibility and actual existence of consensual governance implies that the fundamental alternatives are not market versus government, but voluntary governance versus imposed government.

The dichotomy of consensual versus forced government raises the issue of what makes a contractual arrangement such as a homeowners’ association a market-based system in contrast to a town government. In rental real estate, there is a landlord who leases out units to tenants, with a lease agreement. This contract constitutes a private law between the landlord and each of the tenants. Although the terms are ultimately enforced by the governmental courts, economists would typically consider the lease contract and property ownership to be in the private sector. The lease contract constitutes private governance, even if it is in conjunction with governmental laws and enforcement. Likewise the provision of transient dwelling services in a hotel constitutes both the private-sector provision of collective goods such as the lobby and elevators, and the private governance of the rules and payments between the guests and the management as agents of the owners.

Now consider a duplex, a dwelling with two units that are attached but have separate entrances. Suppose that each unit has a separate owner. Since the two units have common elements, the title holders have a contract which specifies their property rights, obligations, and payments for joint collective goods such as repairs and maintenance. Just as a landlord-tenant lease is a private law and governance, so too is the contract between the owners of a duplex.

This concept generalizes to mutual contracts among the co-owners of condominiums, residential associations, and cooperatives. The master deed and bylaws constitute the private law of the community, and this law along with the voting for a board of directors, and the payments for the community goods, constitutes private governance and the private-sector provision of collective goods (Foldvary, 1994).

The provision of collective goods by a proprietary community such as with a landlord and tenants, or with an association of owners and tenants, is similar to that of a town or city government (MacCallum, 1970). Both elect representatives to a governing agency, both have rules, both collect payments, and both provide collective, i.e. non-rival, goods. The key differences between private governance and imposed government is explicit contracts and legal equality.

When a tenant moves into a unit leased by a landlord, he typically signs a lease contract. This contract implies an explicit agreement by landlord and tenant. The signature provides evidence of the explicit agreement, which implies a mental agreement by the tenant of the provisions of the contract. Similarly, when one buys a unit in a condominium or residential association, or membership in a cooperative, the buyer is presented with the rules - the master deed and bylaws. The buyer signs the contract between himself and the other owners or members, which likewise specifies an explicit agreement.

In contrast, a person moving into a city signs no contract with the other residents or the city government. It has been claimed that merely moving in implies an agreement with the city laws. But a real agreement has to be mental. In a real agreement, a person agrees that one agrees. All cities today have laws that many residents do not favor, and so since any city one would move into has disfavored aspects, there may not be a real agreement with the city policies.

Suppose a person convicted of a crime is given a choice among several prison cells. The fact that the prisoner chooses one particular cell does not imply that he agrees with his imprisonment. Since all countries today have imposed governments, any country one moves into will have imposed rules that the immigrant does not necessarily favor.

Laws in the USA, the UK, and many other countries require signed contracts for the transfer of real property. This recognizes the importance of the evidence provided by explicit agreements.

The second key difference between consensual governance and imposed government is the legal equality of the contracting parties, the including representatives to a governing agency. In imposed government, the officials have a degree of legal immunity. With “sovereign immunity,” the sovereign or state government and its officials are immune from civil suits or criminal prosecutions in the performance of their official service. The concept goes back to the era of monarchs who could not be compelled by the courts, since the courts were created by the monarch as the sovereign of the country. In the United Kingdom, historically, the Crown was not generally subject to prosecution. The USA inherited the concept, whereby the federal government has sovereign immunity and may not be sued unless it consents, such as by the Federal Tort Claims Act. When the US States entered into the federation by adopting the US Constitution, they retained their governmental sovereignty, and they too may not be sued without their consent. Local governments derive their power from the State sovereignty and thus also have immunity.

In contrast, the members of a contractual association are legal equals, and board members may be sued when the violate the terms of the contract or fail in their fiduciary duties. The members of the board of directors have no immunity from lawsuits.

Contractual communities include proprietary real estate such as hotels, shopping centers, office buildings, dwellings owned by a landlord, marinas, industrial parks, and ships. Another form of proprietary ownership is a land trust, whereby the title is held by a trust, which either leases out lots or holds land for conservation. As noted above, the other type of private arrangement is an association such as a condominium, a civil association, and a cooperative.

A group of these private communities can create a broader or higher-level association in order to provide civic goods that have economies of greater scale and scope. For example, a group of 20 neighborhood private communities could form an association to provide the major streets and larger parks, while the neighborhoods provide the smaller, more local, streets and neighborhood parks.

Designating the neighborhood communities as level one, the association of these as level two, the level-two associations could then form level-three for services with an even greater scale and scope, such as pollution measurement and charges. This bottom-up process can continue up to the level of a continent, such as the territory of a country such as the USA or Canada. Since the foundation of this structure is the contractual private community, the entire bottom-up structure would be contractual and consensual. The highest level council (a contractual Congress or parliament) would then provide the services most suited to a large territory, including the defense against foreign attack.

The provision of large-territorial by a grand multi-level association would need to confront the issue of free riding by those not belonging to the network. The key is the degree of free-riding. For example, if a few people who are not hotel guests use its elevator, that does not make the financing of the elevator infeasible, because the hotel relies on the revenue from the paying guests for the cost of the provision of the vertical transit. Likewise a few visitors to a neighborhood park or streets from outsiders does not affect the funding for these works by the local residents.

In a world of private communities, the members receive a package of services, just as the guests of a hotel receive collective goods in addition to their hotel room. The hotel guest pays for the package even if he does not use all the services such as exercise facilities. If there is no municipal government and all collective goods are provided contractually, the services offered to a typical resident would include sidewalks, street maintenance, trimming of trees by the street, street lighting, water and sewerage, any utilities not supplied by firms, parks, public transit, policing and other security, and fire protection. Schooling could be provided by the local association, or there could be individual contracts. A homeowner who rejects membership in the neighborhood civil association would be excluded from these services, or else would have to make an individual arrangement to pay for services. The transaction and other costs may well be lower if a resident belongs to the association and obtains a package of services rather than having to contract with many individual firms such as for fire protection.

Libertarians who advocate for private defense agencies agree that, in the face of a powerful external threat, “then it is in the interest of all the organizations to collaborate, pull resources, and put down the aggressor” (Deckert, 2012, p. 17). The proposition made here is that cooperation would better and be more likely when it is an on-going collaboration among private communities in a multi-level governance structure that provides a package of services that includes defense but also a wide range of collective goods.

The theory of the private provision of collective goods also needs to take into account the evolution or devolution of private provision from governmental provision. The path taken affects the end result. A feasible way to facilitate the transition is to permit the partial or total secession of real estate units from the government (Nelson, 1999). With a partial secession, households could switch from governmental schools to private schools, for example, and subtract from their tax liability the per-student cost paid by government. Households could likewise switch from the governmental to a private garbage collection, or join a homeowners’ association that would replace governmental works such as streets with private streets, as in fact they may do in St. Louis.