In my last post, I introduced the circularity problem with market anarchism. To recap: a key analytical task of market anarchism is to show how a nonstate legal system could arise in the state of nature. To show this, market anarchists want to draw on the beneficial properties of market competition, as laid out in standard price theory. But market competition presupposes a legal framework; there must first be enforcement of property rights and contracts for markets to work. Now, some legal institutions, based on customs, reciprocity, focal points, etc., can arise in the state of nature, and these can be the foundation for some limited market competition. But this type of competition under imperfect property rights is substantially different from competition under perfect property rights, and the conclusions of price theory are based upon the latter. Hence market anarchists are not justified in employing the results of price theory to argue that competition between protection agencies would lead to good outcomes, unless they first show that the legal institutions assumed by price theory are already in place.

In this post, I will go through the theoretical literature on market anarchism to see how widespread and deep-rooted the circularity problem is.

Friedman

Friedman (1996) writes:

Imagine a society with no government. Individuals purchase law enforcement from private firms. Each such firm faces possible conflicts with other firms. Private policemen working for the enforcement agency that I employ may track down the burglar who stole my property only to discover, when they try to arrest him, that he too employs an enforcement agency. (235-36)

There are two ways the circularity problem can come up here. First, what is the law between individuals and protection agencies? How are contracts between individuals and protection agencies enforced? It’s not obvious that they would be self-enforcing; it’s possible that agencies would use their enforcement power to extract taxes, or coercively prevent clients from switching to a different agency. Would other agencies enforce them? This seems to just push the question up one level. And of course, one cannot appeal to market competition as a mechanism for ensuring contracts are enforced, since the very issue being considered is whether there is a legal framework sufficient to support market competition.

Second, what is the law between different protection agencies? How are contracts between different agencies enforced? Friedman seems to appeal to repeated interaction and reputation as the basis for self-enforcement. These mechanisms might plausibly secure cooperation between agencies; this should be explicitly argued, though, and it should be shown that the conditions required for repeated interaction to produce cooperation (small groups, low discount rates, etc.) are met.

Rothbard

Rothbard (1973):

[I]f police services were supplied on a free, competitive market […] consumers would pay for whatever degree of protection they wish to purchase. […] On the free market, protection would be supplied in proportion and in whatever way that the consumers wish to pay for it. A drive for efficiency would be insured, as it always is on the market, by the compulsion to make profits and avoid losses, and thereby to keep costs low and to serve the highest demands of the consumers. Any police firm that suffers from gross inefficiency would soon go bankrupt and disappear.” (217)

Rothbard wants to employ the standard results of price theory to argue that competition between protection agencies would lead to good outcomes. But to draw on price theory, he must first show that its assumptions hold, namely, a legal framework to enforce property rights and contracts. How are these conditions met in Rothbard’s analysis?

Long

Long (2008) argues that market competition provides a stronger constitutional constraint on power than any governmental constitution: “Far from eschewing checks and balances, market anarchists take market competition, with its associated incentives, to instantiate a checks-and-balances system, and to do so far more reliably than could a governmental system.” (141) But market competition presupposes a legal framework that ensures the enforcement of property and contract. What legal framework does Long propose to rely on to provide the foundation for such competition?

Long also writes:

[T]he market anarchist objection to government is simply a logical extension of the standard libertarian objection to coercive monopolies in general … because monopolies are insulated from market competition and hold their customers by force, they lack both the information and the incentive to provide consumers with fair, efficient, and inexpensive service. The anarchist accepts these arguments, and merely asks why they should apply with any less force to the provision of legal services. (133)

The reason the standard price theory arguments for competition over monopoly might not apply to legal services is that they only hold in the context of a pre-existing legal framework. Market anarchists can only appeal to price theory arguments if they first show that property rights and contracts would be enforced. Now, some enforcement, based on norms and reciprocity, can emerge in the state of nature, but this is not enough to satisfy the assumptions of price theory.

Discussing which system best constrains tyranny, Long writes:

Under a governmental system, the cost of state policies leading to war is borne by taxpayers and conscripts, not by the politicians who crafted those policies. Under market anarchism, by contrast, agencies who resolve disputes through violence rather than arbitration will have to charge higher premiums and will thus lose customers. (146)

But it’s possible that a protection agency could externalize its costs through taxation or conscription, or by preying on its competitors and their customers. Long seems to be assuming that there is some robust legal system already in place, which assures that costs are internalized. But this is what must be shown; it cannot be assumed as a starting point.

Hoppe

Hoppe (1998) writes:

[D]efense is a form of insurance, and defense expenditures represent a sort of insurance premium (price). Accordingly … the most likely candidates for offering protection and defense services are insurance agencies. The better the protection of insured property, the lower are the damage claims and hence an insurer’s costs. (22)

But how are contracts between individuals and insurance companies enforced?

[A]ll 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 if not all existing governments. (22)

How are contracts between insurance companies enforced? Are they self-enforcing? Furthermore, if the system of insurance companies is so powerful, what prevents them from preying on customers? Competition? If so, what is the legal framework that supports such competition?

Hoppe argues that “as the result of competition between insurers for voluntarily paying clients, a tendency toward falling prices per insured property values would come about.” (24) But what if insurers compete through violent conflict? What if they coerce payments from clients? With no established legal framework, how are these outcomes prevented?

Murphy

Murphy (2002) writes:

All actions in a purely free society would be subject to contract. For example, it is currently a crime to steal, because the legislature says so. A prospective employer knows that if I steal from his firm, he can notify the government and it will punish me. But in a stateless society there wouldn’t be a legislated body of laws, nor would there be government courts or police. Nonetheless, employers would still like some protection from theft by their employees. So before hiring an applicant, the employer would make him sign a document that had clauses to the effect of, “I promise not to steal from the acme Firm. If I get caught stealing, as established by Arbitration Agency X, then I agree to pay whatever restitution that agency X deems appropriate.” (14)

But to do any work, contracts must be enforced. So are they self-enforcing? This seems implausible, since self-enforcement usually only works well in small groups with repeated interaction. Are they enforced by the arbitration agency? But then how is that contract enforced? Maybe Murphy can answer these questions. But he should answer them before he uses contracting to do any work in his theory.

Caplan

Caplan (1997) writes:

The most impressive arguments for privatizing dispute resolution have little to do with the unique attributes of the adjudication industry; rather, they are the standard arguments for the prima facie superiority of private to public supply. Namely: (1) Public bodies have no incentive to be efficient, and private ones do; and (2) Public bodies usually don’t know what is efficient, while private bodies, though not omniscient, know better. (6)

But these standard arguments from price theory presuppose a legal framework which enforces property rights and contracts. How is this legal framework provided?

Imagine this enforcement system: Throughout the society, there exist 10,000 private security and police companies (approximately the number we have today). Everyone in the society pays premiums to one such security company; in exchange, the client receives protection from criminals and arbitrary prosecution by other police firms. (25-26)

But how are contracts between individuals and protection companies enforced?

Conclusion

Overall, then, there seem to be three circularity-type problems that come up in the literature. First, how are contracts between individuals and protection agencies enforced? Second, how are contracts between different agencies enforced? Third, what legal framework provides the foundation for market competition? Market anarchists have spent some time addressing the second question, but little to none on the others. Note that I don’t mean to imply these questions are unanswerable; just that they haven’t been answered yet.

Finally, a point about method: In general, market anarchists start their analysis with a market in legal services/police and courts/security, etc. This is a mistake: since markets presuppose a legal framework, the very question being discussed is whether there can be a “market” in legal services. The analysis should instead begin in the state of nature, i.e., in the absence of formal legal institutions, and should end by deriving a market in legal services as a conclusion of the model. Since it precludes any circularity problems, this approach is superior.