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Speech given at the Mises Institute Brasil (2011).

The Problem of Social Order

Alone on his island, Robinson Crusoe can do whatever he pleases. For him, the question concerning rules of orderly human conduct — social cooperation — simply does not arise. This question can only arise once a second person, Friday, arrives on the island. Yet even then, the question remains largely irrelevant so long as no scarcity exists. Suppose the island is the Garden of Eden. All external goods are available in superabundance. They are "free goods," just as the air that we breathe is normally a "free" good. Whatever Crusoe does with these goods, his actions have no repercussions — neither with respect to his own future supply of such goods nor regarding the present or future supply of the same goods for Friday (and vice versa). Hence, it is impossible that a conflict concerning the use of such goods could arise between Crusoe and Friday. A conflict is possible only if goods are scarce; and only then is there a need to formulate rules that make orderly, conflict-free social cooperation possible.

In the Garden of Eden only two scarce goods exist: a person's physical body and its standing room. Crusoe and Friday each have only one body and can stand only at one place at a time. Hence, even in the Garden of Eden conflicts between Crusoe and Friday can arise: Crusoe and Friday cannot occupy the same standing room simultaneously without coming into physical conflict with each other. Accordingly, even in the Garden of Eden rules of orderly social conduct must exist — rules regarding the proper location and movement of human bodies. Outside the Garden of Eden, in the realm of all-around scarcity, there must be rules that regulate the use not only of personal bodies, but of everything scarce, such that all possible conflicts can be ruled out. This is the problem of social order.

The Solution: The Idea of Private Property

In the history of social and political thought, myriad proposals have been offered as solutions to the problem of social order, and this multitude of mutually incompatible proposals has contributed to the widespread belief that the search for a single "correct" solution is futile and illusory. Yet a correct solution does exist. There is no reason to succumb to moral relativism. Indeed, the solution to the problem of social order has been known for hundreds of years. The solution is the idea of private property.

Let me formulate the solution first for the special case represented by the Garden of Eden and subsequently for the general case represented by the real world of all-around scarcity.

In the Garden of Eden, the solution is provided by the simple rule stipulating that everyone may place or move his own body wherever he pleases, provided only that no one else is already standing there and occupying the same space.

Outside of the Garden of Eden, in the realm of all-around scarcity, the solution is provided by four logically interrelated rules:

Every person is the private (exclusive) owner of his own physical body. Indeed, who else, if not Crusoe, should be the owner of Crusoe's body? Friday? Or Crusoe and Friday jointly? Yet that would not help avoid conflict. Rather, it would create conflict and make it permanent. Every person is the private owner of all nature-given goods that he has perceived as scarce and put to use by means of his body, before any other person. Again, who else, if not the first user, should be their owner? The second user? Or the first and the second user jointly? Yet such rulings again would be contrary to the very purpose of norms: of helping to avoid conflict, rather than to create it. Every person who, with the help of his body and his originally appropriated goods, produces new products thereby becomes the proper owner of these products, provided only that in the process of production he does not physically damage the goods owned by another person. Once a good has been first appropriated or produced, ownership in it can be acquired only by means of a voluntary, contractual transfer of its property title from a previous to a later owner.

I can spare myself here the task of providing a detailed ethical as well as economic justification of these rules. This has been done elsewhere. However, a few statements in this connection are in order.

Contrary to the frequently heard claim that the institution of private property is only a convention, it must be categorically stated: a convention serves a purpose, and it is something to which an alternative exists. The Latin alphabet, for instance, serves the purpose of written communication and there exists an alternative to it, the Cyrillic alphabet. That is why it is referred to as a convention.

What, however, is the purpose of action norms? If no interpersonal conflict existed — that is: if, due to a prestabilized harmony of all interests, no situation ever arose in which two or more people want to use one and the same good in incompatible ways — then no norms would be needed. It is the purpose of norms to help avoid otherwise unavoidable conflict. A norm that generates conflict rather than helping to avoid it is contrary to the very purpose of norms. It is a dysfunctional norm or a perversion.

With regard to the purpose of conflict avoidance, however, the institution of private property is definitely not just a convention, because no alternative to it exists. Only private (exclusive) property makes it possible that all otherwise unavoidable conflicts can be avoided. And only the principle of property acquisition through acts of original appropriation, performed by specific individuals at a specific time and location, makes it possible to avoid conflict from the beginning of mankind onward, because only the first appropriation of some previously unappropriated good can be conflict-free — simply, because — per definitionem — no one else had any previous dealings with the good.

The Enforcement of Social Order and the Protection of Private Property: The State

As important as this insight is — that the institution of private property, ultimately grounded in acts of original appropriation, is without alternative given the desideratum of conflict avoidance (peace) — it is not sufficient to establish social order. For even if everyone knows how conflict can be avoided, it is still possible that people simply do not want to avoid conflict, because they expect to benefit from it at the expense of others.

In fact, as long as mankind is what it is, there will always exist murderers, robbers, thieves, thugs and con artists, i.e., people not acting in accordance with the above-mentioned rules. Hence, every social order, if it is to be successfully maintained, requires institutions and mechanisms designed to keep such rule breakers in check. How to accomplish this task, and by whom?

The standard reply to this question is to say that this task, i.e., the enforcement of law and order, is the first and primary duty — indeed, the raison d'être — of the state. In particular, this is the answer also given by classical liberals such as my own intellectual master, Ludwig von Mises. Whether or not this answer is correct depends on how "state" is defined.

The state, according to the standard definition, is not a regular, specialized firm. Rather, it is defined as an agency characterized by two unique, logically connected features. First, the state is an agency that exercises a territorial monopoly of ultimate decision making. That is, the state is the ultimate arbiter in every case of conflict, including conflicts involving itself. It allows no appeal above and beyond itself. Second, the state is an agency that exercises a territorial monopoly of taxation. That is, it is an agency that unilaterally fixes the price that private citizens must pay for the state's service as ultimate judge and enforcer of law and order.

The Fundamental Error of "Statism"

As widespread as the standard view regarding the necessity of the institution of a state as the provider of law and order is, it stands in clear contradiction to elementary economic and moral laws and principles.

First of all, among economists and philosophers two near-universally accepted propositions exist:

Every "monopoly" is "bad" from the viewpoint of consumers. Monopoly is here understood in its classic meaning as an exclusive privilege granted to a single producer of a commodity or service, or as the absence of "free entry" into a particular line of production. Only one agency, A, may produce a given good or service, X. Such a monopoly is "bad" for consumers, because, shielded from potential new entrants into a given area of production, the price of the product will be higher and its quality lower than otherwise, under free competition. The production of law and order, i.e., of security, is the primary function of the state (as just defined). Security is here understood in the wide sense adopted in the American Declaration of Independence: as the protection of life, property, and the pursuit of happiness from domestic violence (crime) as well as external (foreign) aggression (war).

Both propositions are apparently incompatible with each other. This has rarely caused concern among philosophers and economists, however, and in so far as it has, the typical reaction has been one of taking exception to the first proposition rather than the second. Yet there exist fundamental theoretical reasons (and mountains of empirical evidence) that it is indeed the second proposition that is in error.

As a territorial monopolist of ultimate decision making and law enforcement, the state is not just like any other monopoly, such as a milk or a car monopoly that produces milk and cars of comparatively lower quality and higher prices. In contrast to all other monopolists, the state not only produces inferior goods, but "bads" (nongoods). In fact, it must first produce bads (such as taxes) before it can produce anything that might be considered a (inferior) good.

If an agency is the ultimate judge in every case of conflict, then it is also judge in all conflicts involving itself. Consequently, instead of merely preventing and resolving conflict, a monopolist of ultimate decision making will also cause and provoke conflict in order to settle it to his own advantage. That is, if one can only appeal to the state for justice, justice will be perverted in the favor of the state, constitutions and supreme courts notwithstanding.

These constitutions and courts are state constitutions and courts, and whatever limitations on state action they may set or find are invariably decided by agents of the very same institution under consideration. Predictably, the definition of property and protection will be continually altered and the range of jurisdiction expanded to the state's advantage. The idea of some "given" eternal and immutable law that must be discovered will disappear and be replaced by the idea of law as legislation — as arbitrary, state-made law.

Moreover, as ultimate judge the state is also a monopolist of taxation, i.e., it can unilaterally, without the consent of everyone affected, determine the price that its subjects must pay for the state's provision of (perverted) law. However, a tax-funded life-and-property protection agency is a contradiction in terms: an expropriating property protector. Motivated, as everyone is, by self-interest and the disutility of labor, but equipped with the unique power to tax, state agents will invariably strive to maximize expenditures on protection — and almost all of a nation's wealth can conceivably be consumed by the cost of protection — and at the same time to minimize the actual production of protection. The more money one can spend and the less one must work for it, the better off one will be.

The Error Compounded: The Democratic State

Apart from the fundamental error of statism generally, additional errors are involved in the special case of a democratic state. A detailed treatment of this subject has been provided elsewhere, but a brief mention is indicated.

The traditional, premodern state form is that of a (absolute) monarchy. Yet monarchy was faulted, in particular also by classical liberals, for being incompatible with the basic principle of "equality before the law." Monarchy instead rested on personal privilege. Thus, the critics of monarchy argued, the monarchical state had to be replaced by a democratic one. In opening participation and entry into state government to everyone on equal terms, not just to a hereditary class of nobles, it was thought that the principle of the equality of all before the law had been satisfied.

However, this democratic equality before the law is something entirely different from and incompatible with the idea of one universal law, equally applicable to everyone, everywhere, and at all times. In fact, the former objectionable schism and inequality of a higher law of kings versus a subordinate law of ordinary subjects is fully preserved under democracy in the separation of "public" versus "private" law and the supremacy of the former over the latter.

Under democracy, everyone is equal insofar as entry into government is open to all on equal terms. Everyone can become king, so to say, not only a privileged circle of people. Thus, in a democracy no personal privileges or privileged persons exist. However, functional privileges and privileged functions exist. Public officials, as long as they act in an official capacity, are governed and protected by public law and occupy thereby a privileged position vis-à-vis persons acting under the mere authority of private law.

In particular, public officials are permitted to finance or subsidize their own activities through taxes. That is, they do not, as every private-law subject must, earn their income through the production and subsequent sale of goods and services to voluntarily buying or not-buying consumers. Rather, as public officials, they are permitted to engage in, and live off, what in private dealings between private-law subjects is considered "theft" and "stolen loot." Thus, privilege and legal discrimination — and the distinction between rulers and subjects — will not disappear under democracy. To the contrary. Rather than being restricted to princes and nobles, under democracy, privileges will be available to all: everyone can engage in theft and live off stolen loot if only he becomes a public official.

Predictably, then, under democratic conditions the tendency of every monopoly of ultimate decision making to increase the price of justice and to lower its quality and substitute injustice for justice and is not diminished but aggravated. As hereditary monopolist, a king or prince regards the territory and people under his jurisdiction as his personal property and engages in the monopolistic exploitation of his "property."

Under democracy, monopoly and monopolistic exploitation do not disappear. Rather, what happens with democracy is this: instead of a prince and a nobility who regard the country as their private property, a temporary and interchangeable caretaker is put in monopolistic charge of the country. The caretaker does not own the country, but as long as he is in office he is permitted to use it to his and his protégés' advantage. He owns its current use — usufruct — but not its capital stock. This does not eliminate exploitation. To the contrary, it makes exploitation less calculating and carried out with little or no regard to the capital stock. Exploitation becomes shortsighted and capital consumption will be systematically promoted.

The Solution: Private-Law Society instead of State

If the state, and especially the democratic state, is demonstrably incapable of creating and maintaining social order; if, instead of helping avoid conflict, the state is the source of permanent conflict; and if, rather than assuring legal security and predictability, the state itself continuously generates insecurity and unpredictability through its legislation and replaces constant law with "flexible" and arbitrary whim, then inescapably the question as to the correct — obviously, nonstatist — solution to the problem of social order arises.

The solution is a private-law society, i.e., a society in which every individual and institution is subject to one and the same set of laws. No public law granting privileges to specific persons of functions (and no public property) exists in this society. There is only private law (and private property), equally applicable to each and everyone. No one is permitted to acquire property by any means other than through original appropriation, production, or voluntary exchange, and no one possesses a privilege to tax and expropriate. Moreover, in a private-law society no one is permitted to prohibit anyone else from using his property in order to enter any line of production he wishes and compete against whomever he pleases.

Specifically regarding the problem at hand: in a private-law society the production of security — of law and order — will be undertaken by freely financed individuals and agencies competing for a voluntarily paying (or not-paying) clientele, just as the production of all other goods and services.

It would be presumptuous to predict the precise shape and form of the security industry emerging within the framework of a private-law society. However, it is not difficult to predict a few central changes that would fundamentally — and favorably — distinguish a competitive security industry from the present, all-too-well-known statist production of (in)justice and (dis)order.

First, while in a complex society based on the division of labor self-defense will play only a secondary role (for reasons yet to be explained), it should be emphasized from the outset that in a private-law society everyone's right to defend oneself from aggression against one's person and property is entirely undisputed. In distinct contrast to the present, statist practice, which renders people increasingly unarmed and defenseless against aggressors, in a private-law society no restrictions on the private ownership of firearms and other weapons exist. Everyone's elementary right to engage in self-defense to protect his life and property against invaders would be sacrosanct, and as one knows from the experience of The Not So Wild, Wild West, as well as numerous recent empirical investigations into the relationship between the frequency of gun ownership and crime rates, more guns imply less crime.

Just as in today's complex economy we do not produce our own shoes, suits, and telephones, however, but partake in the advantages of the division of labor, so it is to be expected that we will also do so when it comes to production of security, especially the more property a person owns and the richer a society as a whole. Hence, most security services will without doubt be provided by specialized agencies competing for voluntarily paying clients: by various private police, insurance, and arbitration agencies.

If one wanted to summarize in one word the decisive difference and advantage of a competitive security industry as compared to the current statist practice, it would be this: contract. The state, as ultimate decision maker and judge, operates in a contractless legal vacuum. There exists no contract between the state and its citizens. It is not contractually fixed, what is actually owned by whom, and what, accordingly, is to be protected. It is not fixed, what service the state is to provide, what is to happen if the state fails in its duty, nor what the price is that the "customer" of such "service" must pay.

Rather, the state unilaterally fixes the rules of the game and can change them, per legislation, during the game. Obviously, such behavior is inconceivable for freely financed security providers. Just imagine a security provider, whether police, insurer, or arbitrator, whose offer consisted in something like this:

I will not contractually guarantee you anything. I will not tell you what specific things I will regard as your to-be-protected property, nor will I tell you what I oblige myself to do if, according to your opinion, I do not fulfill my service to you — but in any case, I reserve the right to unilaterally determine the price that you must pay me for such undefined service.

Any such security provider would immediately disappear from the market due to a complete lack of customers. Each private, freely financed security producer instead must offer its prospective clients a contract

Specifically, in order to appear acceptable to security buyers, these contracts must contain provisions about what will be done in the case of a conflict or dispute between the protector or insurer and his own protected or insured clients as well as in the case of a conflict between different protectors or insurers and their respective clients. And in this regard only one mutually agreeable solution exists: in these cases the conflicting parties contractually agree to arbitration by a mutually trusted but independent third party.

And as for this third party, it too is freely financed and stands in competition with other arbitrators or arbitration agencies. Its clients, i.e., the insurers and the insured, expect of it that it come up with a verdict that is recognized as fair and just by all sides. Only arbitrators capable of forming such judgments will succeed in the arbitration market. Arbitrators incapable of this and viewed as biased or partial will disappear from the market.

From this fundamental advantage of a private-law society all other advantages follow.

First, competition among police, insurers, and arbitrators for paying clients would bring about a tendency toward a continuous fall in the price of protection (per insured value), thus rendering protection increasingly more affordable, whereas under monopolistic conditions the price of protection will steadily rise and become increasingly unaffordable.

Furthermore, as already indicated, protection and security are goods and services that compete with others. If more resources are allocated to protection, fewer can be expended on cars, vacations, food, or drink, for example. Also, resources allocated to the protection of group A (people living along the Pacific, for instance), compete with resources expended on the protection of group B (people living along the Atlantic).

The state, as a tax-funded protection monopolist, will necessarily allocate resources arbitrarily. There will be overproduction (or underproduction) of security as compared to other competing goods and services, and there will be overprotection of some individuals, groups, or regions and underprotection of others.

In distinct contrast, in a system of freely competing protection agencies all arbitrariness of allocation (all over- and underproduction) would disappear. Protection would be accorded the relative importance that is has in the eyes of voluntarily paying consumers, and no person, group, or region would receive protection at the expense of any other one. Each and every one would receive protection in accordance with his own payments.

The most important advantage of a private, contract-based production of law and order, however, is of a qualitative nature.

First, there is the fight against crime. The state is notoriously inefficient in this regard, because the state agents entrusted with this task are paid out of taxes, i.e., independent of their productivity. Why should one work if one is also paid for doing nothing at all?

In fact, it can be expected that state agents will have an interest in maintaining a moderately high crime rate, because this way they can justify ever-increased funding. Worse, for state agents the victims of crime and the indemnification and compensation of such victims play an at best negligible role. The state does not indemnify the victims of crime. To the contrary, the harmed victims are still further insulted in making them, qua taxpayers, pay for the incarceration and "rehabilitation" of the criminal (should he be captured).

The situation in a private-law society is entirely different. Security providers, insurers in particular, have to indemnify their clients in the case of actual damage (otherwise they would find no clients) and hence, they must operate efficiently. They must be efficient in the prevention of crime, for unless they can prevent a crime, they would have to pay up. Further, even if a criminal act could not be prevented, they must be efficient in detecting and recovering stolen loot, because otherwise they must pay to replace these goods. In particular, they must be efficient in the detection and apprehension of the criminal, for only if the criminal is apprehended is it possible for them to make him pay for the compensation owed to the victim and thus reduce their costs.

Moreover, a private, competitive, and contract-based security industry has a general peace-promoting effect. States are, as already explained, by nature aggressive. They can cause or provoke conflict in order to then "solve" it to their own advantage.

Or, to put it differently, as tax-funded monopolists of ultimate decision making, states can externalize the costs associated with aggressive behavior onto others, i.e., the hapless taxpayers, and accordingly will tend to be more aggressive vis-à-vis their own population as well as "foreigners."

In distinct contrast, competing private insurers are by nature defensive and peaceful. On the one hand this is because every act of aggression is costly, and an insurance company engaged in aggressive conduct would require comparatively higher premiums, involving the loss of clients to cheaper nonaggressive competitors.

On the other hand, it is not possible to insure oneself against every conceivable "risk." Rather, it is only possible to insure oneself against "accidents," i.e., risks over whose outcome the insured has no control and to which he contributes nothing. Thus, it is possible to insure oneself against the risk of death and fire, for instance, but it is impossible to insure oneself against the risk of committing suicide tomorrow or setting one's own house on fire.

Similarly, it is impossible to insure oneself against the risk of business failure, of unemployment, or of disliking one's neighbors, for in each case one has some control over the event in question. Most significantly, the uninsurability of individual actions and sentiments (in contradistinction to accidents) implies that it is also impossible to insure oneself against the risk of damages resulting from one's own prior aggression or provocation.

Instead, every insurer must restrict the actions of his clients so as to exclude all aggression and provocation on their part. That is, any insurance against social disasters such as crime must be contingent on the insured submitting themselves to specified norms of civilized, nonaggressive conduct.

Further, due to the same reasons and financial concerns, insurers will tend to require that their clients abstain from all forms of vigilante justice (except perhaps under quite extraordinary circumstances), for vigilante justice, even if justified, invariably causes uncertainty and provokes possible third-party intervention. By obliging their clients instead to submit to regular publicized procedures whenever they think they have been victimized, these disturbances and associated costs can be largely avoided.

Lastly, it is worthwhile pointing out that while states as tax-funded agencies can — and do — engage in the large-scale prosecution of victimless crimes such as "illegal-drug" use, prostitution, or gambling, these "crimes" would tend to be of little or no concern within a system of freely funded protection agencies. "Protection" against such "crimes" would require higher insurance premiums, but since these "crimes" — unlike genuine crimes against persons and property — do not create victims, very few people would be willing to spend money on such "protection."

Still more: while states, as already noted, are always and everywhere eager to disarm their populations and thus rob them of an essential means of self-defense, private-law societies are characterized by an unrestricted right to self-defense and hence by widespread private gun and weapon ownership. Just imagine a security producer who demanded of its prospective clients that they would first have to completely disarm themselves before it would be willing to defend the clients' life and property. Correctly, everyone would think of this as a bad joke and refuse such on offer.

Freely financed insurance companies that demanded potential clients first hand over all of their means of self-defense as a prerequisite of protection would immediately arouse the utmost suspicion as to their true motives, and they would quickly go bankrupt. In their own best interest, insurance companies would reward armed clients, in particular those able to certify some level of training in the handling of arms, charging them lower premiums reflecting the lower risk that they represent. Just as insurers charge less if homeowners have an alarm system or a safe installed, so would a trained gun owner represent a lower insurance risk.

Last and most importantly, a system of competing protection agencies would have a twofold impact on the development of law. On the one hand, it would allow for greater variability of law. Rather than imposing a uniform set of standards onto everyone (as under statist conditions), protection agencies could compete against each other not just via price but also through product differentiation. There could exist side by side, for instance, Catholic protection agencies or insurers applying canon law, Jewish agencies applying Mosaic law, Muslim agencies applying Islamic law, and agencies applying secular law of one variety or another, all of them sustained by a voluntarily paying clientele. Consumers could choose the law applied to them and their property. No one would have to live under "foreign" law.

On the other hand, the very same system of private law-and-order production would promote a tendency toward the unification and harmonization of law. The "domestic" — Catholic, Jewish, Roman, etc. — law would apply only to the person and property of those who had chosen it. Canon law, for instance, would apply only to professed Catholics and deal solely with intra-Catholic conflict and conflict resolution.

Yet it is also possible, of course, that a Catholic might come into conflict with the subscriber of some other law code, e.g., a Muslim. If both law codes reached the same or a similar conclusion, no difficulties exist. However, if competing law codes arrived at distinctly different conclusion (as they would at least in some cases), a problem arises.

In this case, "domestic" (intragroup) law would be useless, but naturally every insured person would want protection against the contingency of intergroup conflicts as well. In this situation, it cannot be expected that one insurer and the subscribers of its law code simply subordinate their judgment to that of another insurer and its law. Rather, as I have already explained, in this situation there exists only one credible and acceptable way out of this predicament: from the outset, every insurer would have to be contractually obliged to submit itself and its clients to arbitration by an independent third party. This party would not only be independent but at the same time the unanimous choice of both parties.

It would be agreed upon because of its commonly perceived ability to find mutually agreeable (fair) solutions in cases of intergroup disagreement. If an arbitrator failed in this task and arrived at conclusions that were perceived as "unfair" or "biased" by either one of the insurers or their clients, this person or agency would not likely be chosen as an arbitrator in the future.

As a result of the constant cooperation of various insurers and arbitrators, then, a tendency toward the unification of property and contract law and the harmonization of the rules of procedure, evidence, and conflict resolution would be set in motion. Thus, in buying protection insurance, every insurer and insured becomes a participant in an integrated system of conflict avoidance and peacekeeping. Every single conflict and damage claim, regardless of where and by or against whom, would fall under the jurisdiction of one or more specific insurance agencies and would be handled either by an individual insurer's "domestic" law or by the "international" or "universal" law provisions and procedures agreed upon by everyone in advance.

Hence, instead of permanent conflict, injustice, and legal insecurity — as under the present statist conditions — in a private-law society, peace, justice, and legal security would hold sway.