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In the nineteenth century, the political philosophy that supported small
government and free markets was called liberalism.
Unfortunately between then and now the enemies of liberalism
succeeded in stealing its name. Which is why people with similar views nowadays
usually call themselves libertarians. The classical liberal, the nineteenth century
liberal position, was that the function of government, was to
do a few things that couldn't be done by individuals on the private market by voluntary
association. And those were traditionally listed as police,
courts and national defense. And I got interested,
I suppose when I was oh in my late teens, in whether you could push the idea
of free markets and voluntary association even farther than that.
Whether it would be possible to have a society, which was organized by private property,
trade, voluntary exchange, that set of ideas, but in which there was no government.
In which all of the useful things government does,
because government does some useful as well as
some useless things, were done in other ways. And is attractive idea, because we have
quite a lot of reasons to believe that where the same thing can be done
either by government or privately, government usually do it worse.
And government doing things usually involves greater restrictions on individual freedom,
because when the government offers you a deal you don't get to turn it down.
Whereas when someone in the private market offers you a deal you do.
So it seems to be interesting to figure out, whether you could
construct a plausible set of institutions, in which the basic police, courts, defense
function were being done privately instead.
I started writing about the subject and eventually wrote my first book,
The Machinery of Freedom, which was published now almost forty years
ago. So how could you have a society,
in which the fundamental functions were produced privately
rather than by government. And let me start with what in some sense are
the most fundamental ones, namely making and enforcing laws.
What we would think of loosely speaking of as, the job of police and courts.
So I want to imagine a society, where individuals hire private firms to protect
their rights and settle their disputes with other individuals.
The same way we hire private firm to ensure us against auto accidents for example.
So I pay some annual sum to one of a variety of different firms,
each of which sells the service of making sure, as best it can, that I don't
get robbed or murdered. And that if I have a dispute with somebody
else, it gets settled in some reasonable and peaceful way.
And there's an obvious problem with that system, one which occurs in thirty seconds or so
to everybody who sees described. And most of them stop after those thirty seconds,
and they say "Well that's why it won't work, and that finishes
it." And the problem is conflict between
rights enforcement agencies. So we will imagine,
that I'm the customer of one rights enforcement agency,
you're the customer of another another. One day I come home and I find my television
set is missing, I call up my rights enforcement agency and
they also notice the door has been broken open.
They prudently had installed a little video camera in my living room
to try to monitor anybody who stole things from me, and that camera shows
a picture of you walking out my door, with my television, or at least they're pretty
sure it's you. So my agency gets in touch with you and says:
"Would you please give our customer Mr. Friedman his television back?"
"And by the way you owe us fifty dollars for our time and trouble,
in locating you and recovering the television set."
And your reply is: "What television set?" "It's true I have a nice television set,
but I bought that from a friend of mine!" "I never heard of Mr. Friedman, I've never
robbed him, go away!" Well my agency says
"Well if you really feel like that, if you're not willing"
"to discuss this matter in a reasonable fashion," "we could send three or four big tough guys"
"over to your front door tomorrow morning" "to carry out the television set, with or
without your permission." And you reply: "Ah, but if you do that, I
too have a rights enforcement agency." "And they will send five or six big tough
guys," "to keep you from taking what I claim is my
television set." And so people say,
we set up a situation for a permanently violent society, in which my agency
and your agency and his agency are always fighting each other,
over the claims of our customers. And I think that's the wrong answer. I don't
think that's at all likely to happen.
And the reason it isn't likely to happen, is that violence is expensive,
that fighting people, as a way of settling disputes, first gives
you very uneven results. There's no guarantee the guy who's in the
right will win, though we'd like to believe there is.
But more than that, it means people get hurt, they may get killed,
houses get smashed, you've gotta pay hazard pay
to your big tough guys to work for you. And so there ought to be a better solution.
And the obvious better solution in this case is
arbitration. So that my agency says to your agency: "Look
we don't want to get into a fight with you," "and you don't want to get into a fight with
us." "How about we go to that private judge over
there, who has good reputation as an honest and competent
judge." "And we agree,"
"that if he says that the television set was stolen from Mr. Friedman,"
"you won't defend your customer when we recover the television set,"
"and if they say that it was not stolen from Mr. Friedman, we will apologize and pay some
damages" "for the costs that we've imposed on him."
Now, that's how you might settle it, if it came up for the first time
but these agencies as we imagine them
are going to be in business for a long time. My agency knows that over the next ten years,
it will have clashes like this with your agency a hundred or a thousand
or five thousand times, and therefore the sensible thing to do is
to agree in advance, on the court that will settle them.
So my agency agrees with your agency that any disputes between the two agencies
will be settled by Mr. Smith's private court. Which is an arbitrator that has a good reputation
for settling such disputes. Now,
it may occur to you to ask the obvious next question, which is
"Who enforces that contract?" Because unlike the world we live in now,
there is no government sitting above the agencies compelling them to keep their word.
But the answer is, that there is a way of enforcing contracts
that we're all familiar with, that doesn't require a government.
And that's what economist sometimes refer to
as the "discipline of constant dealings". If you and I
are going to be interacting for a long time, many times over,
each of us knows that he breaks his word this time
the other one isn't going to trust him next time,
that's the end of a profitable relationship. Therefore it is prudent,
in that kind of a repeat relationship, to try to maintain your reputation
by actually doing what you say you're going to do.
One of the sources that got me thinking about these questions,
was a science fiction book by Robert Heinlein called "The Moon is a Harsh Mistress",
which describes a society on the moon, with private property and without government.
It does a pretty plausible job, which is one reason I started trying to imagine
if I could work out something similar for the world I was living in.
And there's one little bit where the narrator
is visiting earth, and he says
"You know on earth they have laws for everything!" "They even have laws for private contracts."
"Why would you contract with somebody if you couldn't trust him?"
And that's sort of the reaction of someone to whom
my imaginary society is the norm, instead of the present society.
So, you would expect that those private rights enforcement agencies
have an obvious incentive to keep their contract,
because if when the judge
rules against my agencies customer today we ignore the verdict,
then other agency will ignore the verdict when it rules the other way.
So we now have a contractual network.
We now have a world, where every individual is the customer of
private rights enforcement agency, and every pair of private rights enforcement
agencies are customers of a private court, which I
refer to as an arbitration agency. And that then raises some interesting questions.
And the first question, I think maybe the most important one is, "what
kind of law would we get?" And it's worth noticing that
one of the features of this system is that
the law is not the same for everybody. The law it between me and you
is a function of the arbitration agency that our
rights enforcement agencies have chosen. And the law between me and him
is a function of the arbitration agency that my rights enforcement agency and his
rights enforcement agency have chosen. They might be the same rules, they might be
not. That sounds odd and unjust to us.
It sounds less unjust if it occurs to you, that when everybody has the same rule,
it might be the wrong rule they all agreed to,
in which case some of them having the right rule would be better.
But in fact, in many real world societies, including America
at the moment, the legal rules between people are not all
the same. That if you think about state law for example
that the laws are different from state to state
in various respects and therefore the laws between two citizens of California
are not exactly the same as between two citizens of Virginia.
There are some cases, some conflicts that go to federal law some that go to state law,
so there as well it's different. And there's a certain sense
in which the legal system we all live in is a legal system of contractual law.
Because if you think about an ordinary private contract,
where two people or two firms make an agreement, now in the current world enforceable in the
courts, in a sense that contract is a private legal
system. Because the contract between us says
if I don't finish the house I'm building for you
by march,
I agree to pay you damages of five thousand dollars.
That would be a possible term, call it a liquidated damage term in a contract.
But that's really a legal rule. Just a legal rule, just between the two of us.
So I'm now imagining a society, where there are multiple legal rules.
What will they be? And the first thing to realize
is that the rights enforcement agencies are middlemen.
And part of the product they're selling to their customers is the set of legal
rules under which their conflicts will get decided.
And like anyone selling things to customers, the agency has an incentive
to try to produce the product the customers want to buy.
So from this standpoint each rights enforcement agency
will be saying to itself Which arbitration agencies
would our customers like to have their disputes settled by?
And similarly, the arbitration agencies will be saying to themselves
If we want rights enforcement agencies to hire us,
what legal rules will make people most willing to be under
our rules? So that you have in effect a legal system
that is being generated on the free market. That's roughly the same way that cars are
produced now or that food is produced now. Instead of one produced by a political mechanism.
And that to me is one of the interesting features of this system.
And what can you say about that legal system? And the answer is, that for reasons similar
though not identical to the reasons that we expect markets to produce better cars
than socialist systems, that we think that in general
free choice in a private property trade society works better
for producing things than political systems work.
Some of the same reasons, although the situation is a little different,
are going to result in producing good law as well.
So imagine that the customers of my rights enforcement agency
are people who believe in the death penalty. They think that the knowledge, that if someone
kills one of them he's likely to get executed
makes it less likely they'll be killed. On the other hand the customers of another
arbitration agency don't believe that. They think that the death penalty doesn't
deter, and they are really worried about the possibility
that they might be convicted of *** whether
correctly or incorrectly, and get executed. So they would prefer a legal system that doesn't
include a death penalty. So my agency does some market research,
and it figures out that if it could guarantee its customers a capital
punishment court,
in disputes with the other agencies customers, it could raise the price it charges customers
by enough to bring an extra hundred thousand dollars a year and they still
stay with it because they'd be getting more nearly the law they wanted.
And the anti capital punishment agency does some similar market research
and they conclude that if they could guarantee safety from capital punishment, if they could
guarantee that in the disputes it would go to a non capital punishment court
they could charge an extra two hundred thousand dollars a year.
Well in that case the obvious solution for both of them
is that they agree on a non capital punishment court
and the anti capital punishment agency either pays off
the pro capital punishment agency enough to make it agree to that,
or agrees on some other legal issue to accept their view.
So that you should imagine the agency is in effect bargaining
to whatever set of legal rules, whatever court maximizes the summed benefit
to the customers of the two agencies. Now, if there are any economists listening
to this they'll realize, that I've oversimplified in a number of important
ways. And if they're sufficiently curious I think
CATO has hopefully by now, up a recording
of a talk I gave on the market for law, where I went into some of the finer points
on this. Or if you go to my webpage you can find one of the things there that
discusses it. But for at least the first approximation I think it's fair
to say that what I have described is a market,
where it's in the interest of the private courts to try to design an optimal legal system,
a set of legal rules people want live under, and it's in the interest of the rights enforcement
agencies to then agree on those optimal rules.
Now of course the optimal rules may not be the same for everybody,
you could imagine a world where there are some people who are in very
dry parts of the country where you need detailed legal rules on water
rights there other people in much more favored
parts of the country,
where elaborate rules about who can draw water out of a river when, make no sense.
So you might end up with more than one legal system.
But each of those legal systems would be more or less tailored by design to
serve the welfare of the people who are its customers, so to
speak. Now, you might answer, "wait a minute,
"this is no improvement of what we now have, because after all"
"our legal system at present is made by the legislature."
Actually some of it is made by judges but a lot of it is made by the legislature.
"Congressmen want to get reelected" "so therefore"
"congressmen have got to" "try to vote for the laws that people like,
so how is this market system any better?" And there are a number of answers.
And the first answer is, what economists call "rational ignorance".
That you as an individual voter, in order to control
your congressman, in order to make it in his interest
to vote for the laws that benefit you, you require two pieces of information
You have to know what laws are in your interest, and you have to know what your congressman
is doing. You have no reason to know either of those
things in the present system, because if you do a little mental arithmetic
you work out, that the chance that your vote will determine
who wins the next congressional election is maybe one ten thousand or one in a hundred
thousand. The chance that your vote will determine who
wins the next presidential election is maybe one in a million, one in ten million,
somewhere around that. In a large population democracy, each individual
knows his vote has almost no chance of affecting outcomes.
So why should you spend a lot of time and effort
watching what your congressman is doing figuring out how we voted, why he voted, what
the bills he voted on would do when that information is of no use to you?
Similarly, why should you spent a lot of time and effort
figuring out what the ideal legal system is, when having figured it out,
you have no control over what legal system you're under?
So one reason why you would expect the market method for producing law
to work better than the government method,
is one of the reasons you expect markets to do better at producing food
and automobiles and lots of other things that the government
does. Because on the market,
since your choice affects what you get, you can say alright
this rights enforcement agency mostly contracts with court A,
that one mostly contracts with court B, court B has better laws, so I'll switch to
the one that contracts with court B. So just as an ordinary market you have a good
deal of control outcomes. You don't have perfect control, because the
agencies have got to get agreement with each other,
so not all the options are going to be on the table.
But at least your choice has substantial effect on what law you're
under, whereas in the political system your choice
on who to vote for has very close to zero effect on what law you're
going to be under. So you have a reason to pay attention in the
market context and not in the political, just as for other
goods and services. Furthermore,
the information about what works is much easier to get
in the market system, because you actually get to observe the alternatives.
And I'm thinking now less about what the legal rules are
than about how good a job the different agencies do of enforcing them.
So if you think about the political context, we're never going to be able to compare
the Obama administration of 2008 to 2012 with the McCain administration of 2008 to
2012, because only one of them got elected.
So it is very hard. I don't think Obama is doing a very good job,
but that depends on my guesses about what would've happened, if he had done
other things, which we have no way of knowing, that you
know Obama said I'm going to have this big stimulus,
it's gonna get unemployment down substantially, he said
by how much, didn't happen. But of course Obama's defenders
can argue, they might be right, without the stimulus,
things would have been even worse. Therefore we should be grateful to him, even
though it was too optimistic about how it turned out, he did the right thing.
And there's no easy way you know you can
consult different economists and you can find, you know, one Nobel winning economist who
says Obama did the right thing and one who says
he did the wrong thing. On the other hand
imagine that the question is which agency shows up faster when
you report that you've been robbed. Well I'm a customer of agency A, you're a
customer of agency B, we can compare notes, assuming that both of
us have been so unlucky used to be robbed. Or we can observe other things, features of
what they did, and we can see whether on the whole A does
a better or worse job than B. So in that sense
we don't have perfect information, we humans never have perfect information,
but we're in a much better position to choose among the bundle of rights
and rights enforcements, legal rules and the equivalent of police protection,
provided by one agency and another, than we are to choose among the promises of
politicians, which is all we really get to choose among.
So that's another reason why you would expect that
the system I'm describing would be more likely to produce good law
than the system we now live under. And at least my view is that there's lots
of evidence that the system we now live under produces pretty bad law in many
ways. Now another response you sometimes get from
people is "Wait a minute, how is this going to work
for criminals?" "Won't the criminals just form their own"
"rights enforcement agency," "and insist on laws in which *** is legal
and robbery is legal, and so forth?" And I think there are two answers to that.
The simplest but perhaps less important answer is,
very few criminals would really want to live under those laws either.
Because after all, if we have a system where it's legal to *** people
that not only means it's legal for me to *** you,
it also means it's legal for you to *** me
and that doesn't sound like such a great deal. And similarly for robbery.
But even if the murderers said, "Ah, but I'm much better killing other people,"
"so I want a rule that allows ***", he's not gonna get it,
because in order to get that he has to persuade the victim's rights enforcement
agency to agree to a court that allows ***.
And if you go back to my discussion of capital punishment
it's pretty easy to see that almost all of the time
the value to one person of being able to violate someone else's rights
is much less than the value to the victim of not having his rights
violated. That the
hitman might get paid ten thousand dollars for a contract to kill
me. I would be delighted to pay much more than
ten thousand dollars to have some assurance that people won't ***
me. And again this is a fairly brief talk so I
can't go into a lot of detail, but I think it's pretty clear
that if the criminals really decide to try to form their own agency
that agency will be unable to get contracts on its terms with any other agency.
The criminals are vastly outnumbered by the potential victims.
The potential victims are willing to pay much more to get what they want
than criminals are to pay to get what they want
and therefore the criminal agency would fight a hopeless war
against the rest of society and lose.
Which is exactly what would happen at present if the criminals said
"we're starting a new country," "it's in the middle of the united states,"
"it doesn't recognize any of your laws." What happens? Well you can predict pretty
easily what would happen.
So I don't think that's a serious argument. In fact you would expect a good deal less
crime and a good deal less of a problem of crime
in the society I'm describing. Not only because private firms usually do
things better than governments do,
but also because a fair amount of our present crime
is created by government. That is to say the government makes it illegal
for people to do things that they want to do and that harm no one
else. I'm thinking in particular of the war on drugs,
but there are other examples of that. When you make things illegal, that people
want to do, the result is some people do them and you
have a large number of people in prison.
The U.S. has an extraordinarily high imprisonment rate.
Almost one percent of the population is imprisoned any one time.
And that's largely a result of having made laws against victimless crimes
and then having arrested people for breaking those laws.
So I tried to sketch out very briefly how one could have a society functioning
in which there was no government but where institutions of private property
and in which people's rights in fact got protected and which conflicts between people were normally
settled peacefully.