Prof. Bryan Caplan

Econ 370


Week 15:  Radical Privatization

I.                     Why Not Privatize Everything?

A.                 Coase and the lighthouse

B.                 Rothbard's Fable of the Shoes

C.                Widely assumed, even by firm believers in laissez-faire, that at minimum, the government must supply police, courts, law, and criminal punishment.

D.                There are many "hard cases," but the "defense services industry" (police, courts, law, and criminal punishment) is generally regarded as the hardest case of all.  First, I'll sketch the details for how private provision would work.  Then we'll consider the strength of the arguments against it.

II.                   The Free Market in Defense Services

A.                 Police.  No more government police; instead, people who want protection services buy them, presumably on subscription basis.  (Or their apartment/housing complex may "bundle" them).

1.                  Current analog: Security guard services.

B.                 Interaction between police services.  Normally when X allegedly attacks Y, they will subscribe to different police services.  There is no need for this to result in violence: rational firms will want to pre-contract to follow mutually acceptable procedures.

C.                Court services.  If you accuse someone, and he disputes the charge, you (or perhaps your police agency) file a suit against him.  His police agency and yours have a strong incentive to find a mutually acceptable court to resolve the dispute.  Once again, this court is fully private: it works for a fee to resolve disputes.  (To keep judges honest, the fee would probably need to be independent of the judgment).

1.                  Current analog: Arbitration.

D.                Law.  Courts would develop private legal codes, enhancing their product quality and reputation.  Laws would probably be very narrow - limited mainly to protection of person and property - since each case would have to have a private plaintiff, not a public prosecutor.  Conflicts over jurisdiction could be negotiated in advance by police companies.

1.                  Current analog: Arbitrators' legal codes.

E.                 Restitution-based punishment (+ loser pays rules).  What incentive is there to pursue a case?  Winning plaintiff entitled to monetary restitution from defendant, with the amount graded according to the severity of the crime.  (For very serious crimes, e.g. murder, the judgment might be unlimited).  If a criminal can't pay, then he must become an indentured servant.

1.                  Current analog: Arbitration judgments.

F.                 Profit-making jails bid for the services of convicted criminals, making them work in "prison factories."  Once the criminal works off his debt, he is free to go.

G.                Main advantages of the system:

1.                  Productive efficiency: no more inefficient government supply.

2.                  Allocative efficiency: no more rationing of police, court, or jail services.

3.                  Strong checks and balances - if police agency A is corrupt or incompetent, you switch to a competitor.

III.                  Possible Problems with Free-Market Defense Services

A.                 "Externalities of defense services."

1.                  Reply: These have more to do with current policy than the nature of the product.  If police only help paying customers, if judges charge for adjudication, if victims who prosecute win restitution, where is the externality?

2.                  Turnaround: Government defense has lots of externalities.  Bureaucrats who make the world safer get paid the same as those who don't.  Oftentimes "crusaders" become very popular by causing the crime they claim to be fighting (e.g. Prohibition).

B.                 "It would lead to violent chaos."

1.                  Reply:  Why?  It is cheaper to negotiate than to fight, especially since police companies repeatedly interact with each other.  Also, police company employees, unlike conscripts, have to be paid more for a riskier job.

2.                  Turnaround: Existence of government leads to wars, which are far more serious than police agency shoot-outs because governments control the resources of the whole society.

C.                "One strong agency would take over and become the new government."  (Alternate version: Agencies would merge until they had a monopoly).

1.                  Reply: This would only be possible if there were a large MES relative to the demand for defense services.  In the current U.S., there are already about 10,000 security guard companies, so there is little reason to fear the dominance of one strong agency.

2.                  Turnaround: A much bigger risk from governments, since their MES scale is much larger than for mere police agencies.

D.                "Police agencies would build up demand by defending their clients to the death."

1.                  Reply: This would create a severe "adverse selection" problem, just like the one that insurance companies face.  If you announce that you will protect your clients to the death, you encourage all of the riskiest, lawless people to hire you, raising your costs enormously.

E.                 "People would have no incentive to prosecute crimes."

1.                  Reply:  Monetary restitution provides the incentive; the ability to impose indentured servitude ensures that almost all convicted persons will be solvent.

2.                  Turnaround: This is true today: the only incentive of victims to cooperate with prosecutors is desire for revenge.  E.g. rape victims often better off staying quiet.

F.                 "Criminals would be over-punished."

1.                  Reply:  In many ways, profit-making prisons would be more humane: there is an incentive to protect the safety of workers; to separate workers by size and strength; and to provide useful job training.  Legal codes could incorporate prisoner protection as well. 

2.                  Turnaround: Numerous non-violent offenders currently sentenced to harsh prison conditions.  At the same time, many serious violent criminals get light sentences to make room for drug offenders.

G.                Others? 

H.                 In general, most of the criticisms of privatized defense services are equally an argument against government defense services: a great example of an unfair comparison.