How would anarcho-capitalism work?

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This article is from the Anarchy FAQ, by Bryan Caplan with numerous contributions by others.

How would anarcho-capitalism work?

Most of the prominent anarcho-capitalist writers have been academic economists, and as such have felt it necessary to spell out the workings of their preferred society in rather greater detail than the left-anarchists have. In order to best grasp the anarcho-capitalist position, it is helpful to realize that anarcho-capitalists have emerged almost entirely out of the modern American libertarian movement, and believe that their view is simply a slightly more extreme version of the libertarianism propounded by e.g. Robert Nozick.


FAQs on the broader libertarian movement are widely available on the Net, so we will only give the necessary background here. So-called "minarchist" libertarians such as Nozick have argued that the largest justified government was one which was limited to the protection of individuals and their private property against physical invasion; accordingly, they favor a government limited to supplying police, courts, a legal code, and national defense. This normative theory is closely linked to laissez-faire economic theory, according to which private property and unregulated competition generally lead to both an efficient allocation of resources and (more importantly) a high rate of economic progress. While left-anarchists are often hostile to "bourgeois economics," anarcho-capitalists hold classical economists such as Adam Smith, David Hume, and Jean-Baptiste Say in high regard, as well as more modern economists such as Joseph Schumpeter, Ludwig von Mises, F.A. Hayek, Milton Friedman, George Stigler, and James Buchanan. The problem with free-market economists, say the anarcho-capitalists, is not that they defend the free market, but merely that their defense is too moderate and compromising.


(Note however that the left-anarchists' low opinion of the famous "free-market economists" is not monolithic: Noam Chomsky in particular has repeatedly praised some of the political insights of Adam Smith. And Peter Kropotkin also had good things to say about Smith as both social scientist and moralist; Conal Smith explains that "In particular he approved of Smith's attempt to apply the scientific method to the study of morals and society, his critique of the state in The Wealth of Nations, and his theory of human sociability in The Theory of Moral Sentiments").


Now the anarcho-capitalist essentially turns the minarchist's own logic against him, and asks why the remaining functions of the state could not be turned over to the free market. And so, the anarcho-capitalist imagines that police services could be sold by freely competitive firms; that a court system would emerge to peacefully arbitrate disputes between firms; and that a sensible legal code could be developed through custom, precedent, and contract. And in fact, notes the anarcho-capitalist, a great deal of modern law (such as the Anglo-American common law) originated not in legislatures, but from the decentralized rulings of judges. (The anarcho-capitalist shares Kropotkin's interest in customary law, but normally believes that it requires extensive modernization and articulation).


The anarcho-capitalist typically hails modern society's increasing reliance on private security guards, gated communities, arbitration and mediation, and other demonstrations of the free market's ability to supply the defensive and legal services normally assumed to be of necessity a government monopoly. In his ideal society, these market alternatives to government services would take over all legitimate security services. One plausible market structure would involve individuals subscribing to one of a large number of competing police services; these police services would then set up contracts or networks for peacefully handling disputes between members of each others' agencies. Alternately, police services might be "bundled" with housing services, just as landlords often bundle water and power with rental housing, and gardening and security are today provided to residents in gated communities and apartment complexes.


The underlying idea is that contrary to popular belief, private police would have strong incentives to be peaceful and respect individual rights. For first of all, failure to peacefully arbitrate will yield to jointly destructive warfare, which will be bad for profits. Second, firms will want to develop long- term business relationships, and hence be willing to negotiate in good faith to insure their long-term profitability. And third, aggressive firms would be likely to attract only high-risk clients and thus suffer from extraordinarily high costs (a problem parallel to the well-known "adverse selection problem" in e.g. medical insurance -- the problem being that high-risk people are especially likely to seek insurance, which drives up the price when riskiness is hard for the insurer to discern or if regulation requires a uniform price regardless of risk). Anarcho-capitalists generally give little credence to the view that their "private police agencies" would be equivalent to today's Mafia -- the cost advantages of open, legitimate business would make "criminal police" uncompetitive. As David Friedman explains in The Machinery of Freedom, "Perhaps the best way to see why anarcho-capitalism would be so much more peaceful than our present system is by analogy. Consider our world as it would be if the cost of moving from one country to another were zero. Everyone lives in a housetrailer and speaks the same language. One day, the president of France announces that because of troubles with neighboring countries, new military taxes are being levied and conscription will begin shortly. The next morning the president of France finds himself ruling a peaceful but empty landscape, the population having been reduced to himself, three generals, and twenty-seven war correspondents."


(Moreover, anarcho-capitalists argue, the Mafia can only thrive in the artificial market niche created by the prohibition of alcohol, drugs, prostitution, gambling, and other victimless crimes. Mafia gangs might kill each other over turf, but liquor-store owners generally do not).


Unlike some left-anarchists, the anarcho-capitalist has no objection to punishing criminals; and he finds the former's claim that punishment does not deter crime to be the height of naivete. Traditional punishment might be meted out after a conviction by a neutral arbitrator; or a system of monetary restitution (probably in conjunction with a prison factory system) might exist instead. A convicted criminal would owe his victim compensation, and would be forced to work until he paid off his debt. Overall, anarcho-capitalists probably lean more towards the restitutionalist rather than the pure retributivist position.


Probably the main division between the anarcho-capitalists stems from the apparent differences between Rothbard's natural-law anarchism, and David Friedman's more economistic approach. Rothbard puts more emphasis on the need for a generally recognized libertarian legal code (which he thinks could be developed fairly easily by purification of the Anglo-American common law), whereas Friedman focuses more intently on the possibility of plural legal systems co-existing and responding to the consumer demands of different elements of the population. The difference, however, is probably over-stated. Rothbard believes that it is legitimate for consumer demand to determine the philosophically neutral content of the law, such as legal procedure, as well as technical issues of property right definition such as water law, mining law, etc. And Friedman admits that "focal points" including prevalent norms are likely to circumscribe and somewhat standardize the menu of available legal codes.


Critics of anarcho-capitalism sometimes assume that communal or worker-owned firms would be penalized or prohibited in an anarcho-capitalist society. It would be more accurate to state that while individuals would be free to voluntarily form communitarian organizations, the anarcho- capitalist simply doubts that they would be widespread or prevalent. However, in theory an "anarcho-capitalist" society might be filled with nothing but communes or worker- owned firms, so long as these associations were formed voluntarily (i.e., individuals joined voluntarily and capital was obtained with the consent of the owners) and individuals retained the right to exit and set up corporations or other profit-making, individualistic firms.


On other issues, the anarcho-capitalist differs little if at all from the more moderate libertarian. Services should be privatized and opened to free competition; regulation of personal AND economic behavior should be done away with. Poverty would be handled by work and responsibility for those able to care for themselves, and voluntary charity for those who cannot. (Libertarians hasten to add that a deregulated economy would greatly increase the economic opportunities of the poor, and elimination of taxation would lead to a large increase in charitable giving).


For a detailed discussion of the economics of privatization of dispute resolution, rule creation, and enforcement, see my "The Economics of Non-State Legal Systems," which is archived with my other economics writings.