Natural Monopoly in the Private Provision of Defense, working paper, draft IV

(This is my newest draft, for previous drafts see here, here, and here)

 

DEMAND FOR COERCIVE SERVICES

If there were some criminals unwilling to compensate their victims; and if some of those victims were unable or unwilling to force the payment of compensation, but also unwilling to forgo it; and if it were possible to hire a third party to force the payment of compensation at a price less than the value of the compensation, then there would be demand for such services. If these conditions would hold in the hypothesized anarcho-capitalist society, which I contend they would, then there will be demand for coercive services in the anarcho-capitalist society.

THE COERCIVE SERVICE PROVIDER (CSP)

The entity which provides coercive services is the object of our analysis.

ROLE OF THE CSP IN RESOLVING DISPUTES

Let us employ an example to illustrate the role of the CSP in resolving disputes. Smith accuses Jones of destroying his car, which is valued at $5,000. On the principle of double indemnity, Smith asks Jones to pay $10,000 in compensation; Jones refuses. Smith asks Jones to submit to arbitration; Jones refuses. Smith hires JustCorp, a CSP, to force Jones to pay. JustCorp sends a letter to Jones demanding that he pay, and threatening to seize $10,000 worth of his property by force if he refuses. Under this pressure, Jones relents and pays Smith the $10,000. Alternately, Jones refuses and JustCorp does actually seize $10,000 worth of his property on behalf of Smith.

DISPUTE BETWEEN TWO CSP

Let us consider what happens when a CSP is itself a disputant. Continuing where we left off in the above scenario; Jones has been made to pay compensation to Smith, but he still denies stealing Smith’s car. In his view, he has simply been robbed of $10,000 by Smith and JustCorp. Accordingly, on the principle of double indemnity, and supposing Smith and JustCorp share liability, he asks Smith and JustCorp each for $10,000; they refuse. He asks them to submit to arbitration; they refuse. Unable to force them to pay, yet unwilling to abandon his claim against them, he hires another CSP, SecureCorp, to force them to pay. What happens now? Now one CSP is trying to get compensation from another. They are in a dispute. How can this dispute be resolved? The outcome will either be favorable to SecureCorp and its client Jones, favorable to JustCorp and its client Smith, or a perfect compromise. What determines which of these outcomes actually occurs?

RESOLUTION OF INTER-CSP DISPUTE

There are, broadly speaking, two possible methods of resolution: negotiation or violence (1). If violence, then the strongest firm will prevail. For example, if SecureCorp is stronger than JustCorp, it will seize the $10,000 and JustCorp will be unable to seize it back: the end. But what if the dispute is resolved by negotiation rather than violence? While a negotiated settlement between two firms need not necessary result in a completely one-sided settlement favoring the stronger, certainly the result is more likely to favor the stronger. If this is not immediately obvious, consider some analogous situations: negotiations between armed mugger and unarmed pedestrian, negotiation between gangster armed with pistol and gangster armed with knife, negotiations between Germany and Czechoslovakia c. 1939, negotiations between a defiant anarcho-capitalist and the IRS. Needless to say, the stronger party has the stronger negotiating position. Thus, in a dispute between CSP, the outcome is likely to favor the stronger CSP and its client. The greater the disparity in strength between the two CSP, the more the outcome is likely to favor the stronger. At the extreme, given sufficient disparity in strength, the outcome will be entirely one-sided in favor of the stronger: as, for example, it would be in the negotiations between an anarcho-capitalist and the IRS. At a certain point, the imbalance of strength is so severe that it becomes rather absurd to even lend the name “negotiation” to the exchange.

MONOPOLY CSP

Essential Argument:

If Firm X (a) always satisfies its clients’ demands (i.e. either gets compensation or them, or prevents them from having to pay compensation, depending on whether the client is a plaintiff or defendant), and, (b) charges its clients less than the value of the compensation in question, (conclusion) then it will have a 100% share of the coercive services market.

Elaboration:

If ex hypothesi there is 0% chance that a consumer will achieve his goal (either getting compensation or avoiding having to pay compensation) by hiring any firm other than Firm X, and if ex hypothesi there is any cost at all to hiring any firm other than Firm X, then there is no value in hiring any firm other than Firm X. Whereas, if ex hypothesi there is a 100% chance of a consumer achieving his goal if he hires Firm X, and Firm X charges less than the compensation in question, there is value in hiring Firm X. Therefore, under these conditions, Firm X will have 100% of market share.

Justification of Premises:

The argument above proves that, under certain conditions, there will be a monopoly in the coercive services market. Those conditions are, once again: (a) that some firm wins 100% of its disputes with other firms, and (b) that such a firm charges its clients less than the value of the compensation in question. Now we shall examine those two conditions, and see whether they are realistic.

A firm would be able to win all disputes with all firms if it were strongest, as explained above. Not only is it possible for one firm to be stronger than all the rest, it is virtually certain, since “strongest” is a relative property. Surely not all firms at all times would be equally strong. There will almost certainly at any moment be a strongest firm, and sometimes a firm which is considerably stronger than all of its rivals.

Could the strongest firm charge a fee less than the value of the compensation in question? I see no a priori reason to doubt that this is possible. One might object that violence is expensive, soldiers are expensive, etc. And of course that’s true, but it simply does not follow that their cost necessarily exceeds the value of the compensation they collect for the firm and its clients. In some cases it may, it others it may not. In those latter cases, we shall have monopoly.

CONCLUSION

We have established that, in a stateless society, there will be demand for coercive services; and that there will be coercive-service providers; and there will be disputes between coercive-service providers; and that the results of such disputes are likely to favor the stronger CSP; and that it is entirely possible for the strongest CSP to acquire and maintain a monopoly.

ADDENDUM 1

The argument presented above is sufficient to prove the thesis: that a coercive services monopoly is possible. What follows is for the purpose of illustration. What is the fundamental difference between the coercive services market and other markets? Why is monopoly possible in the former but not in the latter? Rival producers of all kinds in all markets compete in two dimensions: price and quality. What is unique about the coercive services market involves quality: namely, for one CSP to provide a higher quality service, its rivals must necessarily provide a lower quality service. For JustCorp to satisfy its client completely, SecureCorp must completely fail to satisfy its client. Or, in a less extreme case, for JustCorp to mostly satisfy its client, Securecorp must mostly not satisfy its client. This is because the demands of their respective clients are mutually exclusive: Smith wants compensation from Jones, Jones does not want to pay compensation to Smith. It is logically impossible for both demands to be fully satisfied. And to the extent that one is partially satisfied, the other is partially unsatisfied. It is a zero-sum game. This is not the case in any other market. In no other market does the satisfying of one consumer logically prelude the satisfying of another.

ENDNOTES

1. There is a third possibility: employment by either SecureCorp, JustCorp, or both of another CSP. However, if every dispute between CSP is resolved by resort to yet another CSP, there is an infinite regress and the dispute is never resolved at all. At some point, a dispute between two CSP must be resolved between those two CSP, without intervention by any third party. It is a logical necessity, unless we posit the existence of an infinite number of CSP, which is absurd.

Why Medieval Iceland Was Not An Anarcho-Capitalist Society

Here is a description of the relationship between chieftains (security providers) and individuals (consumers), which sounds like an example of the freely competitive, polycentric legal system of anarcho-capitalism.

“The concept of goðar as leaders of small states reflects the outward forms of the confrontational politics practiced by chieftains. The idea, however, fails to take into account the complex relationship between the goðar and the bændr, which relied not on a territorial definition hut on negotiable bonds of obligation. A goðorð was not a discrete territorial unit. The chieftains lived interspersed among farmers who served as thingmen of different and sometimes rival goðar. The political map of Iceland was a complex network of criss-crossing ties with chieftains relying for support on farmers, some of whom lived at considerable distances from their goðar.”

“In contrast with the major leaders of other medieval societies, who were often separated from their supporters by intermediaries, Iceland’s fifty or so chieftains, each of whom owned or shared ownership of a goðorð, dealt directly with their followers. Grágás (hereafter abbreviated GG), the thirteenth century collections of Free State law, clearly define the freeman’s right to choose his goði, a right characteristic of a nonterritorial concept of authority”

“In the absence of a policing apparatus, public authority was maintained by personal agreements usually arrived at between leaders acting as advocates for an individual or a group. Such decisions usually took place at a local þing, at the Althing, or at a meeting between two or more importan leaders. The settlement of disputes and the process of government in early Iceland were not characterized by
the command of an authoritative individual, or by organized warfare, but by intricate negotiation and compromise. The courts which met routinely served as governmental institutions ad hoc, that is, they did not engage in acts of governance until called upon to provide judgments in response to specific situations. In such an atmosphere the goðar assumed the role of legal middlemen, specialists in feud, who—because of self-interest, preexisting kin or political obligations, or payment— were willing to help a farmer embroiled in a dispute. The compensations to the goðar for their services, descriptions of which arc found throughout the family and the Sturlunga sagas, formed a major source of income for the chieftains and made up for the lack of taxation revenues. Until recently scholars have not recognized this profitable source of income for the chieftains.”

However, upon closer examination, it is clear that the Icelandic legal system was neither freely competitive nor polycentric.

First, there was no free entry to the market: i.e. a new firm could not enter the market without permission from the existing firms.

“The number of chieftaincies established with the creation of the Althing is not clear, although scholars often assume it was thirty-six. A major constitutional reform (ca. 965) set the number of goðorð at thirty-nine, bur the actual number of chieftains at any particular time may have been higher. Several people might share a goðorð, while in the eleventh century several new chieftaincies were instituted.”

Second, though individuals were not required to hire a particular firm, they were required to hire some firm.

“And on the same day [that he leaves one godi] he must declare himself to be in a thing relationship with another goði.

Third, while individuals could choose from among several firms, they could not choose just any firm.

“The major territorial restriction was that a farmer could not choose a chieftain outside of his quarter of the island.”

Fourth, the Icelandic legal system was not polycentric. Disputes passed through a series of courts culminating in a court of final appeals.

“The functioning of the Icelandic system of lateral decision-making relied upon the country’s extensivecourt structure. Courts both in the home districts and at the Althing were not convened in response to specific circumstances but operated on a set, public schedule. As a result of the constitutional reforms of the mid-960s the island was divided into quarters. Each quarter was arranged into local thing district: three in the Southern, Eastern, and Western Quarters and four in the Northern Quarter. The holding of each district assembly was the joint responsibility of the three local chieftains. Each springtime assembly (várþing) was held approximately five weeks before the Althing. It was the most important local assembly because it included both judicial and regulatory functions. All local farmers and goðar were required to attend the várþing and together they participated in disputes, resolutions, and alliances. A generally political atmosphere must have prevailed. At the same time that the island was divided into quarters, a system of “quarter courts” (fjóðrungsdómar) was established at the Althing. The four fjóðrungsdómar heard cases of the first instance of cases on appeal from the várþing. In order to induce inpariality, the four farmers appointed by each chieftain as judges to these Althing courts would be assigned by lot to one of the courts. Judges might be disqualified because of kinship or other reasons that might prejudice their decision. The system of seating judges further discouraged regionalism; farmers became acquainted with the issues and disputed of other quarters, and decisions were standardized throughout the country. The final reform of the court system was the establishment of the court of appeals (the fimtardómr) at the Althing (ca. 1005). Cases referred to the fimtardómr from the quarter courts were decided by a majority vote of the bændr judges.”

Fifth, while the law originated from custom, it was amended and change at will by a central legislature.

“A major feature of the Althing was the meeting of the legislative or law council, called the lögrétta. Here the chieftains reviewed old laws and made new ones. Only chieftains had the right to vote in the Lögrétta, and each brought two advisers into council meetings. When two or more shared a chieftaincy, only one at a time attended the lögrétta and performed the chieftain’s other official duties at the Althing. The lögrétta was also empowered to grant exemptions from the law. This legislature, which functioned at the centre of the Free State, acted for the country in foreign affairs by making treaties, such as the one with the Norwegian King Olaf Haraldsson (1015-1030) delineating the status of Icelanders in Norway and of Norwegians in Iceland.”

In conclusion, Medieval Iceland did not have a freely competitive or polycentric legal system. Instead, the arrangement should be characterized as a cartel of security providers. Why do I call it a cartel? A cartel has two essential features: (1) a mechanism to restrict external competition (i.e. competition from non-members), and (2) a mechanism to restrict internal competition (i.e. competition between members). Cartels always have these features because, otherwise, they would collapse. The Icelandic system contained both anti-competitive elements. As for restricting external competition, the firms collectively (i.e. via the Althing) controlled entry to the market, and simultaneously forced consumers to employ one of their own number. As for restricting internal competition, there were three methods. First, the country was divided into four quarters, and individuals were prohibited from hiring firms outside their own quarter: thereby insulating those firms from competition with firms in other quarters. Second, the firms collectively (via the Althing) controlled the content of the law. Why does that restrict competition between firms? Because, otherwise, firms could differentiate themselves and compete by offering different legal codes. Third, there was a final arbiter in disputes between firms, a court of final appeals, backed by all the firms collectively. That is, each firm was not free to work towards the resolution of a dispute as it saw fit, but rather had to submit to the judgment of a central authority: thereby limiting competition between firms.

If anarcho-capitalists want an historical example of a freely competing, polycentric legal system, they will have to look elsewhere.

Sources:

http://www.viking.ucla.edu/publications/articles/governmental_order.pdf

http://www.viking.ucla.edu/publications/articles/icelandic_allthing.pdf

Natural Monopoly in the Private Provision of Defense, working paper, draft III

(This is an old draft, for the latest draft of this working paper, see here)

Suppose a man is the victim of a tort, and wishes to obtain restitution. The victim first asks the tortfeasor for restitution, but he refuses. Then the victim asks the tortfeasor to submit to the judgment of an arbitrator, but he again refuses: or agrees, but subsequently disregards the decision of the arbitrator. The victim has three remaining options: he can abandon his claim, he can take restitution by force or threat, or he can enlist a third party to take restitution by force or threat on his behalf. Demand for third party help with the extraction of restitution from tortfeasors could be supplied by firms that hire themselves out to the highest bidder, regardless of the merit of the claim, or by firms that make their assistance contingent on their own determination of the claim’s merit. This essay concerns the latter business, which we shall call judging.

Judging has two components: the evaluation of claims, and the enforcement of those claims found to be legitimate; the service is incomplete and worthless without both components. If a firm is known by consumers to be unable or unwilling to enforce the claims of its clients, its services are of no value at any price. Firms which habitually fail to enforce their clients’ claims for whatever reason can be expected to go out of business. Yet judging firms will often find themselves representing the opposite parties to a dispute, whose claims are mutually exclusive, and cannot be reconciled by any compromise, so that it is impossible for both firms to enforce the claims of their respective clients.

In such cases, what determines which firm enforces its client’s claim? Either one firm agrees not to enforce its client’s claim, or they fight. If they fight, then the stronger firm prevails and enforces its client’s claim. All else being equal, it is always in the interest of a firm to enforce its client’s claim, so under what circumstances would any firm agree to abandon it? If a firm has no hope of prevailing by violence over its rival in the dispute, it will likely choose to abandon its client’s claim; either way it will fail to enforce the claim, and suffer the consequences of that failure, but if it fights, then it also bears the cost of fighting. On the other hand, a firm that expects it can prevail over its rival by violence has little incentive to abandon it’s client’s claim. A firm’s evaluation of its own armed force in relation to that of its rival determines whether it will fight to enforce its client’s claim or concede and abandon it. Assuming that all firms are more or less equally competent in evaluating their armed forces, we can conclude that in a dispute between two firms, the firm with superior armed forces will likely enforce its client’s claim, while the firm with inferior armed forces likely will not. Since judging firms are in the business of enforcing claims against tortfeasors, they naturally must have a certain number of armed men in their employment anyway, regardless of their relations with their competitors. Firms with larger market share, who service more customers, naturally enforce more claims, and thus would likely have more armed men on staff. Therefore, all else being equal, we can expect larger firms to have superior armed forces to smaller firms; and therefore, in disputes between firms of significantly different size, the larger firm will likely enforce its client’s claim, while the smaller firm likely will not. As we said, the services of a a firm which habitually fails to enforce the claims of its clients have no value to consumers, so that this firm will go out of business. Therefore, to conclude, larger firms will likely drive smaller firms out of business. Since firm size is relative, it follows that this eliminative competition will continue until only one firm remains, with 100% of market share.

The economic arguments against natural monopoly, which are valid for every other market, do not apply to the judging market. Note that price plays no role in the argument presented here. The relative prices of the services of the larger and smaller firm are entirely irrelevant, since the services offered by the latter have no value whatsoever. Strictly speaking, we could say that the smaller firms, insofar as they are unable to enforce their rulings, and insofar as enforcement is an essential component of judging, are not offering judging services at all – so of course they cannot compete in the market for judging services. By way of analogy, a drafter of architectural plans is not providing housing and therefore is not competing in the housing market; no matter how low the price of his blue prints, they are not a substitute for an actual house. In the same way, a firm telling its customers that their claims are valid is not a substitute for actually enforcing those claims.

For the same reason that existing small firms are driven out of business, new competitors cannot easily enter the market once a natural monopoly is established. In all other market, new firms usually begin their life small and grow. But this is impossible in the judging market, since a firm would have to already have armed forces superior to those of the monopoly before it could offer the consumer services of any value: which means its growth cannot be financed by sales revenues. It has to begin large, from a large initial capitalization. And if such a large-from-the-start rival emerges, with superior armed forces, the result will not be competition: at least not for long. The new firm will now drive the former monopolist out of business, and become the new monopolist. It is similar with the state’s monopoly. If a rival would-be state tries to emerge within the territory of an existing state, it will be driven “out of business,” as it were, unless it already has armed forces superior to the state. And if it does emerge fully formed with armed forces superior to the state, it does not compete with the state for long, it replaces it and becomes the new state. When we say that the state has a monopoly, we mean that there can only be one state at a time, not there can only be one state for all time. And it is the same with a judging monopoly.

If consumers are not forced to patronize a monopoly judging firm, what prevents them from abandoning that firm in favor of a would-be rival, thereby ending the monopoly? Since a smaller firm with inferior armed forces is unable to enforce the claims of its clients, its services have no value to consumers qua judging services. But suppose an individual hires a small firm not for the narrow economic purpose of obtaining judging services, but for the broader purpose of overturn the existing monopoly. We could say that the good which this individual is buying with his payments to the small firm is the elimination of the existing monopoly. However, this benefit will not actually accrue to this individual unless many other customers of the existing monopoly also switch to the would-be rival. Therefore, customers of the monopoly firm who wish to eliminate its monopoly face a collective action problem. Elimination of the monopoly is a public good, as it were, which will benefit everyone regardless of whether they personally bear the costs of switching to the would-be rival – consequently, no one individual has any incentive to switch. And, in any case, the judging monopoly is no less a monopoly because of its vulnerability to collective action, since the state is similarly vulnerable to collective action, and yet no one would therefore deny that it holds a monopoly.

Despite important similarities, however, a judging monopoly is not a state. The state is essentially aggressive, while a judging monopoly may or may not be aggressive. The large firm drives its smaller competitors out of business and ultimately obtains a monopoly by enforcing the claims of its clients. Whether this involves aggression depends entirely on whether those enforced claims are just. If they are just, if the monopoly firm has used violence only in the pursuit of legitimate restitution, then it has committed no acts of aggression. If the enforced claims are unjust, then it has committed acts of aggression. We can say that the state is (among other things) an aggressive judging monopoly, but not all judging monopolies have to be states. A non-aggressive judging monopoly, which obtained and maintains its monopoly by the enforcement of only just claims, is entirely conceivable. In light of the impossibility of a competitive market for judging, it is this which provides the solution to the problem of private provision of judging for a free society.

A precondition of the free market is the availability of just and effective judging services to victims of crime. That is, victims of crime must be able to obtain restitution., even from unrepentant tortfeasors unwilling to make restitution voluntarily. Of course, it will never be the case in any real society that all victims are fully compensated, but the persons, firms, or institutions responsible for compelling criminals to compensate their victims must be sufficiently competent to at least drive criminality underground. That is, a free market can and will co-exist with crime, but cannot exist if the criminals can commit their crimes openly and without consequence. If criminals can conduct their criminal activity in the open without consequence, it is a sign that either the institutions responsible for combating criminality are ineffectual, or that they are themselves criminal.

If the existence of just and effective judging services is a precondition for the free market, it follows that judging services themselves are not produced in a free market. Hence the market for judging services requires the special analysis provided above. But once just and effective judging services are available to market participants, all other markets for all other goods and services are by definition free markets. If judging services are already available, then all other defense services can be produced on the free market. Services like the investigation of crime, the guarding of property, or the voluntary arbitration of disputes require no special analysis, and can be treated like any other market-produced good or service, subject to the laws of free market economics The problem of private provision of defense is truly nothing other than the problem of private provision of judging services. Once that problem is resolved, all other aspects of the private provision of defense cease to be problematic.

Part I, Second Draft

(This is an old draft, for the latest draft of this working paper, see here)

Suppose a man is the victim of a tort, and wishes to obtain restitution. The victim first asks the tortfeasor for restitution, but he refuses. Then the victim asks the tortfeasor to submit to the judgment of an arbitrator, but he again refuses: or agrees, but then disregards the decision of the arbitrator. The victim has three remaining options: he can abandon his claim, he can take restitution by force or threat, or he can enlist a third party to take restitution by force or threat on his behalf. Demand for third party help with the extraction of restitution from recalcitrant tortfeasors could be supplied in one of two ways. Firms could hire themselves out to enforce the claims of alleged victims with no regard for the merit of those claims, or firms could make their enforcement of the victim’s claim contingent on their determination of the merit of that claim. This essay is concerned with the latter type of business, which I will call judging.

There is a potential for conflict between judging firms. To wit, if one firm hears the complaint of the alleged victim and finds him entitled to restitution, and then another firm hears the appeal of the now-convicted tortfeasor and finds him innocent, which decision will be enforced? There is a chance they will engage in a violent struggle, and the remainder of the essay concerns itself with the consequences thereof, but first let us explain why this is a probable outcome, since many will deny its probability. In the event that two judges issue contrary decisions on the same dispute, which is a commonplace in every legal system, the alternatives to fighting are: (a) reaching an agreement satisfactory to everyone concerned, or (b) reaching an agreement satisfactory to both firms but not both disputants. In the first eventuality, the dispute is resolved. But in the second eventuality, the disaffected disputant may choose to disregard the joint decision of the two firms and appeal to a third, thereby giving rise to the potential for an entirely new conflict. This process could continue indefinitely: or, in any case, until the disaffected disputant runs out of avenues for appeal. Since this is an anarchic system of competing firms, there is no mechanism for limiting appeals, and so any dispute can potentially run the gamut through all the judging firms. Thus, for any given dispute, the probability of a violent conflict between firms is the probability that any two firms in the market will (a) reach different decisions, and (b) be unable to reach an agreement to avert violent conflict. The more firms in the market, the higher this probability. For my conclusions about the emergence of monopoly to follow, there need not be a violent conflict between firms in every dispute, or even most disputes. It can be a relatively rare occurrence. As I discuss below, the occasional lost battle is sufficient to severely undermine the competitiveness of a firm; moreover, the competitiveness of a firm can be obliterated without it ever fighting any battle, supposing its method for avoiding battle is to concede everything under threat of force by its rival. I am not, then, resting my case for monopoly on the assumption of unrealistic levels of violence in the system.

Each judging firm already has in its service individuals capable of exerting the force necessary to extract restitution from those its judges convict, and it is with these armed forces that firms would battle one another. The greater the demand for a firms services, the more frequently it will have to extract restitution, and so the larger an armed force it is likely to posses. Therefore, the larger firm with more customers is likely to have an advantage in battle over the smaller firm with fewer customers. This advantage is likely to be extended by any conflict between the two, since the loser of a battle typically suffers higher losses than the winner. But even if we assume that both suffer equal losses from battle, the losses suffered by the loser will be relatively greater than those suffered by the winner, in light of the smaller force which the loser possessed at the outset. Repeated battling between two firms is likely to result in the armed forces of the smaller firm being depleted, until the smaller firm is unable to provide services to its customers and goes out of business.

But long before repeated battling physically destroyers its armed forces, a habitual loser will likely be abandoned by its customers. A consumer has no reason to patronize a judging firm unless he believes (a) that the firm might render him a favorable decision, and (b) that in the event of a favorable decision, that decision can be enforced. Every failed attempt by a firm to enforce its own decision erodes the consumer’s confidence in the ability of the firm to enforce decisions in the future, and thereby undermines his incentive to hire that firm. Moreover, confidence in a firm can be obliterated without it ever fighting any battle, if its method for avoiding battle is to concede everything under mere threat of force by its rival.

So, one way or another, the smaller of two judging firms is likely be driven out of business by the larger, leaving the larger firm with a monopoly. For the same reason, no firm will be able to enter the market to challenge the monopoly unless it already possesses armed forces superior to those of the monopoly: these of course having to be financed by initial capital. A judging firm can maintain a monopoly indefinitely, so long as it maintains armed forces superior to all challengers. In this respect, the judging monopoly rests on the same foundation as the monopoly of the state. However, as I will explain in the following section, while the judging monopoly is inherently violent, it is not inherently aggressive, and while every state is a judging monopoly, not every judging monopoly must be a state.

There are those who still think they are holding the pass against a revolution that may be coming up the road. But they are gazing in the wrong direction. The revolution is behind them. It went by in the Night of Depression, singing songs to freedom.

Garet Garrett, The People’s Pottage, p. 15

Part I: how a monopoly emerges from competition between DROs

(This is an old draft, for the latest draft of this working paper, see here)

(Rough Draft)

It makes little sense to speak of the emergence of something without first identifying that state of affairs from which it is supposed to be emerging, so let us set the stage. There is no state, and there is a large number of privately owned firms competing to provide consumers with dispute resolution services. All of these firms endeavor to resolve disputes in accord with libertarian law, and none of them intentionally violate libertarian law themselves. In brief, it is boilerplate anarcho-capitalism. I will explain how monopoly emerges from this happy – but unstable – state of affairs.

Some disputes can be resolved by mutual agreement, without either party having to be subjected to violence or coercion. In some such cases, the disputants can arrive at an agreement on their own, without the intermediation of any third party. If this is not possible, a respected arbitrator can be sought out by one or both parties and tasked with making a decision about how the dispute ought to be resolved, but the arbitrator does not enforce this decision. In a non-trivial number of cases, I contend, it will prove impossible to resolve a dispute by mutual agreement, with or without the aid of an arbitrator.

When an agreement fails to materialize, the dispute can only be resolved when someone compels the accused by coercion or violence to pay restitution, or when someone else effectively resists such efforts. The person who employs violence or coercion and thereby determines the outcome of such a dispute is either one of the parties to the dispute or some third party, and this person we shall call the final arbiter for that dispute. For example, if there is a dispute between Jones and Smith, and Jones personally coerces Smith into paying him restitution, or personally seizes restitution from Smith by violence, then Jones is the final arbiter for that dispute. It is by his violent or coercive deed that the outcome is determined.

Alternatively, let us introduce a third party, Jefferson. Jefferson is a judge: a person who not only makes a decision about how a dispute ought to be resolved (like an arbitrator), but also enforces that decision. The judge is to disputes which cannot be resolved by mutual agreement what the arbitrator is to disputes that are resolved by mutual agreement. Both are essential for dispute resolution. If Jones had hired Jefferson to rule on the dispute, and Jefferson had ruled in Jones’ favor and then collected restitution from Smith by violence or coercion, then Jefferson is the final arbiter for the dispute; it is by his violent or coercive deed that the outcome was determined.

If we suppose that Jefferson got restitution out of Smith by violence, we can conclude that Jefferson will be able to do the same in any future dispute with Smith, provided the relative strength of Jefferson and Smith remains the same. So too will Jefferson be able to get restitution out of anyone else who is not stronger than Smith was. If Jefferson, on the other hand, got restitution out of Smith by coercion, we can conclude less. Jefferson will be able to get restitution out of Smith (and anyone who is not stronger than Smith) in any future dispute, provided the relative strength of Jefferson and Smith remains the same, and provided the amount of restitution in question in the future dispute is no greater than the amount in question in the previous dispute. The reason is that higher restitution might inspire Jefferson’s target to fight rather than submit under coercion, and we cannot know the outcome of that fight.

If the world consists of Smith, Jones, and Jefferson, and Jefferson is the strongest, Jefferson, will be the final arbiter in every dispute brought before him. Jefferson will render decisions and always be able to enforce them. Jefferson holds a monopoly in judging. But let us introduce additional judges and see what develops. Enter Washington. Another dispute erupts between Smith and Jones, with Jones accusing Smith of theft. They are unable to agree to a settlement, so they require a judge. Jones brings the case to Jefferson, and Jefferson rules in his favor. Jefferson would enforce this ruling, collect restitution from Smith, and that would be the end of the affair – except for the presence of Washington. Why would Smith not appeal to Washington? He has nothing to lose. He appeals and Washington rules in his favor. So Jefferson wants to force Smith to pay restitution, and Washington wants to prevent Smith from being forced to do so. Now what? Either Jefferson and Washington come to an agreement, or their dispute has to be settled by violence or coercion.

First, let us consider the possibility of the two judges settling their dispute by agreement. Either such an agreement requires Smith to pay full restitution, or it absolves him of paying any restitution at all. There cannot be a compromise. Why? Because, ex hypothesi, neither Jones nor Smith will accept a compromise: otherwise they would never have required a judge in the first place. If the judges reach a compromise that neither of their clients will accept, that only sends the dispute back to Smith and Jones, and it remains unresolved.

Moreover, each judge benefits from enforcing his own ruling, and suffers from agreeing to not enforce it. Judging is a business. Judges profit only by serving their customers. The service which those customers want is a favorable and enforced ruling. No ruling is of any value, no matter how favorable, if it is not enforced. If I expect a 1% chance of a favorable ruling and 1% chance of enforcement from judge X, and a 100% chance of a favorable ruling and 0% chance of enforcement from judge Y, it would be entirely irrational to hire judge Y. If a judge fails to enforce one ruling, it tells his customers that he might fail to enforce others. It calls into question his ability to deliver the service for which his customers are paying. Any judge who routinely fails to enforce his rulings, for whatever reason, cannot expect to remain in business for long. There is very little incentive for any judge to resolve a dispute with another judge by agreeing not to enforce his own ruling. And, if a judge does make such professionally suicidal agreements, he will not be a judge for very long.

Therefore, it is highly unlikely that Jefferson and Washington will reach an agreement as to the resolution of the dispute between Jones and Smith. But suppose Washington does, for whatever strange reason, agree to abandon Smith, and stand aside as Jefferson gets restitution out of him. Why would anyone, Smith or Jones, in any future dispute, seek out Washington to adjudicate? If Washington bows out, he is finished as a judge, or at least on his way to being finished. His had demonstrated his inability to deliver the service for which he customers are paying.

Second, if Jefferson and Washington are unable to reach an agreement, as is likely, then the issue will be settled by violence or coercion. If we suppose that Jefferson fights and beats Washington, and then gets restitution out of Smith on behalf of Jones, we can conclude that Jefferson will be able to do the same in any future dispute, provided the relative strength of Jefferson and Washington remains the same. Likewise, if Jefferson coerces Washington into abandoning Smith, and then gets restitution out of Smith, we can conclude that Jefferson will be able to do the same in any future dispute, provided the relative strength of Jefferson and Washington remains the same. No matter how many additional judges we add to the scenario, Jefferson will remain the final arbiter in all disputes, provided he remains the strongest.

Whether Washington agrees to abandon Smith, or Jefferson forces him to abandon Smith by violence or coercion, Washington is being driven out of the judging business. He cannot compete with Jefferson. He cannot enforce his rulings if ever they differ from Jefferson’s. Whoever he rules against can always appeal to Jefferson, and if Jefferson favors the appeal, Washington’s ruling is effectively null. Because of this, Washington is not offering judging services any more at all, an essential aspect of which is that the ruling be not only made, but be enforced. Washington, if he chooses to remain in the dispute resolution business at all, must devolve into an arbitrator, where his opinions might still be valuable even though they cannot be enforced. Thus, Jefferson becomes the final arbiter because he is the strongest, and because he is the final arbiter, his competition is driven out of business, and Jefferson becomes a monopolist.

Suppose that these four characters have been alone on an island, but all along there were nine other islands each inhabited four persons, and by the time Jefferson becomes final arbiter with respect to Jones, Smith, and Washington, someone on each other island has likewise become final arbiter with respect to the other three persons on that island. Now suppose that these islands are magically drawn together to form a single landmass. I should not need to go through a repetition of the previous story to credibly say that the same process by which Jefferson became final arbiter on his island will now unfold between Jefferson and the nine other final arbiters. It might be that three final arbiters first develop from the ten, and then only sometime later these three start interacting with one another and a single final arbiter emerges for the entire population. The process could unfold in any number of ways, depending on the accidental circumstances that determine which judges and people interact with one another in what order, but the result will be the same – a final arbiter for the entire population will eventually emerge.

One might object: could not several of the judges team together and become stronger than the one which is strongest individually? They might. And if they did, then they as a judging firm with multiple partners would be the new final arbiter. The point is not that a final arbiter will remain so permanently, but rather that there cannot be more than one final arbiter at any given time with respect to the same set of persons. Every dispute offers the opportunity for a new final arbiter to emerge: namely, if the person who is final arbiter in that dispute was not the same person who was final arbiter in a previous dispute with those same persons. This is the same as with states. When we say that the state possesses a monopoly of ultimate decision making, this means that there can only be one state at a time, not that there can only be one state through all time.

The foundation …

The foundation of any and every civilization, including our own, is private ownership of the means of production. Whoever wishes to criticize modern civilization, therefore, begins with private property.

Ludwig v. Mises, Liberalism, p. 63