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F Essays In Political Economy r o m t h e L …
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F
Essays
In Political Economy
r o m t h e L u d w i g v o n M i s e s I n s t i t u t e
Among the most popular and consequential beliefs of our
age is the belief in collective security. Nothing less
significant than the legitimacy of the modern state rests
on this belief. And yet, the idea of a collective security is a
myth that provides no justification for the modern state.
Private-property owners, cooperation based on the
division of labor, and market competition
can and should provide defense from aggression.
THE PRIVATE PRODUCTION
OF D EFENSE
HANS -HERMANN H OPPE
A mong the most popular and consequential
beliefs of our age is the belief in collective
security. Nothing less significant than the
legitimacy of the modern state rests on this belief.
I will demonstrate that the idea of collective
has the power to impose taxes in order to provide
security "collectively."
In commenting on this argument, there is little
use in quarreling over whether man is as bad and
wolf-like as Hobbes supposes, except to note that
security is a myth that provides no justification for Hobbes's thesis obviously cannot mean that man
the modern state, and that all security is and must is driven only and exclusively by aggressive in-
be private. Yet, before coming to the conclusion let stincts. If this were the case, mankind would have
me begin with the problem. First, I will present a died out long ago. The fact that he did not dem-
two-step reconstruction of the myth of collective onstrates that man also possesses reason and is
security, and at each step raise a few theoretical capable of constraining his natural impulses. The
concerns. quarrel is only with the Hobbesian solution. Given
The myth of collective security can also be man's nature as a rational animal, is the proposed
called the Hobbesian myth. Thomas Hobbes, and solution to the problem of insecurity an improve-
countless political philosophers and economists ment? Can the institution of a state reduce aggres-
after him, argued that in the state of nature, men sive behavior and promote peaceful cooperation,
would constantly be at each others' throats. Homo and thus provide for better private security and
homini lupus est. Put in modern jargon, in the state protection? The difficulties with Hobbes's argu-
of nature a permanent underproduction of security ment are obvious. For one, regardless of how bad
would prevail. Each individual, left to his own men are, S --whether king, dictator, or elected
devices and provisions, would spend too little on president--is still one of them. Man's nature is not
his own defense, and hence, permanent interper- transformed upon becoming S. Yet how can there
sonal warfare would result. The solution to this be better protection for A and B, if S must tax them
presumably intolerable situation, according to in order to provide it? Is there not a contradiction
Hobbes and his followers, is the institution of a within the very construction of S as an expropriat-
state. In order to institute peaceful cooperation ing property protector? In fact, is this not exactly
among themselves, two individuals, A and B, re- what is also--and more appropriately--referred
quire a third independent party, S, as ultimate to as a protection racket? To be sure, S will make peace
judge and peacemaker. However, this third party, between A and B but only so that he himself in
S, is not just another individual, and the good turn can rob both of them more profitably.
provided by S, that of security, is not just another Surely S is better protected, but the more he is
"private" good. Rather, S is a sovereign and has as protected, the less A and B are protected from
such two unique powers. On the one hand, S can attacks by S. Collective security, it would seem, is
insist that his subjects, A and B, not seek protection not better than private security. Rather, it is the
from anyone but him; that is, S is a compulsory private security of the state, S, achieved through the
territorial monopolist of protection. On the other expropriation, i.e., the economic disarmament,
hand, S can determine unilaterally how much A of its subjects. Further, statists from Thomas Hobbes
and B must spend on their own security; that is, S to James Buchanan have argued that a protective state
THE LUDWIG VON MISES INSTITUTE 1
THE PRIVATE PRODUCTION OF DEFENSE
S would come about as the result of some sort of First, there appears to be an empirical anomaly for
1
"constitutional" contract. Yet, who in his right which the Hobbesian argument cannot account.
mind would agree to a contract that allowed one's The reason for the warring among different states
protector to determine unilaterally--and irrevo- S1, S2, and S3, according to Hobbes, is that they
cably--the sum that the protected must pay for his are in a state of anarchy visŕvis each other. How-
2
protection; and the fact is, no one ever has! ever, before the arrival of a single world state not
Let me interrupt my discussion here, and re- only are S1, S2, and S3 in a state of anarchy relative
turn to the reconstruction of the Hobbesian myth. to each other but in fact every subject of one state
Once it is assumed that in order to institute peace- is in a state of anarchy visŕvis every subject of any
ful cooperation between A and B it is necessary to other state. Accordingly, there should exist just as
have a state S, a two-fold conclusion follows. If much war and aggression between the private citi-
more than one state exists, S1, S2, S3, then, just as zens of various states as between different states.
there can presumably be no peace among A and B Empirically, however, this is not so. The private
without S, so there can be no peace between the dealings between foreigners appear to be signifi-
states S1, S2, and S3 as long as they remain in a cantly less war-like than the dealings between dif-
state of nature (i.e., a state of anarchy) with regard ferent governments. Nor does this seem to be
to each other. Consequently, in order to achieve surprising. After all, a state agent S, in contrast to
universal peace, political centralization, unification, every one of its subjects, can rely on domestic
and ultimately the establishment of a single world taxation in the conduct of his foreign affairs. Given
government are necessary. his natural human aggressiveness, however pro-
Commenting on this argument, it is first useful nounced it may initially be, is it not obvious that S
will be more brazen and aggressive in his conduct
to indicate what can be taken as non-controversial.
toward foreigners if he can externalize the cost of
To begin with, the argument is correct, as far as it
goes. If the premise is correct, then the conse- such behavior onto others? Surely, I am willing to
take greater risks and engage in more provocation
quence spelled out follows. The empirical assump-
and aggression if I can make others pay for it. And
tions involved in the Hobbesian account appear at
surely there is a tendency of one state--one pro-
first glance to be borne out by the facts, as well. It tection racket--to want to expand its territorial
is true that states are constantly at war with each
protection monopoly at the expense of other states
other, and a historical tendency toward political
centralization and global rule does indeed appear and thus bring about, as the ultimate result of
interstate competition, world government.3 But
to be occurring. Quarrels arise only with the expla-
how is this an improvement in the provision of
nation of this fact and tendency, and the classifica-
private security and protection? The opposite
tion of a single unified world state as an improvement seems to be the case. The world state is the winner
in the provision of private security and protection.
of all wars and the last surviving protection racket.
Doesn't this make it particularly dangerous? And
1
James M. Buchanan and Gordon Tullock, The Calculus will not the physical power of any single world
of Consent (Ann Arbor: University of Michigan Press, 1962); government be overwhelming as compared to that
James M. Buchanan, The Limits of Liberty (Chicago: Univer- of any one of its individual subjects?
sity of Chicago Press, 1975); for a critique see Murray N.
Rothbard, "Buchanan and Tullock's Calculus of Consent," in
idem, The Logic of Action, vol. 2, Applications and Criticism from
THE EMPIRICAL EVIDENCE
the Austrian School (Cheltenham: Edward Elgar, 1995); idem, Let me pause here in my abstract theoretical
"The Myth of Neutral Taxation," ibid.; Hans-Hermann considerations to take a brief look at the empirical
Hoppe, The Economics and Ethics of Private Property (Boston: evidence bearing on the issue at hand. As noted at
Kluwer, 1993), chap. 1.
2
See on this particular point, Lysander Spooner, No
3
Treason: The Constitution of No Authority (Larkspur, Colo.: Pine See Hans-Hermann Hoppe, "The Trouble With Classi-
Tree Press, 1996). cal Liberalism," RothbardRockwell Report 9, no. 4 (1998).
2 THE LUDWIG VON MISES INSTITUTE
ESSAYS IN POLITICAL ECONOMY
the outset, the myth of collective security is as the substitution of government paper money for
widespread as it is consequential. I am not aware gold, financial insecurity has increased sharply, and
of any survey on this matter, but I would venture we are continually robbed through currency depre-
to predict that the Hobbesian myth is accepted ciation. Every detail of private life, property, trade,
more or less unquestioningly by well over 90 per- and contract is regulated by ever higher mountains
cent of the adult population. However, to believe of laws (legislation), thereby creating permanent
something does not make it true. Rather, if what legal uncertainty and moral hazard. In particular,
one believes is false, one's actions will lead to we have been gradually stripped of the right to
failure. What about the evidence? Does it support exclusion implied in the very concept of private
Hobbes and his followers, or does it confirm the property. As sellers we cannot sell to and as buyers
opposite anarchist fears and contentions? we cannot buy from whomever we wish. And as
members of associations we are not permitted to
The U.S. was explicitly founded as a protective enter into whatever restrictive covenant we believe
state ŕ la Hobbes. Let me quote to this effect from to be mutually beneficial. As Americans, we must
Jefferson's Declaration of Independence: "We hold accept immigrants we do not want as our neigh-
these truths to be self-evident: that all men are bors. As teachers, we cannot get rid of lousy or
created equal; that they are endowed by their ill-behaved students. As employers, we are stuck
creator with inalienable rights; that among these with incompetent or destructive employees. As
are life, liberty, and the pursuit of happiness: that landlords, we are forced to cope with bad tenants.
to secure these rights, governments are instituted As bankers and insurers, we are not allowed to
among men, deriving their just powers from the avoid bad risks. As restaurant or bar owners, we
consent of the governed." Here we have it: The must accommodate unwelcome customers. And as
U.S. government was instituted to fulfill one and members of private associations, we are compelled
only one task: the protection of life and property. to accept individuals and actions in violation of our
Thus, it should provide the perfect example for own rules and restrictions. In short, the more the
judging the validity of the Hobbesian claim as to state has increased its expenditures on social secu-
the status of states as protectors. After more than rity and public safety, the more our private prop-
two centuries of protective statism, what is the erty rights have been eroded, the more our
status of our protection and peaceful human coop- property has been expropriated, confiscated, de-
eration? Was the American experiment in protec- stroyed, or depreciated, and the more we have
tive statism a success? been deprived of the very foundation of all protec-
According to the pronouncements of our state tion: economic independence, financial strength,
rulers and their intellectual bodyguards (of whom and personal wealth.4 The path of every president
there are more than ever before), we are better and practically every member of Congress is lit-
protected and more secure than ever. We are tered with hundreds of thousands if not millions
supposedly protected from global warming and of nameless victims of personal economic ruin,
cooling, from the extinction of animals and plants, financial bankruptcy, impoverishment, despair,
from the abuses of husbands and wives, parents and hardship, and frustration.
employers, from poverty, disease, disaster, igno- The picture appears even bleaker when we
rance, prejudice, racism, sexism, homophobia, and consider foreign affairs. Never during its entire
countless other public enemies and dangers. In history has the continental U.S. been territorially
fact, however, matters are strikingly different. In attacked by any foreign army. (Pearl Harbor was
order to provide us with all this protection, the the result of a preceding U.S. provocation.) Yet the
state managers expropriate more than 40 per- U.S. has the distinction of having possessed a
cent of the incomes of private producers year in
and year out. Government debt and liabilities
4
have increased without interruption, thus increas- See Hans-Hermann Hoppe, "Where The Right Goes
ing the need for future expropriations. Owing to Wrong," RothbardRockwell Report 8, no. 4 (1997).
THE LUDWIG VON MISES INSTITUTE 3
THE PRIVATE PRODUCTION OF DEFENSE
government that declared war against a large part away by claiming that these facts are the result of a
of its own population and engaged in the wanton systematic discrepancy (deviancy) between "real"
murder of hundreds of thousands of its own citi- and "ideal" or "true" statism, respectively social-
zens. Moreover, while the relations between ism. To this day, socialists claim that "true" social-
American citizens and foreigners do not appear to ism has not been refuted by the empirical evidence,
be unusually contentious, almost from its very and everything would have turned out well and
beginnings the U.S. government pursued relent- unparalleled prosperity would have resulted, if only
less aggressive expansionism. Beginning with the Trotsky's, or Bucharin's, or better still their very
SpanishAmerican War, culminating in World own brand of socialism, rather than Stalin's, had
War I and World War II, and continuing to the been implemented. Similarly, statists interpret all
present, the U.S. government has become en- seemingly contradictory evidence as only acciden-
tangled in hundreds of foreign conflicts and tal. If only some other president had come to
risen to the rank of the world's dominant impe- power at this or that turn in history, or if only this
rialist power. Thus, nearly every president since or that constitutional change or amendment had
the turn of this century also has been responsible been adopted, everything would have turned out
for the murder, killing, or starvation of countless beautifully, and unparalleled security and peace
innocent foreigners all over the world. In short, would have resulted. Indeed, this may still happen
while we have become more helpless, impover- in the future, if their own policies are employed.
ished, threatened, and insecure, the U.S. govern- We have learned from Ludwig von Mises how to
ment has become ever more brazen and aggressive. respond to the socialists' evasion (immunization)
In the name of national security, it defends us, strategy.6 As long as the defining characteristic
equipped with enormous stockpiles of weapons of --the essence--of socialism, i.e., the absence of the
aggression and mass destruction, by bullying ever private ownership of the factors of production,
new "Hitlers," big or small, and all suspected remains in place, no reform will be of any help. The
Hitlerite sympathizers anywhere and everywhere idea of a socialist economy is a contradictio in
outside of the territory of the U.S.5 adjecto, and the claim that socialism represents a
The empirical evidence thus seems clear. The higher, more efficient mode of social production
belief in a protective state appears to be a patent is absurd. In order to reach one's own ends
error, and the American experiment in protective efficiently and without waste within the frame-
statism a complete failure. The U.S. government work of an exchange economy based on division of
does not protect us. To the contrary, there exists labor, it is necessary that one engage in monetary
no greater danger to our life, property, and pros- calculation(cost-accounting). Everywhere outside
perity than the U.S. government, and the U.S. the system of a primitive self-sufficient single
president in particular is the world's single most household economy, monetary calculation is the
threatening and armed danger, capable of ruining sole tool of rational and efficient action. Only by
everyone who opposes him and destroying the being able to compare inputs and outputs arith-
entire globe. metically in terms of a common medium of ex-
change (money) can a person determine whether
HOW TO THINK ABOUT THE his actions are successful or not. In distinct con-
STATIST RESPONSE trast, socialism means to have no economy, no
Statists react much like socialists when faced economizing, at all, because under these condi-
with the dismal economic performance of the Soviet tions monetary calculation and cost-accounting is
Union and its satellites. They do not necessarily deny impossible by definition. If no private property in
the disappointing facts, but they try to argue them the factors of production exists, then no prices for
6
Ludwig von Mises, Socialism (Indianapolis: Liberty
5
See John Denson, ed., The Costs of War (New Bruns- Classics, 1981); Hans-Hermann Hoppe, A Theory of Socialism
wick, N.J.: Transaction Publishers, 1997). and Capitalism (Boston: Kluwer, 1989), chap. 6.
4 THE LUDWIG VON MISES INSTITUTE
ESSAYS IN POLITICAL ECONOMY
any production factor exist; hence, it is impossible and the range of jurisdiction expanded to the
to determine whether or not they are employed government's advantage.
economically. Accordingly, socialism is not a Hence, Rothbard pointed out, it follows that
higher mode of production but rather economic just as socialism cannot be reformed but must be
chaos and regression to primitivism. abolished in order to achieve prosperity, so can the
How to respond to the statists' evasion strategy institution of a state not be reformed but must be
has been explained by Murray N. Rothbard.7 But abolished in order to achieve justice and protec-
Rothbard's lesson, while equally simple and clear tion. "Defense in the free society (including such
and with even more momentous implications, has defense services to person and property as police
remained to this day far less known and appreci- protection and judicial findings)," Rothbard con-
ated. So long as the defining characteristic--the cluded, "would therefore have to be supplied by
essence--of a state remains in place, he explained, people or firms who (a) gained their revenue vol-
no reform, whether on the level of personnel or of untarily rather than by coercion and (b) did
the constitution, will be to any avail. Given the not--as the State does--arrogate to themselves a
principle of government--judicial monopoly and compulsory monopoly of police or judicial protec-
the power to tax--any notion of limiting its power tion . . . . defense firms would have to be as freely
and safeguarding individual life and property is competitive and as noncoercive against noninvad-
illusory. Under monopolistic auspices the price ers as are all other suppliers of goods and services
of justice and protection must rise and its quality on the free market. Defense services, like all other
must fall. A tax-funded protection agency is a services, would be marketable and marketable
contradiction in terms and will lead to ever more only."8 That is, every private property owner would
taxes and less protection. Even if a government be able to partake of the advantages of the division
limited its activities exclusively to the protection of labor and seek better protection of his property
of pre-existing property rights (as every protec- than that afforded through self-defense by coop-
tive state is supposed to do), the further ques- eration with other owners and their property. Any-
tion of how much security to provide would arise. one could buy from, sell to, or otherwise contract
Motivated (like everyone else) by self-interest with anyone else concerning protective and judicial
and the disutility of labor, but with the unique services, and one could at any time unilaterally
power to tax, a government's answer will invariably discontinue any such cooperation with others and
be the same: to maximize expenditures on protection fall back on self-reliant defense, or change one's
--and almost all of a nation's wealth can conceiv- protective affiliations.
ably be consumed by the cost of protection--and
at the same time to minimize the production of THE CASE FOR
protection. Furthermore, a judicial monopoly PRIVATE SECURITY
must lead to a deterioration in the quality of justice
and protection. If one can only appeal to govern- Having reconstructed the myth of collective
ment for justice and protection, justice and pro- security--the myth of the state--and criticized it
tection will be perverted in favor of government, on theoretical and empirical grounds, I now must
constitutions, and supreme courts notwithstand- take on the task of constructing the positive case
ing. After all, constitutions and supreme courts are for private security and protection. In order to
state constitutions and courts, and whatever limi- dispel the myth of collective security, it is not just
tations to government action they might contain sufficient to grasp the error involved in the idea of
is determined by agents of the very institution a protective state. It is just as important, if not more
under consideration. Accordingly, the definition of so, to gain a clear understanding of how the non-
property and protection will continually be altered statist security alternative would effectively work.
7 8
Murray N. Rothbard, The Ethics of Liberty (New York: Murray N. Rothbard, Power and Market (Kansas City:
New York University Press, 1998), esp. chaps. 22 and 23. Sheed Andrews and McMeel, 1977), p. 2.
THE LUDWIG VON MISES INSTITUTE 5
THE PRIVATE PRODUCTION OF DEFENSE
Rothbard, building on the pathbreaking analysis of on a nationwide and even international scale, and
the FrenchBelgian economist Gustave de Molinari,9 they own large property holdings dispersed over
has given us a sketch of the workings of a free-mar- wide territories and beyond single state bounda-
10
ket system of protection and defense. As well, we ries. Accordingly, they have a manifest self-interest
owe Morris and Linda Tannehill for their brilliant in effective protection, and are big and economi-
insights and analyses in this regard. 11 Following cally powerful. Furthermore, all insurance compa-
their lead, I will proceed deeper in my analysis and nies are connected through a network of
provide a more comprehensive view of the alterna- contractual agreements of mutual assistance and
tivenon-statist-system of security production arbitration as well as a system of international
and its ability to handle attacks, not just by indi- reinsurance agencies, representing a combined
viduals or gangs but in particular also by states. economic power which dwarfs that of most if not
There exists widespread agreement--among all existing governments.
liberal-libertarians such as Molinari, Rothbard, I want to further analyze and systematically
and the Tannehills as well as most other commen- clarify this suggestion: that protection and defense
tators on the matter--that defense is a form of are insurance and can be provided by insurance
insurance, and defense expenditures represent a agencies. To reach this goal, two issues must be
sort of insurance premium (price). Accordingly, as addressed. First, it is not possible to insure oneself
Rothbard and the Tannehills in particular would against every risk of life. I cannot insure myself
emphasize, within the framework of a complex against committing suicide, for instance, or against
modern economy based on a worldwide division burning down my own house, or becoming unem-
of labor the most likely candidates for offering ployed, or not feeling like getting out of bed in the
protection and defense services are insurance morning, or not suffering entrepreneurial losses,
agencies. The better the protection of insured because in each case I have full or partial control
property, the lower are the damage claims and over the likelihood of the respective outcome.
hence an insurer's costs. Thus, to provide efficient Risks such as these must be assumed individually.
protection appears to be in every insurer's own No one except myself can possibly deal with them.
financial interest; and in fact even now, although Hence, the first question will have to be what
restricted and hampered by the state, insurance makes protection and defense an insurable rather
agencies provide wide-ranging services of protec- than an uninsurable risk? After all, as we have just
tion and indemnification (compensation) to in- seen, this is not self-evident. In fact, doesn't eve-
jured private parties. Insurance companies fulfill ryone have considerable control over the likeli-
a second essential requirement. Obviously, any- hood of an attack on and invasion of his person
one offering protection services must appear able and property? Do I not deliberately bring about
to deliver on his promises in order to find clients. an attack by assaulting or provoking someone
That is, he must possess the economic means else, for instance, and is not protection then an
--the manpower as well as the physical re- uninsurable risk, like suicide or unemployment,
sources--necessary to accomplish the task of for which each person must assume sole respon-
dealing with the dangers, actual or imagined, of sibility?
the real world. On this count insurance agencies The answer is a qualified yes and no. Yes,
appear to be perfect candidates, too. They operate insofar as no one can possibly offer unconditional
protection, i.e., insurance against any invasion what-
9
Gustave de Molinari, The Production of Security (New soever. That is, unconditional protection can only
York: Center for Libertarian Studies, 1977). be provided, if at all, by each individual on his own
10
Murray N. Rothbard, Power and Market, chap. 1; idem, and for himself. But the answer is no, insofar as
For A New Liberty (New York: Collier, 1978), chaps. 12 and 14. conditional protection is concerned. Only at-
11
Morris and Linda Tannehill, The Market for Liberty tacks and invasions that are provoked by the victim
(New York: Laissez Faire Books, 1984), esp. part 2. cannot be insured. However, unprovoked and thus
6 THE LUDWIG VON MISES INSTITUTE
ESSAYS IN POLITICAL ECONOMY
accidental attacks can be insured against.12 That is, insurers in mutual arbitration proceedings, a ten-
protection becomes an insurable good only if and dency toward the standardization and unification
insofar as an insurance agent contractually restricts of the rules of procedure, evidence, and conflict
the actions of the insured so as to exclude every resolution (including compensation, restitution,
possible provocation on their part. Various insur- punishment, and retribution), and steadily increas-
ance companies may differ with respect to the ing legal certainty would result. Everyone, by virtue
specific definition of provocation, but there can be of buying protection insurance, would be tied into
no difference between insurers with regard to the a global competitive enterprise of striving to mini-
principle that each must systematically exclude mize aggression (and thus maximize defensive pro-
(prohibit) all provocative and aggressive action tection), and every single conflict and damage
among its own clients. claim, regardless of where and by or against whom,
As elementary as this first insight into the would fall into the jurisdiction of exactly one or
essentially defensive--non-aggressive and non- more enumerable and specific insurance agencies
provocative--nature of protection-insurance may and their mutually defined arbitration procedures.
seem, it is of fundamental importance. For one, it
implies that any known aggressor and provocateur MORE ON AGGRESSION INSURANCE
would be unable to find an insurer, and hence, Now a second question must be addressed.
would be economically isolated, weak, and vulner- Even if the status of defensive protection as an
able. On the other hand, it implies that anyone insurable good is granted, distinctly different forms
wanting more protection than that afforded by of insurance exist. Let us consider just two charac-
self-reliant self-defense could do so only if and teristic examples: insurance against natural disas-
insofar as he submitted himself to specified norms ters, such as earthquakes, floods, and hurricanes
of non-aggressive, civilized conduct. Furthermore, and insurance against industrial accidents or disas-
the greater the number of insured people--and in ters, such as malfunctions, explosions, or defective
a modern exchange economy most people want products. The former can serve as an example of
more than just self-defense for their protec-
group or mutual insurance. Some territories are
tion--the greater would be the economic pressure more prone to natural disasters than others; as a
on the remaining uninsured to adopt the same or result the demand for and price of insurance will
similar standards of non-aggressive social conduct. be higher in some areas than others. However,
Moreover, as the result of competition between every location within certain territorial borders is
insurers for voluntarily paying clients, a tendency regarded by the insurer as homogeneous with re-
toward falling prices per insured property values spect to the risk concerned. The insurer presum-
would come about. At the same time, a tendency ably knows the frequency and extent of the event
toward the standardization and unification of in question for the region as a whole, but he knows
property and contract law would be set in motion. nothing about the particular risk of any specific
Protection contracts with standardized property location within the territory. In this case, every
and product descriptions would come into existence; insured person will pay the same premium per
and out of the steady cooperation between different insured value, and the premiums collected in one
time period are presumably sufficient to cover all
12
On the "logic" of insurance see Ludwig von Mises, damage claims during the same time period (oth-
Human Action (Chicago: Regnery, 1966), chap. 6; Murray N. erwise the insurance industry will have losses).
Rothbard, Man, Economy, and State (Auburn, Ala.: Mises Insti- Thus, the particular individual risks are pooled and
tute, 1993), pp. 498ff.; Hans-Hermann Hoppe, "On Certainty insured mutually.
and Uncertainty, Or: How Rational Can Our Expectations
Be?" Review of Austrian Economics 10, no. 1 (1997); also Richard In contrast, industrial insurance can serve as an
von Mises, Probability, Statistics, and Truth (New York: Dover, example of individual insurance. Unlike natural dis-
1957); Frank H. Knight, Risk, Uncertainty, and Profit (Chi- asters, the insured risk is the outcome of human
cago: University of Chicago Press, 1971). action, i.e., of production efforts. Every production
THE LUDWIG VON MISES INSTITUTE 7
THE PRIVATE PRODUCTION OF DEFENSE
process is under the control of an individual pro- health insurance. With the advances of genetics
ducer. No producer intends failure or disaster, and and genetic engineering--genetic fingerprint-
as we have seen only accidental--non-intended-- ing--medical and health risks previously regarded
disasters are insurable. Yet even if largely control- as homogeneous (unspecific) with respect to large
led and generally successful, every producer and numbers of people have become increasingly more
production technology is subject to occasional specific and heterogeneous.
mishaps and accidents beyond his control--a mar- With this in mind, can anything specific be said
gin of error. However, as the outcome, even if about protection insurance in particular? I would
unintended, of individual production efforts and think so. After all, while all insurance requires that
production techniques, this risk of industrial acci- the risk be accidental from the standpoint of the
dents is essentially different from one producer insurer and the insured, the accident of an aggres-
and production process to another. Accordingly, sive invasion is distinctly different from that of
the risk of different producers and production natural or industrial disasters. Whereas natural
technologies cannot be pooled, and every producer disasters and industrial accidents are the outcome
must be insured individually. In this case, the of natural forces and the operation of laws of
insurer presumably will have to know the fre- nature, aggression is the outcome of human ac-
quency of the questionable event over time, but he tions; and whereas nature is blind and does not
knows nothing of the likelihood of the event at any discriminate between individuals, whether at the
specific point in time, except that at all times the same point in time or over time, an aggressor can
same producer and production technology is in discriminate and deliberately target specific vic-
operation. There is no presumption that the pre- tims and choose the timing of his attack.
miums collected during any given period will be
sufficient to cover all damage claims arising during
that period. Rather, the profit-making presump- POLITICAL BORDERS AND INSURANCE
tion is that all premiums collected over many time Let me first contrast defense-protection insur-
periods will be sufficient in order to cover all claims ance with that against natural disasters. Frequently
during the same multi-period time span. Conse- an analogy between the two is drawn, and it is
quently, in this case an insurer must hold capital instructive to examine if or to what extent it holds.
reserves in order to fulfill its contractual obligation, The analogy is that just as every individual within
and in calculating his premiums he must take the certain geographical regions is threatened by the
present value of these reserves into account. same risk of earthquakes, floods, or hurricanes, so
The second question is, then, what kind of does every inhabitant within the territory of the
insurance can protect against aggression and inva- U.S. or Germany, for instance, face the same risk
sion by other actors? Can it be provided as group of being victimized by a foreign attack. Some su-
insurance, as for natural disasters, or will it have to perficial similarity--to which I shall come
shortly--notwithstanding, it is easy to recognize
be offered in the form of individual insurance, as
two fundamental shortcomings in the analogy. For
in the case of industrial accidents?
one, the borders of earthquake, flood, or hurricane
Let me note at the outset that both forms of regions are established and drawn according to
insurance represent only the two possible extremes objective physical criteria and hence can be re-
of a continuum, and that the position of any par- ferred to as natural. In distinct contrast, political
ticular risk on this continuum is not definitively boundaries are artificial boundaries. The borders
fixed. Owing to scientific and technological ad- of the U.S. changed throughout the entire 19th
vances in meteorology, geology, or engineering, for century, and Germany did not exist as such until
instance, risks that were formerly regarded as ho- 1871, but was composed of nearly 50 separate
mogeneous (allowing for mutual insurance) can countries. Surely, no one would want to claim that
become more and more de-homogenized. Note- this redrawing of the U.S. or German borders was
worthy is this tendency in the field of medical and the outcome of the discovery that the security risk
8 THE LUDWIG VON MISES INSTITUTE
ESSAYS IN POLITICAL ECONOMY
of every American or German within the greater Other things being equal, everyone will prefer safer
U.S. or Germany was, contrary to the previously locations and forms of property to locations and
held opposite belief, homogeneous (identical). forms which are less safe. Yet, regardless of where
There is a second obvious shortcoming. Na- an owner and his property are located and what-
ture--earthquakes, floods, hurricanes-- is blind ever the property's physical form, every owner, by
in its destruction. It does not discriminate between virtue of not abandoning his property even in view
more and less valuable locations and objects, but of potential aggression, demonstrates his personal
attacks indiscriminately. In distinct contrast, an willingness to protect and defend these posses-
aggressor-invader can and does discriminate. He sions.
does not attack or invade worthless locations and However, if the borders of private property are
things, like the Sahara Desert, but targets locations the only non-arbitrary borders standing in system-
and things that are valuable. Other things being atic relation to the risk of aggression, then it follows
equal, the more valuable a location and an object, that as many different security zones as there are
the more likely it will be the target of an invasion. separately owned property holdings exist, and that
This raises the crucial next question. If political these zones are no larger than the extension of
borders are arbitrary and attacks are in any case these holdings. That is, even more so than in the
never indiscriminate but directed specifically to- case of industrial accidents, the insurance of prop-
ward valuable places and things, are there any erty against aggression would seem to be an exam-
non-arbitrary borders separating different secu- ple of individual rather than group (mutual)
rity-risk (attack) zones? The answer is yes. Such protection.
non-arbitrary borders are those of private prop- Whereas the accident-risk of an individual pro-
erty. Private property is the result of the appropria- duction process is typically independent of its lo-
tion and/or production of particular physical cation--such that if the process were replicated by
objects or effects by specific individuals at specific the same producer at different locations his mar-
locations. Every appropriatorproducer (owner) gin of error would remain the same--the risk of
demonstrates with his actions that he regards the aggression against private property--the produc-
appropriated and produced things as valuable tion plant--is different from one location to an-
(goods), otherwise he would not have appropriated other. By its very nature, as privately appropriated
or produced them. The borders of everyone's and produced goods, property is always separate
property are objective and intersubjectively ascer- and distinct. Every property is located at a differ-
tainable. They are simply determined by the exten- ent place and under the control of a different
sion and dimension of the things appropriated individual, and each location faces a unique se-
and/or produced by any one particular individual. curity risk. It can make a difference for my security,
And the borders of all valuable places and things for instance, if I reside in the countryside or the
are coextensive with the borders of all property. At city, on a hill or in a valley, or near or far from a
any given point in time, every valuable place and river, ocean, harbor, railroad or street. In fact, even
thing is owned by someone; only worthless places contiguous locations do not face the same risk. It
and things are owned by no one. can make a difference, for instance, if I reside
Surrounded by other men, every appropriator higher or lower on the mountain than my neigh-
and producer can also become the object of an bor, upstream or downstream, closer to or more
attack or invasion. Every property--in contrast to distant from the ocean, or simply north, south,
things (matter)--is necessarily valuable; hence, west, or east of him. Moreover, every property,
every property owner becomes a possible target of wherever it is located, can be shaped and trans-
other men's aggressive desires. Consequently, formed by its owner so as to increase its safety
every owner's choice of the location and form of and reduce the likelihood of an aggression. I may
his property will, among countless other consid- acquire a gun or safe-deposit box, for instance,
erations, also be influenced by security concerns. or I may be able to shoot down an attacking
THE LUDWIG VON MISES INSTITUTE 9
THE PRIVATE PRODUCTION OF DEFENSE
plane from my backyard or own a laser gun that Consider for a moment a completely stateless
can kill an aggressor thousands of miles away. Thus, world. Most property owners would be individu-
no location and no property are like any other. ally insured by large, often multinational insurance
Every owner will have to be insured individually, companies endowed with huge capital reserves.
and to do so every aggression-insurer must hold Most if not all aggressors, being bad risks, would
sufficient capital reserves. be left without any insurance whatever. In this
situation, every aggressor or group of aggressors
THE DEMOCRATIC STATE would want to limit their targets, preferably to
AND TOTAL WAR uninsured property, and avoid all "collateral dam-
age," as they would otherwise find themselves
The analogy typically drawn between insurance confronted with one or many economically pow-
against natural disasters and external aggression is erful professional defense agencies. Likewise, all
fundamentally flawed. As aggression is never indis- defensive violence would be highly selective and
criminate but selective and targeted, so is defense. targeted. All aggressors would be specific individu-
Everyone has different locations and things to de- als or groups, located at specific places and
fend, and no one's security risk is the same as equipped with specific resources. In response to
anyone else's. And yet the analogy also contains a attacks on their clients, insurance agencies would
kernel of truth. However, any similarity between specifically target these locations and resources for
natural disasters and external aggression is due not retaliation, and they would want to avoid any col-
to the nature of aggression and defense but to the lateral damage as they would otherwise become
rather specific nature of state-aggression and de- entangled with and liable to other insurers.
fense (interstate warfare). As explained above, a
state is an agency that exercises a compulsory All of this fundamentally changes in a statist
territorial monopoly of protection and the power world with interstate warfare. For one, if a state,
to tax, and any such agency will be comparatively the U.S., attacks another, for instance Iraq, this is
more aggressive because it can externalize the costs not just an attack by a limited number of people,
of such behavior onto its subjects. However, the equipped with limited resources and located at a
existence of a state does not just increase the clearly identifiable place. Rather, it is an attack by
frequency of aggression; it changes its entire char- all Americans and with all of their resources. Every
acter. The existence of states, and especially of American supposedly pays taxes to the U.S. gov-
democratic states, implies that aggression and de- ernment and is thus de facto, whether he wishes to
fense--war--will tend to be transformed into be or not, implicated in every government aggres-
total, undiscriminating, war.13 sion. Hence, while it is obviously false to claim that
every American faces an equal risk of being at-
13
tacked by Iraq, (low or nonexistent as such a risk
On the relationship between state and war, and on is, it is certainly higher in New York City than in
the historical transformation from limited (monarchical) to Wichita, Kansas, for instance) every American is
total (democratic) war, see Ekkehard Krippendorff, Staat
and Krieg (Frankfurt/M.: Suhrkamp, 1985); Charles Tilly,
rendered equal with respect to his own active, if
"War Making and State Making as Organized Crime," in not always voluntary, participation in each of his
Bringing the State Back In, Peter B. Evans, Dietrich Ruesche- government's aggressions.
meyer, Theda Skocpol, eds. (Cambridge: Cambridge Uni- Second, just as the attacker is a state, so is the
versity Press, 1985); John F.C. Fuller, The Conduct of War attacked, Iraq. As its U.S. counterpart, the Iraqi
(New York: Da Capo Press, 1992); Michael Howard, War
government has the power to tax its population or
in European History (New York: Oxford University Press,
1976); Hans-Hermann Hoppe, "Time Preference, Govern-
draft it into its armed forces. As taxpayer or draftee,
ment, and the Process of De-Civilization," in The Costs of every Iraqi is implicated in his government's de-
War, John V. Denson, ed. (New Brunswick, N.J.: Transac- fense just as every American is drawn into the U.S.
tion Publishers, 1997); Erik von Kuehnelt-Leddihn, Leftism government's attack. Thus, the war becomes a war
Revisited (Washington, D.C.: Regnery, 1990). of all Americans against all Iraqis, i.e., total war.
10 THE LUDWIG VON MISES INSTITUTE
ESSAYS IN POLITICAL ECONOMY
The strategy of both the attacker and the defender challenge? In particular, how would it deal with the
state will be changed accordingly. While the at- existence of states and state aggression?
tacker still must be selective regarding the targets In answering these questions it is essential to
of his attack, if for no other reason than that even recall some elementary economic insights. Other
taxing agencies (states) are ultimately constrained things being equal, private property owners generally,
by scarcity, the aggressor has little or no incentive and business owners in particular, prefer locations
to avoid or minimize collateral damage. To the with low protection costs (insurance premiums) and
contrary, since the entire population and national rising property values to those with high protection
wealth is involved in the defensive effort, collateral costs and falling property values. Consequently,
damage, whether of lives or property, is even de- there is a tendency toward the migration of people
sirable. No clear distinction between combatants and goods from high risk and falling property value
and non-combatants exists. Everyone is an enemy, areas into low risk and increasing property value
and all property provides support for the attacked areas. Furthermore, protection costs and property
government. Hence, everyone and everything be- values are directly related. Other things being
comes fair game. Likewise, the defender state will equal, higher protection costs (greater attack risks)
be little concerned about collateral damage result- imply lower or falling property values, and lower
ing from its own retaliation against the attacker. protection costs imply higher or increasing prop-
Every citizen of the attacker state and all of their erty values. These laws and tendencies shape the
property is a foe and enemy property and thus operation of a competitive system of insurance-
becomes a possible target of retaliation. Moreover, protection agencies.
every state, in accordance with this character of First, whereas a tax-funded monopolist will
interstate war, will develop and employ more manifest a tendency to raise the cost and price of
weapons of mass destruction, such as atomic protection, private profit-loss insurance agencies
bombs, rather than long-range precision weapons, strive to reduce the cost of protection and thus
such as my imaginary laser gun. bring about falling prices. At the same time insur-
Thus, the similarity between war and natural ance agencies are more interested than anyone else
catastrophes--their seemingly indiscriminate de- in rising property values, because this implies not
struction and devastation--is exclusively a feature only that their own property holdings appreciate
of a statist world. but in particular that there will also be more of
other people's property for them to insure. In
INSURANCE AND INCENTIVES contrast, if the risk of aggression increases and
This brings on the last problem. We have seen property values fall, there is less value to be insured
that just as all property is private, all defense must be while the cost of protection and price of insurance
insured individually by capitalized insurance agencies, rises, implying poor business conditions for an
very much like industrial accident insurance. Yet, we insurer. Consequently, insurance companies
have also seen that both forms of insurance differ in would be under permanent economic pressure to
one fundamental respect. In the case of defense promote the former favorable and avert the latter
insurance, the location of the insured property mat- unfavorable condition.
ters. The premium per insured value will be different This incentive structure has a fundamental im-
at different locations. Furthermore, aggressors can pact on the operation of insurers. For one, as for
move around, their arsenal of weapons may change, the seemingly easier case of the protection against
and their entire character of aggression can alter with common crime and criminals, a system of com-
the presence of states. Thus, even given a initial
n petitive insurers would lead to a dramatic change
property location, the price per insured value can in current crime policy. To recognize the extent of
alter with changes in the social environment or this change, it is instructive to look first at the
surroundings of this location. How would a system present and thus familiar statist crime policy.
of competitive insurance agencies respond to this While it is in the interest of state agents to combat
THE LUDWIG VON MISES INSTITUTE 11
THE PRIVATE PRODUCTION OF DEFENSE
common private crime (if only so that there is more victim. Thus, above all insurers would want to be
property left for them to tax), as tax-funded agents effective in crime prevention. And if they still could
they have little or no interest in being particularly not prevent it, they would want to be efficient in
effective at the task of preventing it, or else, if it has the detection, apprehension, and punishment of
occurred, at compensating its victims and appre- criminal offenders, because in finding and arrest-
hending and punishing the offenders. Moreover, ing an offender, the insurer could force the crimi-
under democratic conditions, insult will be added nal--rather than the victim and its insurer--to pay
to injury. For if everyone--aggressors as well as for the damages and cost of indemnification.
non-aggressors and residents of high crime loca- More specifically, just as insurance companies
tions as well as those of low crime locations--can currently maintain and continually update a de-
vote and be elected to government office, a system- tailed local inventory of property values so they
atic redistribution of property rights from non-ag- would then maintain and continually update a
gressors to aggressors and the residents of low detailed local inventory of crimes and criminals.
crime areas to those of high crime areas comes into Other things being equal, the risk of aggression
effect and crime will actually be promoted. Ac- against any private property location increases with
cordingly, crime, and consequently the demand for the proximity and the number and resources of
private security services of all kinds are currently at potential aggressors. Thus, insurers would be in-
an all-time high. Even more scandalously, instead terested in gathering information on actual crimes
of compensating the victims of crimes it did not and known criminals and their locations, and it
prevent (as it should have), the government forces would be in their mutual interest of minimizing
victims to pay again as taxpayers for the cost of the property damage to share this information with
apprehension, imprisonment, rehabilitation, each other (just as banks now share information on
and/or entertainment of their aggressors. And bad credit risks with each other). Furthermore,
rather than requiring higher protection prices in insurers would also be particularly interested in
high crime locations and lower ones in low crime gathering information on potential (not yet com-
locations, as insurers would, the government does mitted and known) crimes and aggressors, and this
the exact opposite. It taxes more in low crime and would lead to a fundamental overhaul of and im-
high property value areas than in high crime and provement in current--statist--crime statistics.
low property value ones, or it even subsidizes the In order to predict the future incidence of crime
residents of the latter locations--the slums--at and thus calculate its current price (premium),
the expense of those of the former and thus erodes insurers would correlate the frequency, descrip-
the social conditions unfavorable to crime while tion, and character of crimes and criminals with
promoting those favorable to it.14 the social surroundings in which they occur and
The operation of competitive insurers would operate, and develop and under competitive pres-
be in striking contrast. For one, if an insurer could sure continually refine an elaborate system of
not prevent a crime, it would have to indemnify the demographic and sociological crime indicators.15
That is, every neighborhood would be described,
14
On crime and punishment, past and present, see Terry and its risk assessed, in terms and in light of a
Anderson and P.J. Hill, "The American Experiment in Anar- multitude of crime indicators, such as the composi-
cho-Capitalism: The Not So Wild, Wild West," Journal of tion of sexes, age groups, races, nationalities, ethnici-
Libertarian Studies 3, no. 1 (1979); Bruce L. Benson, "Guns for ties, religions, languages, professions, and incomes.
Protection, and Other Private Sector Responses to the
15
Government's Failure to Control Crime," Journal of Libertarian For an overview of the extent to which official--sta-
Studies 8, no. 1 (1986); Roger D. McGrath, Gunfighters, High- tist--statistics, in particular on crime, deliberately ignore,
waymen, and Vigilantes: Vio