Purely Private Enforcement Essay, Research Paper
4.8 Purely private enforcement: a modelRichard Posner writes, “I hope to challenge the assumption, largely unquestioned since Hobbes, that a state (if only a minimal, ‘nightwatchman’ state) is necessary to maintain the internal and external security of society. I am not advocating anarchy. My argument is that a state is not a precondition of social order in the circumstances depicted in the Homeric epics – and even there, it is just barely not. In our circumstances, we could not do without a state.”81 This section will consider precisely the workings of a legal system “in our circumstances” without a state, in which no organization has a monopoly on the right to use violence. Imagine this enforcement system: Throughout the society, there exist 10,000 private security and police companies (approximately the number we have today). Everyone in the society pays premiums to one such security company; in exchange, the client receives protection from criminals and arbitrary prosecution by other police firms. Most people assume that violence and inter-firm warfare would break out at once. But this assumption is inconsistent with history and elementary game theory. An inter-firm war would be fantastically expensive; employee wages would skyrocket to pay the positive wage differential for danger; huge investments could be swiftly lost. The gains from one dispute are so small, and the losses from non-cooperation are so large, that it is difficult to imagine warfare breaking out over one dispute. And this point applies even to a one-turn game. But since firms exist for a long time and must resolve many disputes with each other, the game is actually repeated rather than one-shot. So long as expected profits from non-cooperation are negative, firms would strive for peace. (In contrast, ideologically motivated movements wage wars even when the expected monetary gain is negative.) So long as firms are profit-maximizers, the high cost of violence in a single turn for both combatants, plus the firms’ indefinite time horizon, suggests the cooperative solution.To make this more concrete, imagine that Gary, a customer of Becker Police Services, says that George, a customer of Stigler Security, mugged him. Most people imagine that Stigler Security would defend George to the death regardless of his guilt, and that Becker Police Services would have to start a war with Stigler Security to induce George to pay up. But is that really a profit-maximizing strategy? Stigler Security could either (a) Fight a horrible war, or (b) Agree to arbitrate the dispute. Even in a one-turn game, the choice could hardly be clearer. But of course Becker Police and Stigler Security know that they will interact many times in the future; their relationship is a repeated game. This multiplies the gains from cooperation many times. It also reduces transactions costs, because they could pre-contract to arbitrate all of their disputes with a mutually agreeable judge. As a practical matter, then, the looming danger of confrontation would never rear its head; the firms would likely work out a dispute resolution system in advance.Most people assume that firms would defend even a guilty client to the death; but the reality is closer to the opposite. Any firm that did that would face a massive adverse selection problem. Just as a health insurance company avoids insuring the terminally ill, so too would a police company avoid protecting professional criminals. Firms that did would attract a lot of high-risk clients. By protecting the guilty, they would virtually announce that all professional criminals should buy their protection. But criminals would, on average, be very expensive customers, since they would frequently injure the clients of other companies and thereby provoke disputes. Law-abiding citizens, in contrast, would pay their premiums but rarely call on upon its services. Posner recognizes this adverse selection problem (without explicitly mentioning it) when he discusses law enforcement in primitive societies: “To be sure, the alleged thief who is clearly guilty and expects to be so adjudged by an impartial arbitrator may prefer not to submit to arbitration or not comply with the arbitrator’s adverse judgment, but his kin group is a restraining influence. They may urge him to submit to arbitration to avoid getting involved in a feud over his deed, as they are likely to do because of their collective responsibility. And he will probably submit to their urging; otherwise they may desert him when the neighbor or the neighbor’s kin retaliate for his refusal to submit to arbitration or to comply with the arbitrator’s reward.”82 (emphasis added) Even family would not protect obviously guilty kinsmen for fear of the long-run consequences. A firm that sold security would have to be much more careful about harboring the guilty, because it is easier to switch security companies than join a new family. If a family gives bad incentives, family members may take more risks; but if a firm gives bad incentives, they could attract all of their competitors’ high-risk customers plus encourage current customers to take more risks.Presumably, then, if Gary of Becker’s Police Services accused George of Stigler’s Security, the two firms would set up a trial. They might sub-contract with an arbitration firm, jointly appoint a panel of judges, or what have you. But on the plausible assumption that accused customers would want trials, it would be rational for firms to protect accused clients until they get convicted. After a conviction, the guilty side would have no alternative but to comply with the ruling, because, as explained, it would bad business to defend guilty clients to the death.One vexing question about historical cases of private enforcement involves the rights of convicted criminals. What incentive exists to defend their rights? It is hard to locate them. And yet, criminal sentences were, nevertheless, graded according to severity.83 Perhaps social opprobrium against overpunishment sufficed. It is possible that competing protection firms might take up the cause of overpunished criminals. The historical facts seem more optimistic than economic theory; this question merits further investigation.Even the most avid opponent of the structure-conduct-performance model should be concerned about high market concentration in such a system. But most of the information that we have about the modern security industry suggests that there are no substantial economies of scale: about 7126 firms existed in 1981, and a great deal of the market growth in the previous 17 years came in the form of new firms rather than growth of existing firms.84 While the need of firms to make many bilateral arbitration contracts might increase the minimum efficient scale, the total industry size (hence maximum number of efficiently-sized firms) would probably be much greater if there were full privatization.So long as the concentration remains fairly low, fears about outlaw firms staging a coup are far-fetched. Unlike governments, firms would not have a whole society’s resources to tap to fight a war; all “war” expenses would have to come from stock- and bondholders. And oppressed individuals would have many alternative security suppliers. Even if security were a local natural monopoly, abuse could triger the intervention of a firm from another region. Murray Rothbard discusses this question with great enthusiasm and lucidity: “There is a myth that the ‘American system’ provides a superb set of ‘checks and balances,’ with the executive, the legislature, and the courts all balancing and checking one against the other, so that power cannot unduly accumulate in one set of hands. But the American ‘checks and balances’ system is largely a fraud. For each one of these institutions is a coercive monopoly in its area, and all of them are part of one government, headed by one political party at any given time. Furthermore, at best there are only two parties, each one close to the other in ideology and personnel, often colluding, and the actual day-to-day business of government headed by a civil service bureaucracy that cannot be displaced by the voters. Contrast to these mythical checks and balances the real checks and balances provided by the free-market economy! What keeps A&P honest is the competition, actual and potential, of Safeway, Pioneer, and countless other grocery stores. What keeps them honest is the ability of the consumers to cut off their patronage. What would keep the free-market judges and courts honest is the lively possibility of heading down the block or down the road to another judge or court if suspicion should descend upon any particular one+These are the real, active checks and balances of the free-market economy and the free society.”85 Rothbard goes on to add that, “The same analysis applies to the possibility of a private police force becoming outlaw+Of course, such a thing could happen. But, in contrast to present-day society, there would be immediate checks and balances available; there would be other police forces who could use their weapons to band together to put down the aggressors against their clientele.”86 One need not agree wholeheartedly to see his point: Competition checks the abuse of power. Indeed, our system of federalism and division of powers purports to be precisely that. But it is hard to deny that U.S. history reveals (1) cooperation (or “collusion”) between the executive, legislative, and judicial branches to enlarge the power of the federal government, and (2) growing federal dominance over state and local governments. Imagine what would happen if three large security firms had 60% of the industry and 50 small firms shared the remaining 40%. It would not be surprising if the three largest colluded with each other to expand their power and bully the 50 small firms into submission. So long as the security market were unconcentrated, the market’s competitive checks on abuse of power might be superior to those of our own Constitution.Remarkably, it looks like there is an incentive structure behind pluralistic enforcement systems that leads to tolerable performance. Full legal privatization is at least conceivable. Naturally, many criticisms might be levied against such a system. But the most obvious complaint, that plural enforcement logically implies a Hobbesian war of all against all, is mistaken. This generalization doesn’t hold up historically, and economic theory can give a fairly complete description of the incentives that let pluralistic enforcement systems function.4.9 Criticism of purely private enforcementAt last, we have a picture of what a fully private system would be like. The horrible costs of inter-firm violence would probably induce voluntary arbitration of conflicts; repeated interaction would magnify this incentive and reduce dispute resolution transaction costs; the adverse selection problem would discourage harboring the guilty; and competitive checks (assuming a deconcentrated industry) would keep would-be outlaw firms in line. This system may be imperfect, but there is no historical or theoretical reason to think that it would instantly degenerate into gang warfare. While the simplistic Hobbesian critique is invalid, there are other more sophisticated of purely private enforcement. Let us consider six major complaints, then see how convincing they are.1. Private enforcers would only handle offenses with identifiable victims. While the desirability of some such laws — like drug, gambling, and prostitution prohibitions — is questionable, legalizing other offenses would be intolerable. Pollution is one example. While we could imagine class-action suits to discourage pollution, the concentrated interest of polluter firms would typically overpower the diffuse interest of the public in clean air. We should not neglect the possibility of private solutions to externality problems (as Coase told us), but private solutions usually work only if the transaction costs are low. Society-wide pollution reduction transaction costs are astronomical.2. While the market could take over individual protection, it is difficult to envision national or even regional protection. In my model, I assumed that the whole world had private enforcement. But if some areas still had governments, well-organized and well-funded foreign armies might overwhelm private enforcers. Even if the security companies could repel any attack if they united, the transaction costs of organizing joint defense would be prohibitive. Individual security firms have incentives to protect their clients against sporadic crime or the attacks of others firms, but the firms do not have incentives to protect a whole region or nation. If the concentration of the security market were higher, joint action against foreign aggressors might become more feasible, but then domestic collusion within the security industry would be a danger. The better the market’s checks against foreign governments, the weaker its checks against inter-firm collusion, and vice versa.3. Who would supply public goods? Granted that firms would have incentives to create law and order, but what about the provision of assistance to the needy, or roads, or other public goods that government provides? One may doubt that the range of public goods is as extensive as commonly supposed (local public goods, for example, might be supplied by housing developers, etc.), the complaint about their non-provision is sensible. Indeed, once enforcement were privatized, it would make no more sense to ask security companies to provide public goods than, say, to ask milk producers to supply public goods. Both would be private entities with no special public responsibilities.4. Many people think that voting and democracy have intrinsic worth. It is better if vote-seekers run our society rather than profit-seekers. Public choice theory strongly undermines this claim. One might also point out that intelligent voting is a pure public good, and is therefore undersupplied in democracies, just as markets undersupply pollution abatement. Nevertheless, many people would suggest that voting counterbalances the power of wealth, and would be preferable for that reason.5. However beautiful the economic theory of market enforcement is, it just wouldn’t work. Every social system requires a general sense of legitimacy to survive. People wouldn’t go along with privatization of enforcement, perhaps irrationally or for ideological reasons. Hence it is better to stick with the status quo, which at least enjoys general acceptance and the sanction of tradition.6. Whatever the economic theory of market enforcement says, most people wouldn’t believe that it would work. They would except that chaos and violence would break out immediately. This would lead them to support almost any leader who pledged to “reestablish order.” The result of attempted privatization might be to replace our imperfect political system with something even worse.Other criticisms exist, but these are the most plausible. Indeed, they look devastating. Still, I don’t think that the issue isso simple. One of the most important conclusions of public choice theory is that for any imaginable “market failure,” we can imagine a parallel “government failure.” Thus, market create externalities like pollution, but the democratic process creates externalities like special interest legislation. Markets do not supply public goods, but the democratic process fails to reward public goods like intelligent voting. If markets have imperfect information (as in the Akerloff lemons model), so do goverments (for example, voters are usually ignorant about politicians’ voting records and sources of funding, as well as the likely consequences of a given piece of legislation). And if markets create monopolies, so too do governments (e.g., agricultural cartels, or the post office). Any valid comparison of market and government performance, then, is essentially comparative; merely pointing out problems in one of the two is never conclusive. Moreover, we mustn’t compare an imaginary perfect government with real-world markets; the fair comparisons are between ideal government and ideal markets, and real-world government and real-world markets.With this in mind, we can see why the previous six criticisms of purely private law are not as convincing as they appear. While market enforcement works poorly for pollution and other dispersed harms, many government activities create comparable externalities. For example, special interest groups lobby for legislation that injures all tax-payers slightly, even though the aggregate damage is high. Might the harm from this exceed the harm of pollution? The question is not an easy one. Or take the second argument. Market enforcement would indeed be unlikely to provide effective national or regional defense. Yet national defense is necessary in the first place only because some governments use their national “defense” for aggressive conquest. The fact that some governments use their military offensively creates the need for national defense. National defense is, strangely, only a public good on the assumption that some military forces are a public bad. Moreover, once one creates a national defense, there is the danger that one’s very own armies will be used for aggressive rather than defensive actions. (Presumably, this is true of at least half of the sides in any international conflict.) Usually this is a public bad. The citizens of Nazi Germany, or Saddam Hussein’s Iraq, for example, would likely have been much better off if their military did not exist in the first place. The wars that their militaries provoked were worse than any wars that their militaries deterred. The point is that even though national defense nominally exists to benefit everyone, military actions frequently bring net harm to their own nation’s citizens; though national defense is theoretically a public good, empirically it is often a public bad. If we do an international survey, it is not clear that the advantages of national defense typically outweigh the costs of its frequent abuse.The problem of public goods is, again, inconclusive. Public choice theory suggests that governments supply what interest groups lobby for. It is unclear whether what interest groups lobby for are in fact public goods; many of them (farm cartels or tariffs, for example) are public bads. As mentioned earlier, local public goods could be supplied by housing developers. Are the remaining public goods that could not be privately supplied so valuable that they outweigh the abuse of legislative power? The answer is far from clear.The fourth complaint was competitive enforcement would would make voting atrophy or disappear. Wealth would be the only measure of social value. Public choice theory undermines this complaint by showing that campaign contributions and wealth strongly influence democratic politics. One might also note that intelligent voting is a pure public good (society benefits if I inform myself before I vote, but I pay all of the cost of informing myself), and is therefore undersupplied under democracy. With these facts in mind, one might doubt that democracy is as wonderful as usually