Liberty and anarchy

As we have seen, the price mechanism is extremely versatile and can be very successful at exploiting and distributing resources in a highly efficient manner with the minimum of external planning or control. However all but the most enthusiastic supporters of the free market agree that the mechanism works best when operating within a framework of law that establishes ownership and penalises theft and fraud. It can be argued that markets will regulate themselves as suppliers who cheat their customers will get bad reputations and so lose business, and indeed self-regulation does appear to work on Web sites such as eBay or Amazon where customers are encouraged to rate suppliers and leave feedback, and there are easy-to-use mechanisms for doing so. However in more conventional markets such mechanisms are far less efficient: not many of us are prepared to spend the day standing outside a shop warning would-be customers that the goods within are not up to scratch.

A system in which the power and funding of central government is limited to just that required to protect the liberty of its citizens and facilitate the operation of the market is sometimes referred to as ‘minarchism’ (a term attributed to Samuel Edward Konkin III), ‘minimal statism’ or simply ‘small government’, and its supporters are usually referred to as ‘libertarians’. Perhaps the most prominent were the economists of the Austrian School, so called because it grew out of work done at the University of Vienna in the first decades of the 20th century by Carl Menger, Ludwig von Mises, Friedrich Hayek and others. Henry Hazlitt (quoted earlier) was an advocate of the Austrian School.

Nevertheless it was Adam Smith, writing well over a century earlier, who perhaps best articulates the libertarian ideal with the statement that, once trade restrictions are removed, “the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and his capital into competition with those of any other man, or order of men.” (Smith, 1776, p. 687)

The Austrian School can be seen as a response to the growing influence of socialism in Europe at that time, which was rightly felt to be a threat to such hard-won freedoms. Mises and Hayek in particular were concerned to demonstrate that a planned economy, where the production and distribution of goods and services is controlled by central government rather than by the ‘invisible hand’ of the price mechanism, would inevitably fail. That said, Hayek did see a role for central government, stating in his influential book The Road to Serfdom, published in 1944, “An effective competitive system needs an intelligently designed and continuously adjusted legal framework as much as any other.” (Hayek, 1944, p. 40) Smith would have agreed.

Both the British Prime Minister Margaret Thatcher and the US President Ronald Reagan were vocal supporters of Mises and Hayek. It is therefore somewhat ironic that public spending did not significantly decrease through their respective reigns. In 1978, the year before Thatcher was elected to power, government expenditure in the UK amounted to 43.2 per cent of Gross Domestic Product (GDP). Over the next few years it actually increased, reaching 46.4 per cent of GDP in 1982, and was still at 39.3 per cent when the Labour Party regained power in 1997 (Office for National Statistics). This compares to less than 13 per cent through the decade preceding the First World War. Meanwhile, under Reagan, total government expenditure in the United States between 1980 and 1988 actually rose from 31.3 per cent to 31.6 per cent of GDP (U.S. Government Printing Office). Despite their rhetoric, neither can claim to have achieved ‘small government’.

While most libertarians recognise at least a limited role for central government, supporters of ‘anarcho-capitalism’ negate the need for any kind of government at all. Such people regard the administrative overheads, together with the opportunities that such organisations provide for incompetence and corruption, as too high a price to pay and suggest that the free market can provide even the services necessary to sustain civil liberties and resolve disputes. In his 1970 treatise Power and Market: Government and the Economy, the Austrian School economist Murray Rothbard suggests that ‘defence services’ could be provided by private companies which would compete with each other for your custom, in much the same way as insurance companies do now. Rothbard envisages that such services could be sold on a subscription basis, much like insurance premiums, and indeed that defence services might well be offered by insurance companies as they have a vested interest in reducing crime levels.

If you were to find yourself in a dispute with your neighbour that you were unable to resolve then you would turn to your defence agency who would enter into negotiations with your neighbour’s defence agency. If a resolution could not be reached then the two agencies may resort to violence. However physical conflict is an expensive option so agencies would have an incentive to find a cheaper, more peaceful solution. Once this is found you would have to either accept the solution that your agency offers, or risk having it forcibly applied. This may seem farfetched but Rothbard points out that international relations are maintained in much the same way, without an overriding authority:

“The Argentinian, for example, lives in a state of ‘anarchy’, of nongovernment, in relation to the citizen of Uruguay … And yet the private citizens of these and other countries live and trade together without getting into insoluble legal conflicts, despite the absence of a common governmental ruler. The Argentinian who believes he has been aggressed upon by a Ceylonese, for example, takes his grievance to an Argentinian court, and its decision is recognized by the Ceylonese courts … Although it is true that the separate nation-states have warred interminably against each other, the private citizens of the various countries, despite widely differing legal systems, have managed to live together in harmony without having a single government over them. If the citizens of northern Montana and of Saskatchewan across the border can live and trade together in harmony without a common government, so can the citizens of northern and of southern Montana.” (Rothbard, 2004, p. 1050)

Supporters of anarcho-capitalism cite examples from medieval Iceland (Friedman, 1979), the Wild West of America (Anderson & Hill, 1979) and even modern-day Somalia (Leeson, 2007) where law and order has been maintained for decades and sometimes even centuries without central government. However the concept of a private defence agency seems uncomfortably close to that of a gang to whom you pay ‘protection money’ to ensure you don’t get hurt – the implication being that you certainly will get hurt if you don’t pay. Indeed arguably a good example of Rothbard’s defence agencies in action is the Mafia. In Sicily, where the Mafia originated, it is estimated that over 80 per cent of businesses currently pay ‘pizzo’ to the Mafia, taking an estimated £1.3 billion a year from the island’s economy. (Rafanelli, 2008) As Italian historian Paolo Pezzino tells us: “The Mafia is a kind of organized crime being active not only in several illegal fields, but also tending to exercise sovereignty functions – normally belonging to public authorities – over a specific territory …” (Pezzino, 1995)

The anarcho-capitalist may argue that there is little difference between rule by the Mob and rule by government. However history teaches us that the strong and the charismatic will inevitably attract followers and attempt to control available resources and manpower, if only to prevent rivals from doing the same. Anarcho-capitalism may be a starting point but it is not sustainable as it inevitably leads to the nation-states that we have now. To imagine otherwise is to be as deluded about human nature as the communists that libertarians so despise. As James Madison put it back in 1788 in an article addressing the people of New York, “If men were angels, no government would be necessary.” (Madison, 1788)

Chapter 2: Market failures →