Chapter 12 On Government and the Private Production of Defense

Hoppe begins by attacking the "myth of collective security," which is the idea that the state can and will protect the rights of a group of private property owners. The need for collective security begins with the world view of Thomas Hobbes where "in the state of nature, men would constantly be at each others' throats." The state is established to keep the peace in this violent world--to be the sole provider of security to parties living within the area of the states' territorial monopoly and it is be paid for such security through the imposition of taxes.

How is this not a protection racket? The state is comprised of men who are no different in their essential character than the parties for whom they are to keep at peace and it gets to unilaterally set the price for its peacekeeping efforts through taxation.  How is this not extortion?

There is a further issue, which is that the state being in temperament violent like the people it is comprised of, would under Hobbes view, have equally violent relations with all other states. Logically it would follow that foreign peoples should have warlike relations with each other, but this is empirically not the case.  

Part II

Considering that the United States government  was created to "secure these rights [(the rights of life, liberty and the pursuit of happiness)], governments are instituted among men, deriving their just powers from the consent of the governed." How has this worked? Hoppe follows with a long list of the many infringements of the rights of citizens in the U.S., including: income taxation, inflation through paper money, restrictions on freedom of contract and free association. "In short, the more the state has increased its expenditures on 'social' security and 'public' safety, the more our private property rights have been eroded, the more our property has been expropriated, confiscated, destroyed, or depreciated and the more we have been deprived of the very foundation of all protection: economic independence, financial strength and personal wealth."

If we consider the relations between the United States and foreign nations, the U.S. has engaged in hundreds of foreign conflicts, while the citizens of the US and the foreign peoples are not at war with each other, all of which undermines Hobbes world view. "The belief in a protective state appears to be a patent error, and the American experiment in protective statism a complete failure."

Part III

Both socialists and statists fall prey to the same error that is, if only different people had led the movement rather than Stalin or a particular U.S. president, then the outcome would have been different. Mises answered the socialists, but, according to Hoppe, Rothbard answered the statists. "[T]he institution of the state [can]not be reformed but must be abolished in order to achieve justice and protection." [See,  Chapter 11, Part IV regarding the predictable decrease in the quality of services coupled with the predictable increase in the cost thereof.]

The solution for the property owner who will require protection services even in the absence of a Hobbesian universe would be to seek protection services from private parties at an agreed upon price.

Part IV

Having rejected the idea that collective security can be achieved through state action, Hoppe recognizes that people still need protection services.  Protection and defense services are most likely to be provided by private insurance agencies. The agency has the correct incentives given that better protection results in fewer claims. Insurance companies are already structured in a manner to best take on these services because they already cross national boundaries and have contractual programs of re-insurance and arbitration.  Existing insurance companies assets often exceed the assets of government, i.e. they are economically capable of providing the protection and compensating their clients for their losses.

Hoppe recognizes that many risks aren't insurable: suicide, retaliation following provocation of another, entrepreneurial losses, etc., but even these are matters of contract with various insurance companies offering levels of protection and pricing. Still, the concept of the non-aggressive and non-provocative insured is important for those people having less of those unique qualities are higher risk parties and, rightly, would pay more for protection services. This would have the salutary effect of people being financially rewarded for being less aggressive and less provocative.

The contracts between the insured and their agent would specify governing law, e.g. Catholic insurers would apply Canon law, Jewish insurers would apply Mosaic law, Muslims would apply Islamic law, etc.  In the event of a conflict between a Catholic and a Muslim where there legal codes would result in a different outcome, the insurance companies would resolve the conflicts by presenting their case to a mutually agreed upon arbiter. In such a circumstance, all parties would be incentivized to develop laws which are fair to all since they could find their own client on the opposite side in the future. Hence law would be increasingly result in a legal-moral consensus of the appropriate outcome.

In a world of private insurance companies competing with one another, no company could, as the government does, get away with increasing the cost of protection services while decreasing the quality of the services.

Part V

Risks of natural disasters (which are more prevalent in some areas than in others) would likely be treated as pooled risks and all parties in a certain geographic area would share the costs of the insurance.  Risks of industrial accidents are personal and those costs would be borne by the enterprise owner. The third risk, the risk of "aggression and invasion by other actors" is a case that must be separately considered.

Part VI

Aggression and invasion can be distinguished from natural disasters in that natural disasters occur within naturally occurring fixed locations, but the boundaries of the ownership of property are arbitrary and shift over time.  Further, natural disasters are blind to their victims and are indiscriminate, but man initiated aggression is "directed specifically toward valuable places and things."  Due to the unique characteristics of property and the subjective nature of value, all property owners will "have to be insured individually, and to do so every aggression-insurer must hold sufficient capital reserves."

Part VII

The existence of a state changes the "entire character" of aggression. This is a consequence of a state being able to externalize the cost of its aggression onto its subjects.  Consequently, "war-will tend to be transformed into total-undiscriminating-war."  

In a stateless world, most property owners would be "insured by large, often multinational insurance companies endowed with huge capital reserves," and bad actors would have little or no insurance.  Their lack of insurance (but not lack of liability for their acts) would cause them to limit their targets in order to limit the damages they become responsible to pay.

All of the foregoing changes in a world with "states." A attack upon a target within a state is treated (by the state) as an attack upon every individual citizen of the state, i.e. each citizen is equally obligated to pay for retaliation against the attacking state. When the attacked state retaliates, it retaliates against a state whose citizens then are immediately equally obligated to rise to the defense of the state. Hence warfare, instead of being between two individuals who have damaged each others' property, quickly becomes total war. 


It logically follows from the foregoing that all defense must be "insured individually by capitalized insurance agencies," very much like industrial accident insurance and not in the manner of insuring against natural disaster where geographically contiguous owners can pool their risk. 

How would insurance companies deal with risk in a world that still contained some states?

To answer this question one must understand the economic laws that will govern the insurance companies behavior.  "[P]rivate property [owners] generally...prefer locations with low protection costs...and rising property values....[Further], higher protection coasts...imply lower or falling property values."

As noted earlier, due to the territorial monopoly of states, they tend to lower the quality of protection while increasing the cost. Insurance companies are incentivized to prefer rising property values since they are also property owners and rising values offer the opportunity to insure more property. 

The incentive structure for states and insurance companies providing defense is wholly different.  The states protect property only to assure that there is more left for them to tax. "[T]hey have little or no interest in being particularly effective at the task of preventing ...[crime], or if it has occurred, at compensating its victims..." To add insult to injury, instead of compensating victims, the state forces the victim (through taxation) to pay the costs associated with apprehending and imprisoning the criminal.

Insurance companies, since they must compensate victims, have strong incentives to prevent crime from occurring. Because they are seeking to prevent crime they would assemble data on how and where crimes are being committed and by whom. Instead of the cost of crime prevention being shared equally by all communities without regard to the aggressors in the community, each individual would pay for insurance for himself and the risk associated with his community.  This, when coupled with the right of communities to exclude aggressors, would have the salutary effect of promoting civil behavior, instead of the decivilizing effect of sharing the costs equally between all parties.

Part IX

How would private insurers protect against state aggression? "States are inherently aggressive and pose a permanent danger to every insurer and insured." Consequently, insurers would want to restrict the right of government agents to enter free territories. 

What if a government attacks a free territory? Since there is no collective (state) defense, this would be easy in theory; however, it the state is responding to an attack from an individual in the free territory, the state has redress to the insurance company for compensation for losses and perhaps even for apprehending the offending individual.  Since the state has not been attacked by another state, what moral principle could it articulate to convince its citizens they should respond in mass to an offense within the borders of the state? Thus, would total war be discouraged

Still, if a state were aggressive (as it is naturally inclined to be), it would be met with resistance by the private forces of the insurance companies, which would (due to competitive forces) be "efficient and competitive firms." These firms would target the aggressors within the state, i.e. they would seek to kill the leadership of the state while avoiding collateral damage.

Part X

Hoppe concludes with noting that he has accomplished the following:

1. Exposed the error that the state can provide protection services and the disastrous consequences that follow from that error.

2. Shown that private insurance companies can provide better services at a lower cost.

3. Demonstrated that a system of private insurers would minimize aggression and promote peace.

The remaining task is to correct "the erroneous public perception and judgment of the state as just and necessary...[whereupon the] government would implode and its powers evaporate." 










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