In 1920, the great Austrian economist Ludwig von Mises expanded on what is known as the “economic” or “socialist calculation problem” in his work, Economic Calculation in the Socialist Commonwealth.
Mises described the nature of the price system under capitalism and described how individual subjective values are translated into the objective information (prices) necessary for rational allocation of resources.
Mises argued that the pricing systems in socialist economies were deficient because if a public entity owned all the means of production, no rational economic inputs could be obtained for capital goods as they were merely internal transfers and not “objects of exchange.”
The same holds true for any line of production socialized by government.
As socialized industries like security (policing) and defense (military) have no genuine economic inputs – that is to say, no objective money prices as determined voluntarily on the open market established by how much individuals are willing to pay for such “services” – government is unable to properly discern, relative to demand, if what it is engaged in is of overall benefit to society.
Systems of private property and voluntary exchange however, enable consumers to compare – via a medium of exchange (money) – the costs of goods and services without having to obtain knowledge of their underlying factors of production.
As consumers rely on their own personal cost-benefit analysis – prices develop – which are contingent on how much voluntary paying consumers are willing to pay. The resulting price system therefore, promotes the economically efficient deployment of resources relative to demand.
This is called the signalling function of prices, as well as the rationing function which prevents over-use of any resource. Without this market process to fulfill such comparisons, Mises argued, there is no way to compare different goods and services and/or rationally calculate profits and losses.
Absent this feedback, socialized industries like policing lack the means to relate consumer satisfaction to economic activity – which ultimately leads to surpluses and shortages and disables governments ability to properly ascertain how to deploy resources optimally.
Austrian economist Dr. Hans Hermann Hoppe points out in his essay State or Private Law Society:
The state, as a tax-funded protection monopolist, will necessarily allocate resources arbitrarily. There will be overproduction (or underproduction) of security as compared to other competing goods and services, and there will be overprotection of some individuals, groups, or regions and underprotection of others. In distinct contrast, in a system of freely competing protection agencies all arbitrariness of allocation (all over- and underproduction) would disappear. Protection would be accorded the relative importance that is has in the eyes of voluntarily paying consumers, and no person, group, or region would receive protection at the expense of any other one. Each and every one would receive protection in accordance with his own payments.
The problem of planning production is the “knowledge problem” explained by noble prize winning economist F.A. Hayek in his 1937 work Economics and Knowledge and then again in greater detail in his 1945 work The Use of Knowledge in Society.
Building on the earlier work of Mises and others, Hayek argued that while in centrally planned economies an individual or a select group of individuals must determine the distribution of resources, these planners will never have enough information to carry out this allocation reliably.
Within capitalism, the overall plan for production is composed of individual plans from capitalists in large and small enterprises. Since capitalists purchase labour and capital out of the same common pool of available, but scarce labor and capital, it is essential that their plans fit together in at least a semi-coherent fashion.
Hayek defined an efficient planning process as one where all decision makers form plans that contain relevant data from the plans from others. Entrepreneurs acquire data on the plans from others through the price system which forms an indispensable communications network for plan coordination among entrepreneurs. Increases and decreases in prices inform entrepreneurs about the general economic situation, to which they must adjust their own plans.
Hayek asserted that a centrally planned industry could never match the efficiency of the open market because any individual knows only a small fraction of all which is known collectively. A decentralized economy thus complements the dispersed nature of information spread throughout society.
In Hayek’s words:
The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction.
Government planners of policing simply do not have the information available to the them to successfully determine how to deploy resources without price signals. To illustrate this, imagine a gas shortage. When gas is in short supply, prices go up. In these situations, entrepreneurs are quickly derided by government as “price gougers.” The state then usually steps in and fixes prices, disabling the price mechanism from properly functioning.
This has disastrous effects. The aforementioned rationing function of prices that serve to preserve scarce resources has now been interfered with – meaning shortages of gas are likely on the way. When the government sets the price of gas, you don’t get cheap gas, you get no gas.
Bureaucrats simply do not posses the collective information contained within the market economy. Instead, they must rely on mere whim in determining how to deploy police. This necessitates government determining for itself what police should be doing and results in focusing on things like traffic and drug enforcement in order to line their coffers instead of pursuing actual violent criminals.
The historical definition of monopoly has always been one denoting the grant of special privilege by the State, reserving a certain area of production to one particular individual or group.
This definition of monopoly goes back to the common law and acquired great political importance in England during the sixteenth and seventeenth centuries, when a historic struggle took place between classical liberal libertarians and the Crown over the issue of monopoly as opposed to freedom of production and enterprise.
Monopolies can only be sustained by government. This is done by endowing special privileges onto favored corporations(which are not free-market entities). These privileges include limited liability, selectively enforced regulation, selective taxation, etc. This creates a huge barrier of entry for competing firms not favored by the state thus creating favored monopolies.
In fact until the progressive era, the definition of “monopoly” was always understood in this light. Monopoly is not a free market danger and you are going to be hard pressed to find any historical example of monopoly that existed for any significant amount of time without being propped up by government in one way or another.
Obviously this is certainly the case when it comes to government policing where the production of security is socialized by the state.
Dr. Hoppe says:
Government allows no appeal above and beyond itself. Also, government is an agency that exercises a territorial monopoly of taxation. That is, it is an agency that unilaterally fixes the price that private citizens must pay for it’s service as ultimate judge and enforcer of law and order. Every “monopoly” is “bad” from the viewpoint of consumers. Monopoly is here understood in its classic meaning as an exclusive privilege granted to a single producer of a commodity or service, or as the absence of “free entry” into a particular line of production. Only one agency, A, may produce a given good or service, X. Such a monopoly is “bad” for consumers, because, shielded from potential new entrants into a given area of production, the price of the product will be higher and its quality lower than otherwise, under free competition.
In the absence of a government law enforcement monopoly, private companies would be competing on the open market to provide citizens with the lowest cost, highest quality service available. This would reduce police misconduct because firms that employee violent law enforcers will loose market share as customers flee to their cheaper nonviolent competitors.
By no longer designating law enforcement a public good, private firms would have to foot the bill themselves for the abuses of their employees. This means, to avoid these costly pay-outs, firms would undoubtedly demand rigorous ethical and moral standards as outside arbitrators would hold their employees much more accountable than the state apparatus they belonged to otherwise would.
This may seem like a radical idea to some but a government monopoly, in any arena, does three things: Restrict personal choice, draw up costs, and drive down quality. Certainly, having the individual liberty to choose who provides you with law enforcement services is preferable to a forced government monopoly that demands taxpayer money to not only pay for its abuses, but to function at all.
It is probably also important to mention so-called “private prisons.” Capitalism is almost universally derided as being whats wrong with the current statist system of protection and arbitration – but nothing could be further from the truth.
So-called “privatized” prisons are nothing more than government prop-ups endowed with selective monopoly privileged by the state. Only does it become profitable to hold as many prisoners as the US does when the state subsidizes the cost. It is estimated to cost taxpayers around $30,000 a year to house each individual inmate. In a true free-market system, where law, protection, prison services etc. are provided on the open market like every other good or services, the prisons themselves would be responsible for the cost of housing, food, etc.
This means prison populations would fall dramatically as security firms find it untenable to pursue victimless crimes like drug possession, etc. Why? Because voluntary paying customers would never stand to pay thousands of dollars every time little Johnny has to be ran down for his nickle bag of dope.
Only through the coercive mechanism of government, where the state happily assumes the role of ‘victim’ is this possible. In a stateless society, what you would be left is a civil, restitution based legal system that only compensates victims of actual property/violent crime.
This would empty prisons and slash brutality, because again, voluntary paying customers will not choose to fund violent enforcers. When police departments have to pay the costs of their employees brutality themselves and they see their insurance premiums going higher and higher, they will quickly learn to promptly fire and not employee over-aggressive security workers. Capitalism is not the problem, it is the answer! – and would revoke the perverse incentives that exist in the government policing monopoly.
An advantage of market policing is that companies would have a contractual responsibility to protect their customers. In Warren v. District of Columbia, the court found that public police have no such responsibility. Thus, they cannot be sued for ignoring calls for help.
This is why the response time of police in some areas is so long and why the percentage of cases successfully pursued against burglars and thieves range in the single digits. So in other words, government police have no legal obligation to either serve or protect you.
Dr. Hoppe points out:
If one wanted to summarize in one word the decisive difference and advantage of a competitive security industry as compared to the current [government] practice, it would be this: contract. The state, as ultimate decision maker and judge, operates in a contractless legal vacuum. There exists no contract between the state and its citizens. It is not contractually fixed, what is actually owned by whom, and what, accordingly, is to be protected. It is not fixed, what service the state is to provide, what is to happen if the state fails in its duty, nor what the price is that the “customer” of such “service” must pay. Rather, the state unilaterally fixes the rules of the game and can change them, per legislation, during the game. Obviously, such behavior is inconceivable for freely financed security providers. Just imagine a security provider, whether police, insurer, or arbitrator, whose offer consisted of something like this:
I will not contractually guarantee you anything. I will not tell you what specific things I will regard as your to-be-protected property, nor will I tell you what I oblige myself to do if, according to your opinion, I do not fulfill my service to you — but in any case, I reserve the right to unilaterally determine the price that you must pay me for such undefined service.
Any such security provider would immediately disappear from the market due to a complete lack of customers. Each private, freely financed security producer instead must offer its prospective clients a contract. And these contracts must, in order to appear acceptable to voluntarily paying consumers, contain clear property descriptions as well as clearly defined mutual services and obligations. Moreover, each party to a contract, for the duration or until the fulfillment of the contract, would be bound by its terms and conditions; and every change of terms or conditions would require the unanimous consent of all parties concerned.
Specifically, in order to appear acceptable to security buyers, these contracts must contain provisions about what will be done in the case of a conflict or dispute between the protector or insurer and his own protected or insured clients as well as in the case of a conflict between different protectors or insurers and their respective clients. And in this regard only one mutually agreeable solution exists: in these cases the conflicting parties contractually agree to arbitration by a mutually trusted but independent third party.
And as for this third party, it too is freely financed and stands in competition with other arbitrators or arbitration agencies. Its clients, i.e., the insurers and the insured, expect of it that it come up with a verdict that is recognized as fair and just by all sides. Only arbitrators capable of forming such judgments will succeed in the arbitration market. Arbitrators incapable of this and viewed as biased or partial will disappear from the market.
In the absence of a government protection monopoly, and the tax burden associated with paying for it, consumers can afford their own security services. Also, it isn’t hard to imagine firms ran by voluntary donation or churches operating to provide security to those too poor to afford it. (There would also likely exist volunteer police departments in the vein of current volunteer fire departments.)
Much like in any other industry, however, where the market is allowed to operate there exists the lowest cost and most abundance for all. What percentage of Americans do not own a personal computer? Who cant afford a McDonald’s double cheeseburger? Who doesn’t at least have a smartphone with 3G capability? Very few people. The security industry would be no exception.
Take the restaurant industry. In the restaurant market their exists competing firms offering products at different economic tiers. On the bottom you have fast food restaurants. I think its safe to assume everyone can procure access to $1 worth of capital to afford a McDonalds cheeseburger, right?
Next there are fast-casual restaurants. These includes brands like Panera Bread and IHOP. These companies offer a higher quality product for a little more money. Then there are casual restaurants. These might include the likes of Chilies or Red Lobster. These restaurants offer a yet higher quality product for a higher cost. Then there are fine dining restaurants. Like that french place I cant afford. Again, higher quality higher price.
The market provides a wide array of products and services tailored to meet our every need. Contrary to popular belief, business owners actually make alot more money, not by providing high cost products to few people, but by providing low cost products to the most people. This is why McDonald’s, as a company is worth much more than that snazzy little French place or any of the casual or fast casual restaurants.
Perhaps I cant afford that fancy french place but Ill hit up IHOP in the morning, am I right? And even if I was homeless and penniless, I could still collect 20 cans to buy a cheeseburger at McDonalds.
I am not promising utopia, there is no such thing – But a voluntary market always provides better than a coercive government monopoly. Why should we all have to eat at McDonalds? We shouldn’t. In the same way, we should have a choice as to who provides us with law enforcement and security services.