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NOTE Private Defense

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Essay 2. Private Defense

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Virtually everyone agrees that a government is needed to provide the essential service of military defense.

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People with an open mind may be genuinely sympathetic to the arguments for a free society,

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yet they regard all the clever blueprints for an anarchist social order as hopelessly naive,

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I believe, because a community based on voluntary relations would apparently be helpless in

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the face of neighboring states. This essay claims that such a view, though widespread,

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is completely false. There is nothing intrinsic to military defense that requires state provision.

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The free market can provide defense more cheaply and more effective than the government can.

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It is foolish and reckless to entrust the state with the protection of civilian lives

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and Property.

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Private defense forces would enjoy a tremendous advantage, and in all but the most lopsided

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contests would slaughter their government adversaries.

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1.

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Insurance

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In an anarchist society committed to the sanctity of private property and contract, insurance

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companies would most likely oversee defense services.

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To see how this market would operate an analogy would be useful.

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Imagine a large city located on a major fault line.

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Every so often the residents endure a severe earthquake which kills dozens of people and

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causes billions of dollars in property damage.

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To cope with the risk of such disasters, people purchase insurance for their lives and property.

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Policyholders pay a fixed premium while the insurance agencies pledge to indemnify the

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are the estates of anyone who suffers bodily or financial harm during an earthquake, according

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to the precise terms specified in the contract. The force of competition keeps the price of

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such insurance reasonable. Actuaries can estimate the expected costs per period of providing

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certain levels of coverage and thus calculate the minimum premiums that would allow the

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and the insurer, all things considered, to break even in the long run.

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If the market rates exceeded these minimum prices, new firms will have an incentive to

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enter the insurance market to reap the profits.

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Their entry would drive insurance premiums down towards the actuarially fair rates.

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It is crucial to realize that the behavior of the residents greatly influences the city's

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and thus the total bill paid out by insurance companies following each disaster.

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Buildings, roads and bridges can be designed with varying degrees of structural integrity and construction costs.

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The better the design, the greater its expense.

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Through their premium structure, insurance companies provide incentives for safer designs, thus defraying their higher costs.

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Profit-hungry businesses will thereby produce buildings and infrastructure exhibiting the optimal combination of durability and price without any need for government codes and inspectors.

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In addition to encouraging sturdier designs, insurance companies could use other means to reduce their exposure.

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Exposure. They might employ teams of seismologists to forecast earthquakes and publicize these

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findings as a service to their customers. For those citizens too poor to afford housing

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in quake-proof buildings, the insurance companies can construct shelters and require that these

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policyholders evacuate their buildings and retire to the shelters in an emergency. In

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general an insurance company will gladly spend funds to protect its clients and their property

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so long as the expected reduction in liability claims is sufficient to justify the expenditure.

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Just as the free market can provide the optimal response to dangerous earthquakes, so too

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can it provide the best protection from foreign militaries. Like natural disasters, wars bring

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widespread death and destruction. In market anarchy, insurance companies would provide

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coverage for these losses too, and would thus have a great financial interest in deterring

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and repelling military attacks.

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2. Financing.

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It is easy enough to imagine a system of private mail delivery or even highway construction.

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In contrast, free market defense presents a conceptual hurdle, since it is not clear

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what would be the voluntary analogues to government taxation and military spending.

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Funds from foreign aggression is a classic public good, and as such seems the perfect

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candidate for government provision. Without the ability to extort revenues from all citizens,

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how could private firms raise the funds required by modern militaries? After all, any individual

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citizen could refuse to buy the product, yet still enjoy the security made possible by

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by his neighbors' contributions.

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On a practical level, hundreds of small decentralized armies would surely be wiped out by a consolidated

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attack from a neighboring state.

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The framework described in the first section avoids these apparent difficulties. In a free

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society it is not the average person, but rather the insurance companies that would

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purchase defense services. Every dollar in damage caused by foreign aggression would

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would be fully compensated, and thus insurers would seek to protect their customers' property

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as if it were their own. Because of economies of scale, coverage for large geographical

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regions would likely be handled through a few dominant firms, ensuring standardized

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pricing and a coordinated defense. It will be useful to elaborate on this hypothetical

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consolidation. Suppose we start in an initial anarchist society with no defense services

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Imagine that the one serious military threat is invasion and conquest by a certain mercurial neighbour.

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The residents of this free society take out insurance policies on their lives and all major property,

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such that the total claims that would follow an invasion are estimated at $1 trillion.

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The insurance agencies hire geopolitical consultants and believe that the annual risk of attack is 10%.

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If the society is composed of 10 million people, the per capita expenditure on insurance from foreign aggression is $10,000.

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On top of this hefty expense, the residents remain completely vulnerable.

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In this bleak situation, an executive at the Ace Insurance Company has a brilliant idea.

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He can undercut his rivals and offer the same level of coverage for only, say, $5,000 per

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person, half the price charged by his competitors. He can afford to do this by spending some

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of his revenues on military defenses and thereby lower the probability of foreign conquest.

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For example, he might pay private defense agencies $40 billion a year to maintain helicopters,

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banks, trained personnel, etc., and be on constant alert to repel any attacks. If these

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preparations reduced the chance of foreign invasion to only, say, one-half of one percent

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per year, then they would pay for themselves. The innovative insurance executive would reap

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huge profits and capture the market for military liability, while the residents would enjoy

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enjoy increased security and lower premiums. With property safe from foreign expropriation,

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investment and population growth would be stimulated, allowing greater economies of

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scale and further rate cuts.

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Free Riders

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Does the above system really avoid the perennial problem of private defense? That is, can it

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overcome the free rider problem?

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After Ace Insurance entered into long-term contracts with defense agencies, what would

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stop a rival firm such as Mucha Insurance from undercutting Ace? After all, the likelihood

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of property damage would be the same for Mucha's clients as for Ace's, yet Mucha wouldn't

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spend a dime on military expenditures. This reasoning is perfectly valid, yet the case

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for private defense remains strong. In the first place, the clients of the insurance

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These companies are not homogenous, and consequently the market for defense is far more lumpy than

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assumed in standard economic models. Although above we discussed per capita premiums, this

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was only to give the reader a rough idea of the expenses involved. In reality, large firms

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would provide the bulk of revenue for the insurance industry. The policies taken out

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on apartment complexes, shopping malls, manufacturing plants, banks and skyscrapers would dwarf

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those taken out by individuals. Consequently, there wouldn't be the nightmarish bargaining

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problem that so worries the sceptics of private defence. The brilliant executive at Ace Insurance

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would be perfectly aware of the above considerations. If necessary, he would write only long-term

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contracts and would make them conditional on the acceptance of a minimum threshold of

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of Clients. In other words, he would offer a package deal to the major companies, but

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the special low rates would only apply if a sufficient number of those policies were

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sold. It is true that this suggested remedy is rather vague. There are many interesting

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issues studied in cooperative game theory concerning the bargaining process of these

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These large firms and how the costs of defense would be split among them.

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But make no mistake, military defense would be adequately funded for the simple reason

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that shareholders of rich companies are anything but reckless when it comes to money.

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Because of their size, the biggest companies couldn't ignore the effect of their own behavior

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on military preparedness.

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Furthermore, certain types of property, airports, bridges, highways, power plants and, of course,

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Equipment would be far likelier targets of foreign attack, and their owners would thus

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constitute an even smaller group to benefit disproportionately from defence expenditures.

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This heterogeneity would weaken further the spillover character of defence services, making

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an efficient arrangement all the easier to achieve. Those companies that ended up paying

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the most might perceive the arrangement as unfair, but there would nevertheless always

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The highest contributors might even advertise this fact, much as large corporations make ostentatious donations to charity in order to carry goodwill.

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Thus we see that the lumpiness of a realistic defense industry mitigates the impact of the positive externalities, spillover effects of military spending.

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Because a few critical industries will pay for a basic level of defense, regardless of contributions from others,

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and contributions from others, the only possible harm of free riding would be an unfair burden placed on certain corporations.

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In any event, it isn't obvious that there would even be widespread free riding.

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As we shall now argue, defense services can largely be restricted to paying customers after all.

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In the earlier discussion, we treated a foreign invasion as an all-or-nothing proposition.

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The neighbouring state either quickly conquered the anarchist society or was effectively deterred from attacking.

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In reality, wars can remain in stalemate for many years.

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During such protracted struggles, insurance companies would certainly be able to deploy their military forces so as to limit gratuitous protection for non-clients.

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Most obvious, naval escorts would only protect convoys of paying customers.

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Customers. All other shipping would be at the mercy of foreign fleets. Anti-aircraft

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and missile defences would only protect those regions in which paying customers owned property.

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And of course, the owners of real estate on the border would always pay for its protection,

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lest the defence agencies pull their tanks and troops back to a more defensible position.

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Government vs. Private Military Expenditures

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The above considerations show that people living in market anarchy could overcome the

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free rider problem and raise funds adequate for their defence. Yet there is a symmetric

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counter-argument that is generally overlooked. It is true that coercive taxation allows governments

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to acquire immense military budgets, but this advantage is more than offset by the tendency

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of Governments to squander their resources. For any meaningful comparison between government

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and private defence budgets, the latter needs to be multiplied several-fold, since private

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agencies can purchase equivalent military hardware at only a fraction of the prices

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paid by governments. Everyone knows that governments are profligate with their money and that military

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budgets are always a huge component of total spending. Since their operations are often

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When conducted in foreign lands and shrouded in secrecy, a military can spend its funding

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with virtually no accountability. Taxpayers were shocked when an audit revealed that the

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U.S. Pentagon had spent $600 per toilet seat. What few people realize is that this example

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is typical. Because of the government's monopoly, no one has any idea how much an F-14 Tomcat

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This last point is important, so I want to stress that it is caused by the very nature of government, not merely the accidents of history.

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If a government raises its funds through taxation, then it must justify this theft by spending

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In the most despotic regimes, the rulers can't simply pocket the money. Consequently, not a single official in the entire government has any personal incentive to identify and eliminate wasteful spending.

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In market anarchy, on the other hand, defense services would be sold in the open market. Fierce competition among suppliers and cost-consciousness among the buyers would keep the prices of toilet seats as well as money.

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The first two sections demonstrated that military defence, like any other service, can be provided on the free market.

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To appreciate the tremendous advantage that this gives to the anarchist society, it will be useful to first explore the peacetime superiority of private industry versus government planning.

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To appreciate the tremendous advantage that this gives to the anarchist society, it will be useful to first explore the peacetime superiority of private industry versus government planning.

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To this end, we will review the critique of socialism.

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The traditional opponents of socialism argued that it has insufficient incentives for the average worker.

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Without tying pay to performance, people would shirk and output would be far

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lower than in a capitalist economy.

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Only if a new socialist man evolved, who enjoyed working for his comrades as

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much as for himself, could a socialist system succeed.

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Although valid, this criticism misses the essence of the problem.

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It took Ludwig von Mises to explain in a 1920s paper

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The True Floor with Socialism

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Without market prices for the means of production, government planners cannot engage in economic calculation and so literally have no idea if they are using society's resources efficiently.

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Consequently, socialism suffers not only from a problem of incentives, but also from a problem of knowledge.

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To match the performance of a market economy, socialist planners would not need to be merely angels committed to the common wheel, they would also need to be gods capable of superhuman calculations.

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At any time, there is only a limited supply of labour, raw materials and capital resources that can be combined in various ways to create output goods.

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A primary function of an economic system is to determine which goods should be produced,

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in what quantities and in what manner from those limited resources. The market economy

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solves this problem through the institution of private property, which implies free enterprise

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and freely floating prices. The owners of capital, labour and natural resources, the

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means of production, are free to sell their property to the highest bidder. The entrepreneurs

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Producers are free to produce and sell whatever goods they wish. The ultimate test of profit

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and loss imposes order on this seeming chaos. If a producer consistently spends more on

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his inputs than he earns from selling his output, he will go bankrupt and no longer

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have any influence on the manner in which society's resources are used. On the other

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hand, the successful producer creates value for customers by purchasing resources at a

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None of this is true in the socialist state. Even if they truly intended the happiness of their subjects, the government planners would squander the resources at their disposal. With no test of profit and loss, the planners would not be able to make money.

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Manors would have no feedback and would thus be operating in the dark. A decision to produce

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more shoes and fewer shirts or vice versa would be largely arbitrary. Furthermore, the

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individuals to ultimately decide the fate of society's resources would be selected

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through the political process, not through the meritocracy of the market.

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4. Private vs. Government Defense

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The general advantages of private industry over government planning operate just as well

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in the field of military defense. Because the military derives its funding in a coercive

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manner, the link between output and consumer satisfaction is severed. Because of their

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monopoly, a state's armed forces can bumble along indefinitely with no benchmark of comparison.

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Even in a limited state whose subjects enjoy a large degree of economic freedom, the armed

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and forces constitute an island of socialism.

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To get a sense of the problems involved, imagine the situation faced by Joseph Stalin during

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World War II.

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As absolute dictator, Stalin had at his disposal every resource, including human, in the Soviet

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Union.

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Stalin needed to use these resources to achieve his goals, the foremost of which, we shall

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Stalingrad was the preservation and expansion of his political rule.

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Some of Stalin's choices were obvious enough. Clearly he needed to overthrow the Nazi regime,

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and clearly this required, before their surrender, defeat of the German armies besieging Stalingrad.

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As we become more specific, however, Stalin's choices become less clear. Yes, he should

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If you would use all available steel for the production of military equipment, there is no need for new tractors at the moment.

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But how much of this steel should be devoted to planes, to tanks and to witch models, to mortars, to bombs or to railroads needed to move material to the front?

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Yes, all civilians, young and old, sick and healthy, should devote their lives to repelling the Huns.

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Consider precisely how many people should engage the enemy, work in tank factories, dig trenches

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around the city, or forage for food to ensure survival through the winter.

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Even those tactical and strategic decisions normally made by military commanders have

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the same flavour.

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Yes, a sharpshooter such as Vasily Zaitsev should be used as a sniper, rather than as

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a bomber pilot or factory worker.

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But how best to exploit Vasily?

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Would he be ordered to kill as many Germans as quickly as possible? Surely not, for with

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every shot who reveals his position. But would it also be far too conservative to have him

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wait months in the hope of getting one clear shot at a general?

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It is evident that Stalin, or his subordinates, must make all of these decisions and thousands

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more just like them largely through arbitrary guesswork. The wartime goal of expelling the

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Economic calculation allows entrepreneurs to judge whether a plan has been profitable.

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have led to the deaths of millions of people. Just as a free market in agriculture would

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have prevented famine, a free market in defense would have prevented such monstrous casualties.

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Private Defense

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Economic calculation allows entrepreneurs to judge whether a plan has been profitable.

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It allows successful ventures to expand and causes failed operations to disband. The market

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constantly readjusts itself to the changing data, conditions of supply,

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consumer demand, technical knowledge. Now that we understand the manner in which

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insurance companies could objectively and quantitatively appraise military

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success, it is easy to see the advantages of private defense. In a situation

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comparable to the Battle of Stalingrad, the anarchist community would respond in

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the most efficient manner humanly possible. Insurance companies would

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would determine the relative value of various military targets and place bounties on them for capture or elimination.

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Individuals left to their own spontaneous devices would try various techniques to produce this service.

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Some might buy tanks and hire men to attack the Germans head-on.

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Others might hire sharpshooters to snipe at them from afar.

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Some might buy mortars and shell them.

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Some might hire propagandists and offer bribes to law defectors.

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Over time, only the best defence firms would survive.

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They would expand their operations, increasing the overall efficiency of the war effort.

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Because they would be operating in a system of property rights,

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they would need to purchase all of their resources, including labour.

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This would ensure that the resources were being used as effectively as possible.

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For example, those areas on the front in urgent need of soldiers or ammunition would bid up their wages or prices,

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avoiding the arbitrariness of government troop deployment and supply.

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Even if, to reduce transaction costs and maximize response time, a single firm monopolized the defense of a region,

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the firm could still engage in internal cost accounting and calculate the profitability of its various branches.

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Perhaps more important, free competition would ensure that technological and strategic advances

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were rewarded and quickly implemented. In contrast, a government military must rely

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on a bureaucratic chain of command where innovation, especially from outsiders, is stifled. In

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a very real sense, a military confrontation between a statist and a free society would

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would be a war of a few minds versus millions.

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Apples and Oranges

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This theoretical discussion is sure to provoke the cynic to remark,

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I'd like to see what your insurance companies would do if they met a panzer division.

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But such a question misses the point.

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We have demonstrated that a private defense system is the most effective, not that it

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is invulnerable.

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Yes, a small society of anarchists would be unable to repel the total might of Nazi Germany,

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but a small society of statists would fare even worse, and in fact, plenty of government

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militaries were obliterated by Hitler's armies.

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Expertise One might wonder whether private individuals

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would be as knowledgeable about military affairs as government professionals. Surely Colin

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William Powell makes a better general than Bill Gates.

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This fact rests on the monopoly status of the US military.

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If private individuals were allowed to compete with Pentagon generals, the incompetence of

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the latter would be manifest.

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The average stockholder is no expert in professional sports or foreign cuisine, yet private ownership

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still yields excellent baseball clubs and French restaurants.

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The savvy executives hire others to identify talented individuals.

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Intelligence

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Even if a military bound by property rights and contract would have fared well in wars

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of an earlier era, what of modern warfare with its sophisticated espionage?

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Could there be anarchist spies?

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Private defense agencies would gather research just as any company does.

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They would hire analysts and collect information in any way legally possible. Presumably the

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most powerful computers and smartest codebreakers would reside in an anarchist society. Whatever,

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if any, the loss caused by prohibitions on wiretaps and torture, it would be more than

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recovered in efficiency.

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On this topic, we note that counterintelligence would probably be quite limited. Defense agencies

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These would have possibly several major buyers and would be operating in an open market.

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Consequently, they would need to advertise the capabilities of their products. This openness,

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however, is a virtue. What better way to avoid military defeat than by showing potential

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enemies how advanced their anarchist foe would be? The defence agencies in a free society

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would have nothing to hide from governments.

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Do or Die

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The nature of military defense makes it less amenable to the trial and error

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correction mechanism of the free market.

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A nation can spend years in preparation for an attack

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without receiving any feedback on the quality of its efforts.

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A sudden invasion could then wipe out the private defenders before they had a

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chance to adapt.

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This situation is different from the typical industry in which repeated

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transactions day in day out allow experimentation with various techniques

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and the weeding out of inefficiencies.

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To meet this objection we must remember that private defense agencies, unlike

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their government counterparts, need not be limited to regional clients.

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A multinational defense agency could provide, say, fighter jet services to

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to several insurance companies in various areas of the world. Although inadequate strategies

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or training might remain hidden until a sudden disaster, at most only one of the agency's

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franchises would be lost. The others would study the incident and learn to avoid it. In

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such an environment, military strategists from all over the world would collaborate

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in the New Art of Defense. While government planners guarded their precious secrets and

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protocols, anarchist agencies would hire the best and brightest minds. Expert personnel

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would be rotated from region to region, providing training in the latest tactics and equipment.

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High-tech weapons would be stockpiled in central locations and loaned out to anarchist societies

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This sharing, unthinkable among government militaries except in the direst circumstances, would further reduce the costs of private defence.

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Nuclear Weapons

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The case for private defence must deal with the possibility of nuclear blackmail.

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In modern warfare, it would seem that only a nation that can credibly threaten to obliterate its opponents is safe from a first strike.

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that can credibly threaten to obliterate its opponents is safe from a first strike.

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The anarchist society would probably not develop or even own nuclear weapons.

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In the first place, the term defense has been adopted consciously in this essay and is not

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the euphemism as used in government propaganda, because they would gain nothing from foreign

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and Conquest, since this would constitute theft and would be fully prosecuted within

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the anarchist courts, the owners of defense agencies would have no reason to spend money

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on weapons that were ill-suited to tactical defense. Precision of weaponry would be of

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paramount importance since battles would be fought near or amidst the defense agency's

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customers. Another, perhaps more significant, consideration is that defense agencies would

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would be most likely legally prohibited from owning weapons of mass destruction.

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The anarchist legal system would operate on the same principles of voluntary contract

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that underlay the defense industry.

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Insurance companies would vouch for individuals and pledge to compensate anyone victimized

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by their clients.

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In an effort to limit their liability, insurers would require certain concessions from their

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customers.

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It is hard to imagine that an insurance agency would pledge, say, one million dollars for

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any innocent person killed by defense firm X when firm X held a stockpile of hydrogen

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bombs. Despite its probable lack of nuclear weapons, the anarchist society remains a viable

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option. Most obvious, there are statist societies that currently survive without nuclear devices.

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By its very nature, the anarchist society would be a completely harmless neighbour.

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No state would ever fear attack from an anarchist military, and so there would be no need to preemptively strike it, unlike the Japanese on Pearl Harbour.

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With no taxation, regulation, tariffs or immigration quotas, the anarchist society would be of tremendous value to all major governments.

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They would surely act to protect it from intimidation by a rival nuclear power.

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Lessons from History

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The historical record supports our theoretical discussion.

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Government military campaigns are characterized by gross blunders that

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would be comical if not so tragic.

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The only reason certain powers such as the United States

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maintain their aura of dominance

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is that they only fight other governments.

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So far we have restricted attention to government militaries per se.

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In reality, of course, a state hampers all of its operations with wartime

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controls,

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further weakening its military effectiveness.

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Price controls cause not only consumer vexation

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through ration cards and meatless Tuesdays,

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but also reduce output.

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Modern wars are won with material. It is no accident that the freest nations usually

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win their wars.

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It is a statist myth that abuse of rights must be met in kind. Bertrand de Juvenal,

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in his classic On Power, argues that the other European countries had no choice but to institute

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conscription in response to Napoleon. Yet this example only proves the dismal imagination

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of Government Planners.

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Surely a resilient anarchist society would have used its superior technology and industrial

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capacity to furnish voluntary armies with forts, cannons, horses and protective armour,

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sufficient to repel more numerous yet ill-equipped and poorly trained conscripts.

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The analogy of France fighting other European powers is inappropriate. If a government army

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If anybody ever attacked an anarchist society, the situation would be akin to the Vietnam

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War with the technological roles reversed. There would be a clash of cultures similar

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to the encounter between Pizarro and the Incan Emperor Atahualpa. The advantages of private

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property are as manifest in the production of defense services as with any other. There

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is nothing magical about government military forces if they have fewer tanks and planes

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A tiny country such as Taiwan can outperform Communist China in the economic arena. It could defend itself just as efficiently if its residents would only abandon their faith in government, police and armies and embrace total freedom.