Legislation and military defense have long been described as hallmark purposes for the state's existence. Yet we know that a free market usually produces goods and services more efficiently than any entity not constrained by the competitive pressure. So can't the free market also produce legislation and defense? Famous economists from the Austrian school claim this is possible. In this post we'll explore the main theoretical arguments in favour of this scheme.

Bob Murphy's Chaos Theory is a great reference for this topic. Let's start with legislation first. Consider that even if there is no state apparatus to enforce the prohibition of stealing, people will still want some kind of guarantee or mechanism that reduces the probability that they will, at some point in the future, become victims of theft. It is beneficial for people to engage in mutual agreements, or contracts, safeguarding against such malign activities. Thus, in a free society - one where property rights are generally accepted - all actions would be subject to contract. For clarity, consider that the contract has a clause saying "I promise not to steal from firm X. If I get caught stealing, as established by arbitration Agency Y, I agree to pay whatever restitution that Agency Y deems appropriate." This is a completely voluntary contract and ensures that Agency Y is appropriately just in deciding the outcome of conflict cases. This is because the reputation, and hence the clientele, of firm X depends on the public opinion for firm X, which is itself affected by whether they have hired an objective, just arbitration agency, as judged by the public.

Since people would be submitting themselves contractually to the rulings of an arbitration agency, they will naturally expect nothing but the highest reputation and quality defense from these agencies. But likewise, companies will expect at least some form of restitution in the event of theft, so the arbitrators cannot be overly lenient in their verdicts. Thus, a trade-off exists on both sides, pushing the market of arbitration to an equilibrium where maximal justice with respect to all conflicting sides is delivered.

What if a person is found guilty but has no money to pay the restitution? In this case we need someone to cover for him - an insurance firm, of which that person is a paying client. So here are the incerntives: if the insurance company believes the person is likely to cause trouble, then it will charge them higher premiums. If the person refuses to have insurance altogether, no one will engage in any business activity with him because there would be no one to cover up for any damages that he may cause. Thus, to live an easy life, one should have insurance and actively avoid engaging in any malign activities. Some people who have no insurance will still commit crimes, true. But these cases occur in any legal system.

Wars between insurance companies will also be very unlikely because war is expensive and in a market system it is difficult to externalise the costs of war onto others. Private mercenaries will receive no special privileges to engage in violence, unlike current government soldiers. The agencies that interpret the laws will likely be different from the ones enforcing them thus there is nothing that would make wars between insurance companies attractive or economically viable.

Who defines property rights? How can I prove that the house I live in is actually owned by me? Again, establishing a title registry is a practical problem and there will be companies specialized in solving it. They will likely develop a complicated hiararchical web of records specifying who owns what. Those companies publicizing property titles will not be the ones who are enforcing property rights, thus assuring no conflict of interests.

Thus, if we have a system of valid and recognized property titles, then a contractual system governing the exchange of those titles would form a stable basis for private law. The satisfaction of the if clause could itself be baked into each contract, e.g. something like "We agree to pay any debts so long as the obligations have been spelled out in a valid contract, according to the terms described by firm Z". This shows that detailed contingencies, e.g. those in contract law, could be incorporated themselves into the contracts.

Additionally, in the contract between a client and a firm there could be clauses stating that the company will pay a certain amount of money to the client if any accident happens during its services. This would require insurance companies on the companies' side and would incentivize them to reduce the likelihood of such accidents. This mechanism will guarantee high product quality and safety.

Now consider the case for private defense. Obviously virtually everyone would like to live in peace and prevent attacks on his property. And similar to a natural disasters, clients could sign insurance contracts against warring countries. It will be up to the insurance companies to provide the best defense, for which naturally they will charge a premium fee. As the competition between these insurance agencies increases, the quality of the defense provided will go up and the price will go down. Securing the territory's perimeter will likely require hiring a contractual army, strategic officers, building high tech systems, various defenses and deterrents.

Skeptics would argue that such private defense will likely have a huge free rider problem. While, indeed, free riders might exist, they will likely be a negligible part of the community and will not pose a problem to the establishment of defense in general. Consumers in the defense market are not homogeneous. Those who own large infrastructure - key roads, bridges, shopping malls, have more to lose when it comes to foreign attacks and are more likely to invest in defense, irrespective of whether others do so. Thus, defense contracts will be signed for sure. There might be spillover when it comes to individual households but it is likely that they will also not have large capability to influence the market, precisely because they are not large buyers of defensive services.

Overall, a market for defensive services will be all-around more efficient compared to state-led defense systems. The profit and loss signals in a market anarchy setting serve to provide useful information to consumers and producers, allowing them to adjust according to the current dynamic situation. Compared to that, adjustments in the state-owned army happen almost blindly, in a top-down inorganic way, with large time lags between one's action and its effects. Innovation is slower, when it's not stifled, and there is little accountability to the actual citizens that often become victims of war.

Thus, from an economic calculation point of view, market anarchy is a more computationally efficient solution to the problem of defense. As a result, it is likely that all else being equal, a private defense force will obliterate a state-owned one. This is not to say that a huge Panzer division cannot roll through a small market anarchy community. Of course it can, these are lose-lose situations and they exist in life. But the important thing is to have the right incentives. It should be difficult to externalise the costs of war onto the populace. It should be difficult to "sell" the idea that conscription is needed. It should be made obvious that largescale war benefits no one except the people in charge who do not suffer the costs of the war effort. In all these aspects, a private defense force is more efficient and will fare much much better than one of the same size but which is state-owned.