Rejoinder to David Friedman on the Economics of Anarchy

Abstract

The received wisdom once stated that anarcho-capitalism would collapse into Hobbes's state of nature, with life nasty, short, and brutish. The problem of competing governments is the problem of externality par excellence. But David Friedman, among others, has argued persuasively that privately financed arbitration agencies can overcome the basic externalities problems behind social order. Unfortunately the matter is not so simple, because the state a coercive monopoly on the use of force may reemerge. Like most advocates of libertarian anarchy, Friedman wishes to have it both ways. Private protection agencies are supposed to be able to produce public goods by cooperating. But somehow collusion, which is a public good for the firms in question (if not for all of society), is supposed to be impossible or unstable. My initial piece argued that the same mechanisms that encourage interagency cooperation also would allow agency collusion. Friedman's comment has not changed my mind about the soundness of this conclusion. The industry for protection services is particularly vulnerable to collusion because it is what I call a network industry. Specifically, the industry is characterized by the following features: