View source for Book Review: The Machinery of Freedom

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{{DES | des = [[Scott Alexander]] reviews the third edition of his friend's book.  He points out that some things are very interesting, but has MANY criticisms.  "My overall conclusion is that I am delighted by this fascinating and elegant system and would very much like to see it tried somewhere very far away from me." | show=}}
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[conflict of interest: David Friedman is an amazing person who has been very nice to me and among other things hosted the San Jose SSC meetup earlier this month]

David Friedman’s The Machinery of Freedom is half Libertarianism 101: Introduction To Libertarianism, and half Libertarianism 501: Technical Diagrams For Constructing An Anarcho-Capitalist State.

And aside from either of these, it’s interesting as a historical artifact. The first edition was published in 1973; the Third Edition copy I read is from last year, but the updates are minor and the book keeps its 1973 feel – including a discussion of health care economics which puts the price of a doctor’s visit at $10.

One of my takeaways was how new libertarianism was in 1973. The introduction says:

These peculiar views of mine are not peculiar to me. If they were, I would be paying Harper and Row to publish this book instead of Harper and Row paying me. My views are typical of the ideas of a small but growing group of people, a ‘movement’ that has begun to attract the attention of the national media. We call ourselves libertarians.

This book is concerned with libertarian ideas, not with a history of the libertarian movement or a description of its present condition. It is fashionable to measure the importance of ideas by the number and violence of their adherents. That is a fashion I shall not follow. If, when you finish this book, you have come to share many of my views, you will know the most important thing about the number of libertarians – that it is larger by one than when you started reading.

There is something very innocent about expecting someone to become a libertarian after reading a book arguing for libertarianism, something very much a product of the time when the movement was new and anything was possible. Friedman discusses and debates the views of Ayn Rand not as some sort of ascended cultural archetype, but as a fellow theorist who happens to be writing around the same time. It makes the book somehow fresher than one that starts from the perspective of “Okay, you’ve heard all of these arguments before, so let me preach to the choir and see what happens.”

But sometimes the book is dated in ways less innocuous than ten-dollar doctor visits. For example, in Chapter 5, “The Rich Get Richer And The Poor Get Richer,” Friedman argues against excessive concern with inequality, saying:

In absolute terms, the rich have gotten richer, but the gap between rich and poor seems, so far as very imperfect statistics make it possible to judge, to have ben slowly closing…we can note that both the rise in the general standard of living and the decreasing inequality appear to have been occurring fairly steadily over a long period of time, in a variety of different more or less capitalist societies…in the previous chapter I argued that liberal measures tend to injure the poor, not benefit them, and to increase, not decrease inequality. If that has been true in the past, then the increasing equality we have experienced is in spite of, not because of, such measures…

Even if the capitalist invests all the income from his capital and consumes none of it, his wealth will only grow at the rate of return on capital. If the interest rate is less than the rate at which the total wages of workers increase, the relative wealth of the capitalists will decline. Historically, the rate of increase in total wages has run about 5 to 10 percent a year, roughly comparable to the interest rate earned by capital. Furthermore, capitalists consume part of their income; if they did not, there would be little point in being a capitalist. The share of the national income going to capital in this country has varied over time but not consistently increased, as shown in Appendix III.

The heartbreaking thing is that every word of this was true in 1973. In fact, 1973 is frequently given as the inflection point, when for some reason middle-class wages stopped rising at the same rate as the wealth of the top 1% and capital’s share of income started a steady climb (this is frequently blamed on Reagan, but started almost a decade before his presidency).

There are enough issues like this that they make the book’s arguments less compelling, or at least cry out to be addressed. Likewise, the book’s statistics are fascinating and in many cases very counterintuitive and convincing, but I have a lot of trouble double-checking them because they’re mostly 1970s statistics.

I can’t do justice to the Libertarian 101 arguments in this review because there are too many of them on too many different topics. This is too bad because they are excellent and fascinating and you should really read them. Aside from recommending you get the book, I’ll shove those into a separate Highlights post later this week. But for now I want to focus on the claim that I found most interesting: Government claims legitimacy partly from its role in helping the poor, but the costs fall disproportionately on the poor and it screws them over more than any other group:

Suppose that one hundred years ago someone tried to persuade me that democratic institutions could be used to transfer money from the bulk of the population to the poor. I could have made the following reply: “The poor, whom you wish to help, are many times outnumbered by the rest of the population, from whom you intend to take the money to help them. If the non-poor are not generous enough to give money to the poor voluntarily through private charity, what makes you think they will be such fools as to vote to force themselves to take it?

I think I have a good answer to this question. Nobody’s vote makes very much difference, so people are happy to vote for signaling/psychological reasons rather than financial ones. If casting my vote to help the poor makes me feel like a good person, but losing money in redistribution schemes makes me poorer, well, my vote 100% determines whether I feel good or not, but only 1/300-million determines whether I get poorer. This might also be profitably mapped onto construal level theory, ie Robin Hanson’s Near Mode vs. Far Mode.

Anyway, having determined that democracy should not be expected to help the poor, he gets on to demonstrating that in fact it doesn’t:

There are some programs that give money to the poor – Aid to Families With Dependent Children, for instance. But such programs are vastly outweighed by those having the opposite effect – programs that injure the poor for the benefit of the not-poor. Almost surely, the poor would be better off if both the benefits that they now receive and the taxes, direct and indirect, that they now pay were abolished.

He then goes on to list examples, including Social Security, food subsidies (which increase food prices and go to rich farmers), state universities (since they cost tax money and mostly rich people go to university), and urban renewal projects (which bulldoze low-quality housing that the poor can afford to create high-quality housing that they can’t, thus pushing up their housing prices).

I don’t know much about the 1973 situation, but a lot of these don’t seem very convincing nowadays. Social Security no longer appears regressive: as per Wikipedia, “for people in the bottom fifth of the earnings distribution, the ratio of [Social Security] benefits to taxes is almost three times as high as it is for those in the top fifth.” And by my understanding, people who earn less than about $20,000 don’t pay federal income taxes at all, meaning the burden of universities, etc don’t fall upon them. A Cato Institute study finds that poor people on welfare can get benefits packages worth up to about $20,000. It seems really unlikely that whatever they have to pay because of farm subsidies or whatever compensates for that.

But Friedman also makes the stronger point that when government programs fail, it’s the poor who are most affected and who have the fewest other options. For example, he notes that the cost per capita of law enforcement/police/courts is $40 (remember, this is 1973!) and estimates that minus government waste and corruption, the free market could provide extremely competent policing for $20. He says:

There are many inhabitants of the ghetto who would be delighted to pay twenty dollars a year if in exchange they actually got protection; many of them have more than that stolen every year as a result of the poor protection they get from our government-run protection system. They would be even happier if at the same time they were relieved of the taxes that pay for the protection that the government police does not give them. In spite of popular myths about capitalism oppressing the poor, the poor are worst off in those things provided by government, such as schooling, police protection, and justice. There are more good cars in the ghetto than good schools.

I somewhat agree with the spirit of this quote, but certainly some of the problem is that poor people live in poor areas that collect little tax revenue and underfund their social services. Bigger government could solve this problem – just have school district funding set at the state or federal level. It’s less obvious that smaller government could – poor people would still have X dollars to spend on schools, for low values of X. But here we get into complicated proposals like vouchers and private policing that I’ll leave for later.

II.

Let’s get to what we’re really here for – the crazy anarcho-capitalist utopia.

This quote is very long, but it’s worth it:

How, without government, could we settle the disputes that are now settled in courts of law? How could we protect ourselves from criminals?

Consider first the easiest case, the resolution of disputes involving contracts between well-established firms. A large fraction of such disputes are now settled not by government courts but by private arbitration of the sort described in Chapter 18. The firms, when they draw up a contract, specify a procedure for arbitrating any dispute that may arise. Thus they avoid the expense and delay of the courts.

The arbitrator has no police force. His function is to render decisions, not to enforce them. Currently, arbitrated decisions are usually enforceable in the government courts, but that is a recent development; historically, enforcement came from a firm’s desire to maintain its reputation. After refusing to accept an arbitrator’s judgment, it is hard to persuade anyone else to sign a contract that specifies arbitration; no one wants to play a game of ‘heads you win, tails I lose’.

Arbitration arrangements are already widespread. As the courts continue to deteriorate, arbitration will continue to grow. But it only provides for the resolution of disputes over pre-existing contracts. Arbitration, by itself, provides no solution for the man whose car is dented by a careless driver, still less for the victim of theft; in both cases the plaintiff and defendant, having different interests and no prior agreement, are unlikely to find a mutually satisfactory arbitrator. Indeed, the defendant has no reason to accept any arbitration at all; he can only lose–which brings us to the problem of preventing coercion.

Protection from coercion is an economic good. It is presently sold in a variety of forms–Brinks guards, locks, burglar alarms. As the effectiveness of government police declines, these market substitutes for the police, like market substitutes for the courts, become more popular.

Suppose, then, that at some future time there are no government police, but instead private protection agencies. These agencies sell the service of protecting their clients against crime. Perhaps they also guarantee performance by insuring their clients against losses resulting from criminal acts.

How might such protection agencies protect? That would be an economic decision, depending on the’-costs and effectiveness of different alternatives. On the one extreme, they might limit themselves to passive defenses, installing elaborate locks and alarms. Or they might take no preventive action at all, but make great efforts to hunt down criminals guilty of crimes against their clients. They might maintain foot patrols or squad cars, like our present government police, or they might rely on electronic substitutes. In any case, they would be selling a service to their customers and would have a strong incentive to provide as high a quality of service as possible, at the lowest possible cost. It is reasonable to suppose that the quality of service would be higher and the cost lower than with the present governmental system.

Inevitably, conflicts would arise between one protective agency and another. How might they be resolved?

I come home one night and find my television set missing. I immediately call my protection agency, Tannahelp Inc., to report the theft. They send an agent. He checks the automatic camera which Tannahelp, as part of their service, installed in my living room and discovers a picture of one Joe Bock lugging the television set out the door. The Tannahelp agent contacts Joe, informs him that Tannahelp has reason to believe he is in possession of my television set, and suggests he return it, along with an extra ten dollars to pay for Tannahelp’s time and trouble in locating Joe. Joe replies that he has never seen my television set in his life and tells the Tannahelp agent to go to hell.

The agent points out that until Tannahelp is convinced there has been a mistake, he must proceed on the assumption that the television set is my property. Six Tannahelp employees, all large and energetic, will be at Joe’s door next morning to collect the set. Joe, in response, informs the agent that he also has a protection agency, Dawn Defense, and that his contract with them undoubtedly requires them to protect him if six goons try to break into his house and steal his television set.

The stage seems set for a nice little war between Tannahelp and Dawn Defense. It is precisely such a possibility that has led some libertarians who are not anarchists, most notably Ayn Rand, to reject the possibility of competing free-market protection agencies.

But wars are very expensive, and Tannahelp and Dawn Defense are both profit-making corporations, more interested in saving money than face. I think the rest of the story would be less violent than Miss Rand supposed.

The Tannahelp agent calls up his opposite number at Dawn Defense. ‘We’ve got a problem. . . .’ After explaining the situation, he points out that if Tannahelp sends six men and Dawn eight, there will be a fight. Someone might even get hurt. Whoever wins, by the time the conflict is over it will be expensive for both sides. They might even have to start paying their employees higher wages to make up for the risk. Then both firms will be forced to raise their rates. If they do, Murbard Ltd., an aggressive new firm which has been trying to get established in the area, will undercut their prices and steal their customers. There must be a better solution.

The man from Tannahelp suggests that the better solution is arbitration. They will take the dispute over my television set to a reputable local arbitration firm. If the arbitrator decides that Joe is innocent, Tannahelp agrees to pay Joe and Dawn Defense an indemnity to make up for their time and trouble. If he is found guilty, Dawn Defense will accept the verdict; since the television set is not Joe’s, they have no obligation to protect him when the men from Tannahelp come to seize it.

What I have described is a very makeshift arrangement. In practice, once anarcho-capitalist institutions were well established, protection agencies would anticipate such difficulties and arrange contracts in advance, before specific conflicts occurred, specifying the arbitrator who would settle them.

In such an anarchist society, who would make the laws? On what basis would the private arbitrator decide what acts were criminal and what their punishments should be? The answer is that systems of law would be produced for profit on the open market, just as books and bras are produced today. There could be competition among different brands of law, just as there is competition among different brands of cars.

In such a society there might be many courts and even many legal systems. Each pair of protection agencies agree in advance on which court they will use in case of conflict. Thus the laws under which a particular case is decided are determined implicitly by advance agreement between the protection agencies whose customers are involved. In principle, there could be a different court and a different set of laws for every pair of protection agencies. In practice, many agencies would probably find it convenient to patronize the same courts, and many courts might find it convenient to adopt identical, or nearly identical, systems of law in order to simplify matters for their customers.

Before labelling a society in which different people are under different laws chaotic and unjust, remember that in our society the law under which you are judged depends on the country, state, and even city in which you happen to be. Under the arrangements I am describing, it depends instead on your protective agency and the agency of the person you accuse of a crime or who accuses you of a crime.

In such a society law is produced on the market. A court supports itself by charging for the service of arbitrating disputes. Its success depends on its reputation for honesty, reliability, and promptness and on the desirability to potential customers of the particular set of laws it judges by. The immediate customers are protection agencies. But the protection agency is itself selling a product to its customers. Part of that product is the legal system, or systems, of the courts it patronizes and under which its customers will consequently be judged. Each protection agency will try to patronize those courts under whose legal system its customers would like to live.

The idea is that these protection agencies are companies like any other, and so will try to provide a good product at a low cost that satisfies their customers. People can choose their favorite, and so in some sense decide which laws to be bound by. Although they will not have complete flexibility in choosing their laws, lawmaking bodies will be sort of subject to consumer demand.

He correctly points out that contrary to what you might expect this system does not by definition exclude victimless crimes. If you want to hire a police agency that things being gay is a crime, you can pay them money to go find gay people and throw them out of town. Then the gay people will hire their own police agency to defend themselves. I think Friedman believes that opposing homosexuality has a major free rider problem, and that most people like to signal virtue by complaining about them but very few people would be willing to pay money for it. By comparison, gay people would be willing to pay a lot of money to be protected from this sort of thing, so their protection agencies would be stronger than the agencies of whoever wants to kick them out, and they’d stay.

This seems to me overly optimistic. After all, back when only a tiny percent of the country was tolerant of homosexuality, it might be that church groups could raise a lot of money to enforce anti-gay laws, and gay people were mostly poor and couldn’t raise very much money to defend themselves. I think I know what Friedman’s response would be, which is “Yes, and during that time in your real-world statist society, homosexuality was also illegal. Yes, you would have to wait for cultural norms to change before homosexuality would be legalized, but it would very likely be easier to do my way than yours.” I think he’s possibly right.

My overall conclusion is that I am delighted by this fascinating and elegant system and would very much like to see it tried somewhere very far away from me.

I am sure Friedman has to listen to so many objections that he can recite most of them by memory and is sick to death of them. Indeed, he admits this and devotes no small amount of space to rebutting many of them. Will we get taken over by one giant protection racket? Probably not, monopolies are rare in practice. Will criminals get their own protection and arbitration agencies that say crime is okay? Probably not; no other protection agency would agree to arbitrate on their terms, and without arbitration they would be in a war with all the other agencies, which the other agencies would win since legitimate business can mobilize more money than crime can. Would there be constant bloody battles? Probably not; profit-seeking corporations would be too smart to lose money that way when better options like arbitration are available. Would the heads of protection agencies form a pact, then use their combined might to take over the country and become kings? Probably not; right now police chiefs and military generals don’t do this, even though they are in a good position to.

Here are some objections of mine I didn’t see rebutted:

1. People who don’t purchase protection are pretty much fair game for anyone to rob or murder or torture or whatever. This seems harsh, especially since this society is likely to have a sizable underclass. I don’t know if “$20 for a year of police protection” was a reasonable estimate for the 70s, but I expect this would be much costlier now. Compare the percent of people who, pre-Obamacare, still didn’t have health insurance, and how much higher it would have been if there weren’t government programs that kind of got health insurance bundled in with employment.

2. Protection agencies are going to be engaged in constant brinksmanship for the same reason nation-states are engaged in constant brinksmanship. If Agency 1 wanted concessions from Agency 2, it has an incentive to seem kind of crazy and like it might actually declare real war, however unprofitable, in order to bluff Agency 2 into complying. Remember, countries have the same economic incentives to avoid war that companies do, but they still occasionally get involved in them. Even when they don’t, the threat of such leads many resources to be wasted in military buildup.

3. Security companies and their clients are very unlikely to want to pay for the cost of incarcerations. There’s no incentive to pay extra for criminal rights, so convicted criminals are likely to end up facing something like corporal punishment Never mind, this went an unexpected direction and is probably a good thing.

4. If I am the church-funded protection agency charged with flogging gay people, and you are the gay-person funded protection agency charged with protecting them, it’s hard to see what kind of arbitration we would agree on. I…uh…guess this might be another one that isn’t so bad, since that might mean the agencies are forced to actually fight, which raises the cost of being anti-gay to a potentially prohibitive level.

5. There are some things which might decrease crime in an area in general instead of just involving crime against a specific person. For example, adding streetlights, fighting drug abuse, putting troubled youth in after-school programs, fighting the broken window effect. If these are public goods, nobody will be incentivized to pay extra for them.

6. In fact, protection agencies have a strong incentive to make everybody as scared of crime as possible, and in fact to raise the actual crime rate if they can, in order to get people to buy their Premium plan. Given that this is anarcho-capitalism and there are no laws against crime, this can’t possibly end well.

7. It would be hard to have large-scale public laws. Right now Saudi Arabia can have laws about how no woman can go outside unveiled, America can have laws that nobody can go outside unclothed, and some European beaches can have laws saying go ahead and be naked. Likewise, some small villages can have zoning laws saying not to build non-scenic skyscrapers, but Dubai can say to build as high as you want and then some. This seems harder under anarcho-capitalism until people start coordinating the formation of intentional communities, at which point it becomes less anarcho-capitalism and more Patchwork.

8. Gang leaders and barbarian warlords had the chance to become protection agencies like this, but never did. This suggests that this system is unstable or unnatural. It’s possible that once the equilibrium of protection and arbitration agencies is established it will be stable, but of all of the various lawless societies to exist throughout history, none of them coalesced upon this system. Suspicious.

9. An extension of this: it’s unclear that we’re not already living in this society. It’s just that one protection and arbitration agency has completely taken over from all of the others and instituted a policy of using force against those who don’t pay for its services. That’s allowed under anarcho-capitalism because everything is allowed under anarcho-capitalism. So expecting anarcho-capitalism to be stable is expecting the thing that has already happened to not happen again a second time.

10. There seems to be a lot of opportunities for rich people to purchase greater privileges not available to the masses. After all, negotiation results are often determined by a party’s BATNA. Rich people may have access to very strong security companies (or premium plans from regular companies) that could win most fights; they can use this to insist on better arbitration terms. A rich person’s company might only accept basic arbitration (eg punish the rich person for murder) if other companies agree to lopsided deals (like don’t go after the rich person for less dramatic things like sexual harassment. On the other hand, a poorer person’s company might have to accept the worse side of the deal, where the poor person can be prosecuted for a very wide range of crimes against the rich person, including giving offense and not being respectful enough. Yes, it’s easy to see how a company could arise that charges extra in exchange for not accepting these compromises, but this still suggests you’re going to have more rights if you’re able to pay more money.

But the main reason I want this tried far away from me is none of these. It’s just a general expectation that something will go wrong when we try a social system we’ve never tried before. I was very impressed to learn that very few people predicted, before the fact, that Communist countries would have terrible economies. Even the American 1950s opponents of Communism argued that okay, fine, Communist countries will probably outperform capitalist countries economically, but freedom is more important than mere wealth.

If people can’t figure out that Communism might sink the economy, I don’t trust them to figure out all of the things that might go wrong with anarcho-capitalism. Even if David Friedman replies with utterly convincing rebuttals to all of my ten points above, it’s going to be the eleventh point I didn’t think of that makes the system explode.

III.

And this leads me into one of my deepest problems with libertarianism and anarcho-capitalism: why should it work?

I don’t mean the sort of “why should it work” where you answer with specific reasons why no, monopolies won’t form, and no, people won’t routinely sell themselves into slavery, and no, protection agencies won’t form a new feudal ruling class, and no, people won’t bash their heads against public goods problems and externalities forever without any market solutions appearing, and no, the poor won’t starve to death. I mean the very Outside View question of “why is it that, by coincidence, not using force is an effective way to solve all problems?”

Good governance is a really really hard problem. The idea that the solution to this problem contains zero bits of information, that it just solves itself if you leave people alone, seems astonishing. Even if we agree that capitalism works very well by incentivizing companies to do what the consumers wants, there are still a lot of peripheral issues which that just doesn’t cover. Friedman for example is a strong supporter of child rights, because children should mostly be free from coercion from their parents, and that children treated this way turn out better. Now in addition to solving governance with zero bits of information, you have solved optimal child-rearing with zero bits of information. That is implausibly impressive.

Given that the universe is allowed to throw whatever problems it wants at us, and that it has so far gleefully taken advantage of that right to come up with a whole host of very diverse and interesting ones, why is it that none of these problems are best addressed by a centralized entity with a monopoly on force? That seems like a pretty basic structure from a game-theoretic perspective, and you’re telling me it just never works in the real world? Shouldn’t there be at least one or two things where a government, or any form of coercive structure at all, is just the right answer? And can’t we just have a small government that does that?

The closest thing I’ve found to a response here is on page 142, where Friedman makes the following very witty observation:

The internal dynamic of limited government is something with which we, to our sorrow, have a good deal of practical experience. It took about 150 years, starting with a Bill of Rights that reserved to the states and the people all powers not explicitly delegated to the federal government, to produce a Supreme Court willing to rule that growing corn to feed your own hogs is interstate commerce and can therefore be regulated by Congress.

So if we have any kind of government at all, it will eventually metastasize into the sort of thing that makes laws about whether we’re allowed to grow corn to feed our own animals, or bans us from drinking raw milk, or whatever else it feels like doing.

So which is better: moving to full anarcho-capitalism, or trying to move towards a system that can provide more of the benefits of government with fewer of the costs?

I don’t know, so it’s a good thing I don’t have to choose. The obvious next step seems to be setting up anarcho-capitalist experiments somewhere and seeing how they do, as well as continuing to experiment with new and better forms of government. Trying to predict anything from theory runs into the same problem where everyone assumed Communism would be an economic powerhouse – we’re just not that smart. Instead we need to figure out ways to produce experimentation with and competition among different governments and government-like-entities – a goal I know David Friedman agrees with.
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