The Machinery of Freedom/animated lecture/transcription

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In the 19th century, the political philosophy that supported small government and free markets was called "liberalism". Unfortunately, between then and now, the enemies of liberalism succeeded in stealing its name, which is why people with similar views nowadays usually call themselves "libertarians".


The classical liberal, the 19th century liberal position, was that the function of government was to do a few things that couldn't be done by individuals on the private market by voluntary association, and those were traditionally listed as police, courts, and national defense. And I got interested, I suppose, when I was in my late teens in whether you could push the idea of free markets and voluntary association even farther than that -- whether it would be possible to have a society which was organized by private property, trade, voluntary exchange -- that set of ideas -- but in which there was no government, in which all of the useful things government does (because government does some useful as well as some useless things) were done in other ways.


And it's an attractive idea because we have quite a lot of reasons to believe that where the same thing can be done either by government or privately, governments usually do it worse, and government doing things usually involves greater restrictions on individual freedom because when the government offers you a deal, you don't get to turn it down -- whereas when someone in the private market offers you a deal, you do.


So it seemed to me interesting to figure out whether you could construct a plausible set of institutions in which the basic police, courts, defense functions were being done privately instead. I started writing about the subject and eventually wrote my first book, Machinery of Freedom, which was published now almost 40 years ago.


So how could you have a society in which the fundamental functions were produced privately rather than by government? And let me start with what in some sense are the most fundamental ones, namely making and enforcing laws -- what we would think of loosely speaking as the job of police and courts. So I want to imagine a society where individuals hire private firms to protect their rights and settle their disputes with other individuals -- the same way we hire a private firm to insure us against auto accidents, for example. So I pay some annual sum to one of a variety of different firms, each of which sells the service of making sure, as best it can, that I don't get robbed or murdered and that if I have a dispute with somebody else it gets settled in some reasonable and peaceful way.


And there is an obvious problem with that system, one which occurs in thirty seconds or so to everybody who sees it described, and most of them stop after those thirty seconds and they say "well that's why it won't work" and that finishes it, and that problem is conflict between rights enforcement agencies. So we will imagine that I'm the customer of one rights enforcement agency you're the customer of another -- one day I come home, and I find my television set is missing. I call up my rights enforcement agency; I also notice that the door has been broken open -- they prudently had installed a little video camera in my living room to try to monitor anybody who stole things from me, and that camera shows a picture of you walking out my door with my television, or at least they're pretty sure it's you.


So my agency gets in touch with you and says "Would you please give our customer Mr. Friedman his television back, and by the way you owe us $50 for our time and trouble in locating you and recovering his television set." And your reply is "What television set? It's true I have a nice television set I bought from a friend of mine, I never heard of Mr. Friedman, I never robbed him, go away." Well my agency says "Well if you really feel like that, if you're not willing to discuss this matter in a reasonable fashion, we could send three or four big tough guys over to your front door tomorrow morning to carry out the television set with or without your permission." And you reply "Ah, but if you do that, I too have a rights enforcement agency, and they will send five or six big tough guys to keep you from taking what I claim is my television set." And so people say we've set up the situation for a permanently violent society in which your agency and my agency and his agency are always fighting each other over the claims of our customers.


And I think that's the wrong answer. I don't think that's at all likely to happen, and the reason it isn't likely to happen is that violence is expensive -- that fighting people as a way of settling disputes first gives you very uneven results -- there's no guarantee the guy who's in the right will win (though we'd like to believe there is) -- but more than that it means people get hurt and they get killed houses get smashed you've got to pay hazard pay to your big tough guys who work for you; there ought to be a better solution.


And the obvious better solution in this case is arbitration, so that my agency says to your agency "look we don't want to get into a fight with you, you don't want to get into a fight with us. How about we go to that private judge over there who's got a good reputation as an honest and competent judge, and we agree that if he says that the television set was stolen from Mr. Friedman, you won't defend your customer when we recover the television set and if they say that it was not stolen from Mr. Friedman, we will apologize and pay some damages for the hassle we've imposed."


Now that's how you might settle if it came up for the first time. But these agencies as we imagine them are going to be in business for a long time -- my agency knows that over the next ten years it will have clashes like this with your agency a hundred or a thousand or five thousand times, and therefore the sensible thing to do is to agree in advance on the court that will settle them. So my agency agrees with your agency that any disputes between the two agencies will be settled by Mr. Smith's Private Court, which is an arbitrator that has got a good reputation for settling such disputes.


Now it may occur to you to ask the obvious next question which is who enforces that contract? Because unlike the world that we live in now, there is no government sitting above the agencies compelling them to keep their word. But the answer is that there is a way of enforcing contracts that we're all familiar with that doesn't require a government, and that's what economists sometimes refer to as "the discipline of constant dealings". If you and I are going to be interacting for a long time, many times over, each of us knows if he breaks his word this time, the other one isn't going to trust him him next time, that's the end of a profitable relationship, therefore it is prudent in that kind of a repeat relationship to try to maintain your reputation by actually doing what you say you're going to do.


One of the sources that got me thinking about these questions was a science fiction book by Robert Heinlein called The Moon Is a Harsh Mistress which describes a society on the Moon with private property and without government; it does a pretty plausible job which is one reason I started trying to imagine if I could work out something similar for the world I was living in. And there's one little bit where the narrator is visiting Earth, and he says "you know on Earth they have laws for everything! They even have laws for private contracts! Why would you contract with someone if you couldn't trust him?" And it's sort of the reaction of someone to whom my imaginary society is the norm instead of the present society. So you would expect that those private rights enforcement agencies have an obvious incentive to keep their contract because if, when the judge rules against my agency's customer today we ignore the verdict, then the other agency will ignore the verdict when it rules the other way.


So we now have a contractual network, we now have a world where every individual is the customer of a private rights enforcement agency, and every pair of private right enforcement agencies are customers of a private court, which I refer to as an arbitration agency. And that then raises some interesting questions. And the first question, I think maybe the most important one, is what kind of law will we get. And it's worth noting that one of the features of this system is that the law is not the same for everybody. The law between me and you is a function of the arbitration agency that our rights enforcement agencies have chosen, and the law between me and him is a function of the arbitration agency that my rights enforcement agency and his rights enforcement agency have chosen. They might be the same rules, they might be not. That sounds odd and unjust to us; it sounds less unjust if it occurs to you that when everybody has the same rule it might be the wrong rule they all agree to, in which case some of them having the right rule would be better, but in fact in many real-world societies including America at the moment, the legal rules between people are not the same. That if you think about state law for example, that the laws are different from state to state in various respects and therefore the laws between two citizens of California are not exactly the same as between two citizens of Virginia. There are some cases, some conflicts, that go to federal law, and some that go to state law, so they are as well as different.


And there's a certain sense in which the legal system we all live in is a legal system of contractual law. Because if you think about an ordinary private contract, where two people or two firms make an agreement -- now, in the current world, enforceable in the courts -- in a sense, that contract is a private legal system, because the contract between us says "if I don't finish the house I'm building for you by March, I agree to pay you damages of $5000." That would be a possible term, called a "liquidated damage term" in a contract -- but that's really a legal rule, just a legal rule just between the two of us.


So I'm now imagining a society where there are multiple legal rules -- what will they be? And the first thing to realise is that the rights enforcement agencies are middlemen, and part of the product they're selling to their customers is the set of legal rules under which their contracts will get decided, and like anyone selling things to customers, the agency has an incentive to try to produce the product the customers want to buy. So from this standpoint, each rights enforcement agency will be saying to itself "which arbitration agencies would our customers like to have their disputes settled by?" And similarly the arbitration agencies will be saying to themselves, "if we want rights enforcement agencies to hire us, what legal rules will make people most willing to be under our rules?" So you have in effect a legal system that is being generated on the free market roughly the same way that cars are produced now, or that food is produced now, instead of one produced by a political mechanism -- and that to me is one of the interesting features of this system.


And what can you say about that legal system? And the answer is that for reasons similar though not identical to the reasons that we expect markets to produce better cars than socialist systems, that we think that in general free choice in a private property trade society works better for producing things than political systems work, some of the same reasons -- although the situation is a little different -- [garbled] producing good law as well.


So imagine that the customers of my rights enforcement agency are people who believe in the death penalty -- they think that the knowledge that if someone kills one of them he's likely to get executed makes it less likely they'll be killed. On the other hand, the customers of another arbitration agency don't believe that; they think that the death penalty doesn't deter, and they're really worried about the possibility that they might be convicted of murder, whether correctly or incorrectly, and get executed, so they would prefer a legal system that doesn't include a death penalty.


So my agency does some market research, and it figures out that if it could guarantee its customers a capital punishment court in disputes with other agencies' customers, it could raise the price it charges its customers by enough to bring in an extra $100,000 a year, and they'd still stay with it because they'd be getting more nearly the law they wanted -- and the anti-capital-punishment agency does some similar market research, and they conclude that if they could guarantee safety from capital punishment, if they could guarantee that in the disputes it would go to a non-capital-punishment court, they could charge an extra $200,000 a year. Well in that case, the obvious solution for both of them is that they agree on a non-capital-punishment court, and the anti-captial punishment agency either pays off the pro-capital-punishment agency enough to make it agree with that, or it agrees on some other legal issue to accept their view. So that you should imagine the agencies in effect bargaining to whatever set of legal rules, whatever court maximizes the summed benefit to the customers of the two agencies.


Now, if there are any economists listening to this, they'll realize that I've oversimplified in a number of important ways, and if they're sufficiently curious, I think Cato has hopefully by now up a recording of a talk I gave on the market for law where I went into some of the finer points on this -- or if you go to my web page, you can find one of the things there that discusses it -- but for at least a first approximation, I think it's fair to say that what I have described as a market works in the interest of the private court to try to design an optimal legal system, instead of legal rules people want to live under, and it's in the interest of the rights enforcement agencies to then agree on those optimal rules.


Of course the optimal rules may not bet the same for everybody. You could imagine a world where there are some people who are in very dry parts of the country where you need detailed legal rules on water rights, there are other people in much more favored parts of the country where elaborate rules about who can draw water out of a river when make no sense, so you might end up with more than one legal system --- but each of those legal systems would be more or less tailored by design to serve the welfare of the people who are its customers, so to speak.


Now you might answer "wait a minute, this is no improvement over what we now have, because after all our legal system at present is made by the legislature" -- actually some of it made by judges but a lot of it is made by legistlature -- "Congress want to get re-electeed, therefore Congressmen have got to try to vote for the laws that people like, so how is this market system any better?" And there are a number of answers, and the first answer is what economists call "rational ignorance" -- that you as an individual voter, in order to control your congressman, in order to make it in his interest to vote for the laws that. benefit you, you require two pieces of information. You have to know what laws are in your interest, and you have to know what your congressman is doing. You have no reason to know either of those things in the present system -- because if you do a little mental arithmetic, you work out that the chance that your vote will determine who wins the next Congressional election is maybe one in 10,000 or one in 100,000; the chance that your vote will determine who wins the next presidential election is maybe one in a million, one in ten million, somewhere around that. In a large-population democracy, each individual knows his vote has almost no chance of affecting outcomes, so why should you spend a lot of time and effort watching what your Congressman is doing, figuring out how he voted, why he voted, what the bills he voted on would do, when that information is of no use to you?


Similarly, why should you spend a lot of time and effort figuring out what the ideal legal system is when, having figured it out, you have no control over what legal system you're under?


So one reason why you would expect the market method for producing law to work better than the government method is one of the reasons you expect markets to do better at producing food and automobiles and lots of other things that the government does -- because on the market, since your choice affects what you get, you can say "all right, this rights enforcement agency mostly contracts with court A, that one mostly contracts with court B, court B has better laws, so I'll switch to the one that contracts with court B." So just as in an ordinary market, you have a good deal of control over your outcomes. You don't have perfect control, because the agencies have got to get agreement with each other, so not all the options are going to be on the table, but at least your choice has a substantial effect on what law you're under -- whereas in the political system, your choice of who to vote for has very close to zero effect on what law you're going to be under, so you have a reason to pay attention in the market context and not in the political -- just as for other goods and services


Furthermore, the information about what works is much easier to get in the market system, because you actually get to observe the alternatives -- and I'm thinking now less about what the legal rules are than about how good a job the different agencies do with enforcing them. So if you think about the political context, we're never going to be able to compare the Obama administration of 2008-2012 with the McCain administration of 2008-2012 because only one of them got elected -- so it is very hard. I don't think Obama's doing a very good job, but that depends on my guesses about what would have happened if he had done other things, which we have no way of knowing! That, you know, Obama said "I'm going to have this big stimulus, it's going to get unemployment down substantially" - he said by how much, it didn't happen. But of course Obama's defenders can argue -- they might even be right -- "without the stimulus, things would have been even worse, therefore we should be grateful to him even though he was too optimistic about how it would turn out, he did the right thing." And there's no easy way -- you know you can consult different economists and you can find one Nobel-winning economist who says Obama did the right thing, another says he did the wrong thing.


On the other hand, imagine the question is which agency shows the faster when you report that you've been robbed. Well, I'm a customer of agency A, you're a customer of Agency B, we compare notes assuming that both of us have been so unlucky as to be robbed, or we can observe other things -- features of what they did -- and we can see whether on the whole A does a better or worse job than B. So in that sense, we don't have perfect information -- we humans never have perfect information -- but we're in a much better position to choose among the bundle of rights and rights enforcements, legal rules and the equivalent of police protection, provided by one agency and another than we are to choose amoug the promises of politicians, which is all we really get to vote on.


So that's another reason why you would expect that the system I'm describing would be more likely to produce good law than the system we now live under, and at least my view is that there's lots of evidence the system we now live under produces pretty bad law in many ways.


Now another response you sometimes get from people is "wait a minute -- how is this going to work for criminals? Won't the criminals just form their own rights enforcement agency and insist on laws in which murder is legal and robbery is legal and so forth?" And I think there are two answers to that.


The simplest but perhaps less important answer is very few criminals would really want to live under those laws either, because after all if we have a system where it's legal to murder people, that not only means it's legal for me to murder you, it also means it's legal for you to murder me, and that doesn't sound like such a great deal, and similarly for robbery.


But even if the murderer said "ah, I'm much better at killing other people, so I want a rule that allows murder", he's not going to get it, because in order to get that, he has to persuade the victim's rights enforcement agency to agree to a court that allows murder -- and if you go back to my discussion of capital punishment, it's pretty easy to see that almost all of the time, the value to one person of being able to violate someone else's rights is much less than the value to the victim of not having his rights violated -- that the hit-man might get paid $10,000 for a contract to kill me, I would be delighted to pay much more than $10,00 to have some assurance that people won't murder me, and again this is a fairly brief talk so I can't go into a lot of detail, but I think it's pretty clear that if the criminals really decide to try to form their own agency, that agency will be unable to get contracts on its terms with any other agency, the criminals are vastly outnumbered by the potential victims, the potential victims are willing to pay much more what they want than the criminals are to get what they want, and therefore the criminal agency would fight a hopeless war against the rest of society and lose, which is exactly what would happen at present if the criminals said "we're starting a new country, it's in the middle of the United States, it doesn't recognize any of your laws" what happens? Well, you can predict pretty easily what would happen. So I don't think that's a serious argument.


In fact, you would expect a good deal less crime in, and a good deal less of a problem of crime in, the society I'm describing -- not only because private firms usually do things better than governments do, but also because a fair amount of our present crime is created by government. That is to say, the government makes it illegal for people to do things that they want to do and that harm no-one else -- I'm thinking in particular of the war on drugs, but there are other examples of that. When you make things illegal [that] people want to do, the result is some people do them and you have large number of people in prison. The US has an extraordinarily high imprisonment rate; almost 1% opf the population is in prison at any one time -- and that's largely the result of having made laws against victimless crimes and then having arrested people for breaking those laws.


So I've tried to sketch out very briefly how one could have a society functioning in which there was no government but were institutions of private property, and in which people's rights in fact got protected and in which conflicts between people were normally settled peacefully.