Normally, I write blogs to explain libertarian ideas to non-libertarians, or even non-political people. I do this because most of the people I know are not libertarians. Most, in fact, do not follow politics at all and the ones who do are either democrat or republican. This blog is not for the people I know. There was a question posed on a libertarian blog that I follow regarding what constitutes a libertarian, who can call themselves libertarian and what the long term goal should be. Of course that is a huge set of questions. 10 self-identifying libertarians would give 10 different answers. The purists out there believe that absolutely everything should be done privately, this is the anarchist branch of the movement. Other types of libertarians feel that the non-aggression principle could be upheld and still have certain functions like an army or court system, an example of this type of libertarian is the “minarchist”, which stands for mini-anarchist. The binding principle that holds everyone who identifies as a libertarian is the non-aggression principle (NAP). I currently fall into the minarchist camp. It is important to note that the term anarchy does not mean a world without laws, it means a world without government where laws are agreed to and enforced privately. This is not mass chaos, far from it.
I say that I am currently a minarchist. This is because I have not found a viable way to make the military and court system private. When I do, I will call myself an anarchist, or anarcho-capitalist. During the discussion, I was given some resources that show how this could possibly be done. This blog is going to explain why I still think we can’t. This is where my non-political friends may want to stop reading.
The resource material was given to me by a fellow blogger and included “The Private Production of Defense” by Hans-Hermann Hoppe’, and “Chaos Theory” by Robert P Murphy. They made the argument that we could do away with government run armies by replacing them with Insurance companies that would do essentially the same thing. “Chaos Theory” tries to answer some of the natural misgivings and questions related to defense against war being an insurable risk that come to mind after reading Hoppe’s work. In my opinion, neither work seems to have a full understanding of how insurance works. For this critique I will concentrate more on the work of Hoppe’ and later get into some of the defenses of the work put forth in Mr. Murphy’s book. I think it is important to note that I do not disagree with the assessment in the section entitled How to think about the statist response. Mises and Rothbard make excellent points regarding how the state works vs. private entities. My problem is not with their goal, just the means to deliver it.
The first assertion that I have a problem with is that defense is a form of insurance and the expenditures would constitute the price of coverage. As a person in the insurance field, this struck me as odd. On its face, I could see the possibility of insuring against war, but only if I didn’t have a clear understanding of what insurance is. Let’s take a little time to understand what insurance is, what can and can’t be insured and the characteristics of insurable risk.
Insurance is a system to make large financial losses more affordable by pooling the risks of many individuals and business entities and transferring them to an insurance company or other large group in return for a premium.
So far so good for insuring war. Everyone chips in and the insurance company keeps us safe from the invading armies. Let’s keep going.
Insurable Risks are risks for which it is relatively easy to get insurance and that meet certain criteria. These include being definable, accidental in nature, and part of a group of similar risks large enough to make losses predictable. The insurance company also must be able to come up with a reasonable price for the insurance.
This is where it starts to go bad for insuring the prospect of war. Let’s take a look at some characteristics of insurable risk.
Elements of Insurable Risk:
- The loss must be definite. There must be actual damage, and hard to falsify. The loss would have a date/time, evidence of loss.
- The loss must be unexpected. Expected losses such as oil changes, tire rotations, A/C checkup, etc… are expected maintenance and therefore would not be insurable. A house fire or car accident would not be expected and therefore covered.
- The loss must be large enough to cause financial hardship to the insured. Small claims would not be covered because they would not cause the insured hardship. A broken pencil, for example would not be covered.
- The damage must be calculable. An actual dollar value must be able to be placed on the damage. The cost to replace a house can be calculated, but if you recorded what you believe to be a million dollar idea during the night and the recording device failed to save it, it would not be insurable.
- There must be a large group of people with the potential for similar losses. This makes it easier to predict losses using the theory of very large numbers. If only a small group are exposed to a similar risk there is no way to predict the loss and is therefore uninsurable.
- The losses must be isolated to individuals. Things that would have an effect on many people every time would not be insurable. For instance fire would be a potential loss for everyone in a neighborhood, but only single houses catch on fire and therefore is insurable.
So what does all that mean? Well, it means that there are things that are covered such as fire, theft, and many other things that would be catastrophic and unexpected enough, and there are things that can never be covered because they cannot be isolated to individuals such as flood, earthquake in certain states, hurricanes in certain states and, you guessed it, war.
Let’s take the example of the house fire from above and say it did spread to each house in the whole neighborhood. How do insurance companies guard against this type of possibility? The answer is that they diversify. Instead of insuring every house in the neighborhood, they insure a few houses in a lot of similar neighborhoods, spreading out the risk and satisfying the insurable risk.
Looking at the list of requirements, insuring war seems ok right up until the last bullet point. That last bullet point is why people in Miami, Florida have to purchase hurricane coverage through the state, and why people in California have to purchase earthquake coverage through the state, and why everyone in America has to purchase flood insurance through the federal government.
The next problem in the paper arises with the assertion-“…the manpower as well as the physical resources—necessary to accomplish the task of dealing with the dangers, actual or imagined, of the real world. On this count insurance agencies appear to be perfect candidates, too. They operate on a nationwide and even international scale, and they own large property holdings dispersed over wide territories and beyond single state boundaries. Accordingly, they have a manifest self-interest in effective protection, and are big and economically powerful. Furthermore, all insurance companies are connected through a network of contractual agreements of mutual assistance and arbitration as well as a system of international reinsurance agencies, representing a combined economic power which dwarfs that of most if not all existing governments.”(Hoppe’ 36). I would actually submit that even the largest insurance company does not have the manpower or physical resources to deal with even a minor invasion from an army, or ISIS, or even a local Girl Scout troop. They would have to spend billions of dollars and hire hundreds of thousands of people. They would then have to train those people spending millions more. The rate increases necessary for the typical homeowner would be beyond cost prohibitive. Contrary to popular belief, insurance companies do not have a huge profit margin. They make huge profits through volume and investing.
At this point in the article, Hoppe’ tries to address the terms of what might and might not be covered. In insurance terms this would be called “moral hazard”. The concept that you cannot insure yourself and then cause a claim. He gives the example of taking out a life insurance policy then committing suicide a couple days later. With regard to self-defense, Hoppe’ lets the insurance company define what would and would not be covered based on the action of the individual.
So far in this thought experiment, we have removed the state of what used to be a nation, and replaced it with a multinational conglomerate of insurance companies, connected by networks of related industries, who make the rules by which you have to agree or face the prospect of not being defended in the event of war. That reminds me of something else, but I can’t think of the word. But I digress.
The next assertion I have a problem with is that because the insurance companies adopt a standard of behavior that each insured must adhere to or risk losing coverage, that even the uninsured will adopt the same behavior. I see no reason why there would be any economic pressure placed on the uninsured. In fact, I would wager the opposite would be true. Going even further, Hoppe’ believes that common laws would be set into motion naturally by market forces which dictate the acceptable behavior of policy holders regarding self-defense and aggression. So instead of a state body to make laws, insurance companies get to do it. Every claim would fall under the jurisdiction of an insurance arbiter. Sounds like a court system to me.
Moral Hazzard and why less people would insure:
X X X X X O X O
X X X X O X O X
X X X X X O X O
X X X X O X O X
o- did not pay premium
x- paid premium
In a neighborhood with a group of houses (fig.1), you have all the homeowners paying for defense insurance. The town is invaded by a foreign state and the insurance company successfully defends the town and keeps 12 homes from being destroyed. If half the residents decided not to purchase defense insurance (fig.2), the insurance company would still have to defend the town for the people who do pay, they would still save 12 homes. On average half the saved homes and half the destroyed ones would have paid. It would be impossible to differentiate between homes in close proximity when fighting a battle either in the air or ground.
At this point in the paper, Hoppe’ for some reason breaks the insurance into natural claims and industrial claims and tries to figure out which category war would go into. For the reasons I stated above, it would not go into either. Also because political borders would be eliminated and only geographic and private property borders would remain. Hoppe’ asserts that aggressive people would not be able to procure insurance and would attack only other uninsured people. I would like to get an example of these uninsurable aggressors. How would they know who to attack? As part of your agreement with the insurance company, you would have to allow your name to appear on public lists of insured people.
There is an assertion that insurance companies would strive to reduce costs of protection and consequently prices would fall. I would ask for evidence that insurance prices have ever fallen over time. I would also wonder by which predictive measure the prices could accurately be assessed, since by definition war does not meet the requirements for insurable risk.
The idea that insurance carriers care about property values and that it somehow helps their business beyond their own property holdings is incorrect. Insurance does not set value based on market value, it is based on replacement cost. Property value has no bearing on the price of your policy. If you have a 2000 square foot home in the ghetto, and a similar 2000 square foot home across the railroad tracks in the suburbs, the replacement cost would be the same even though the home in the suburbs may have a property value twice as high. If the cost to rebuild is $100 per square foot, both homes would be ideally insured for $200,000. The cost of the insurance would vary based on other things, not the property value.
In “Chaos Theory”, Mr. Murphy tries to answer some questions regarding questions around “free riders”, and also if a private army could defeat a state run army. A problem for the insurance company arises in the area of training, and extent of the force. One could easily make the argument, and both authors do very well, that a private army would be more efficiently run, monetarily. However, when comparing a full-time, well used army to a hodgepodge of soldiers cobbled together and only used to defend policy holders it becomes clear who would win in a battle. Compound that with the fact that offensive weapons would be outlawed and you have a recipe for disaster. The other question posed in the book was who would be attacked if no state existed? The answer is that the insurance company would be attacked. Their buildings, the banks that hold their money, the buildings that hold their computer databases, memories and files. In essence, they would attack the government, by another name.
Lastly, there are several types of insurance, and the author treats them all like one entity. For instance, there is a huge difference between personal and commercial insurance. Different rating parameters, risk, asset allocation and infinite other dimensions. This would be true even without a state. The idea that all the money gained from commercial interests would help pay for personal interests is nonsense. Commercial companies large enough would self-insure. There are private armies right now. Those companies would not contribute to the insurance pool leaving small and midsize businesses to pool the army, driving costs up for their goods and services.
The truth is that at this point even great minds like Mises, Rothbard and all the others whom I admire greatly have not come up with a way that is better for defending individuals than what has come about through government. I say that grudgingly. I wish it were not true. Everything they say about the ever growing state is absolutely true, but we can’t move forward with bad ideas. I wish that at the end of all this I could give an alternative, but I can’t. I will have to leave that up to smarter people than I.