Why No Anarcho-Capitalism?

Because Tiebout Competition Does Not Work

Bryan Caplan argues that in theory all government services, including protection of property, could be provided by competing capitalist firms. This is known as anarcho-capitalism.

But from a dynamic perspective, anarcho-capitalism seems like a classic case of an unstable equilibrium. On a diagram, there would be no arrows leading into it and plenty of arrows leading out of it.

How can we get from where we are now to anarcho-capitalism? I don’t see a path. And if we somehow find ourselves in anarcho-capitalism, my guess is that some predator organization would emerge that would overwhelm the anarcho-capitalist protection agencies, one by one.

Before you say “Iceland in the year 1000,” please read my review of Mark S. Weiner’s The Rule of the Clan. What that book shows, at least to me, is that yes, you can have order without a central government. But that order is a collection of clans, and within none of the clans is there anything resembling personal liberty.

To have liberty with decentralized government you need an exit option. Somebody who is unhappy with the way his polity is being run must be able to move to a different polity.

That brings me to the Tiebout hypothesis, which is that as people enter and exit different towns, the governments in those towns will be pressured to provide services efficiently. Caplan rejects the Tiebout hypothesis.

you must first accept that non-profit competition is far inferior to for-profit competition. The “competition” between local governments is like an academic test that doesn’t count for your grade. It’s better than nothing, but anemic compared to a standard exam where students’ futures are on the line.

I think that Caplan probably would agree that robust Tiebout competition would be equivalent to anarcho-capitalism. And he would agree that robust Tiebout competition does not take place currently.

If we changed the status of towns from nonprofit to profit, would Tiebout competition be robust? Would we find ourselves in anarcho-capitalist utopia? I’m afraid not.

Caplan concedes that nonprofit status is not the only source of weak competition among governments. For many reasons, people are unable or unwilling to exercise their exit option. Do you think I want to live under the de facto dictatorship of the Montgomery County, Maryland teachers’ union? No, I put up with it because I have other reasons to stay here.

Anarcho-capitalism (= robust Tiebout competition) needs a viable exit option in order to work. If you can’t easily switch to a different provider of government services, there will never be a competitive market for those services. Changing your protection service has to be as easy as switching your go-to apple from Red Delicious to Granny Smith.

Look at the big tech companies, like Facebook or Amazon. They try to make it hard for you to switch, and they are fairly successful at it. Are government services similar to apples or to Apple? I believe it’s the latter.

In fact, Apple’s quasi-monopoly is nothing compared with the natural monopoly that accrues to a government in a particular territory. Apple has to work much harder to keep my business than does the government of Montgomery County.

You cannot create a sufficiently competitive environment in government services for anything close to anarcho-capitalism to emerge.

substacks referenced above:

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Tiebout Was Wrong, But Why?

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Reflections on the Brook-Caplan Anarcho-Capitalism Debate