Undercutter war insurance agencies

Economics Political Theory
1

I’ve been stepping through the problem of war insurance funding a defense in a stateless society. The snag I’ve come to is this:

You have insurance companies insuring lots of people for war damages against attacks from other states. From this perspective, there is no free-rider problem since it’s just a payment guarantee in case of attack.

I assert it is more cost-effective to, instead of constantly paying to rebuild and relocated, have a military that could stop invasions. In fact this realization would come about immediately by the insurance agencies.

http://www.plunkettresearch.com/Industries/Insurance/InsuranceStatistics/tabid/238/Default.aspx

  • In 2009 $900 billion in medical service benefits were paid in the US, and if about 1% of stateless former US GDP went to defense, that would be ~$140 billion, the most expensive military in the world still.

Because of this, insurance-defense agencies would be better off collectively funding defense with the money from premiums, and so they would do that, working out how much each agency needed to pay based on how many policies were being defended and in what areas. Ceteris paribus, an insurance-defense agency with more policies in border and coastal areas would have to pay more for the collective grid, and ceteris paribus an agency with more total policies would have to pay more. That’s just a technical issue, it can be worked out.

The problem I see involves undercutter war insurance agencies. The undercutter just pays people for war damage, but not funding the collective defense grid. This makes the undercutter cheaper by free-riding on the other agencies’ defense grid, and the insurance agencies can’t just not defend San Diego.

Of course once the undercutter gets big enough, it begins to make more sense for that agency to invest in military hardware, though possibly only after an invasion or raid by a state trying to “stop the drug trade” or “restore order to those poor americans living in anarchy” enabled by their undercutting the defense-paying firms. But this is not satisfactory, and disappointingly Hoppe did not even register this obvious problem. Perhaps Rothbard, Friedman or someone else dealt with this.

How is the undercutter stopped?

If the undercutter problem cannot be solved then insurance-based defense can only be ancillary.

2

The insurance companies who pay for the defense grid make their insurance contracts long term (a couple years or something). So, for one war, you’d probably just buy a 5 year policy or something.

3

I’m not sure what you mean. The defense has to be paid before any war, preferably to deter war altogether.

A long-term contract would only delay existing customers of the defense-paying insurance agencies, it wouldn’t prevent it forever, and it wouldn’t prevent people in the area who have no war insurance altogether from buying the undercutter’s insurance.

You may say, “no problem”, but then comes perhaps a more likely scenario of an insurance agency in this arrangement spawning an offshoot agency that doesn’t pay for the defense. The contracts expire eventually, those who paid for the defense won’t be fooled the second time around, and then you have the undercutter taking over like the scenario I stated above.

4

This is because insurance does not actually solve the free rider problem… which has actually been met with much vehemence by many of the mises.org forum members.

I made a thread about it here. Free Riding and National Defense - some problems and possible solutions

I’ll summarize the solutions to the free rider problem in increasing complexity and “robustness”.

  1. Charity - Its been pointed out that empirically, national defense is a pretty cheap good to provide. Maybe $20bn for all of these united states. At less than 100 dollars per american, this is pretty reasonable.
  1. Dominant assurance contracts - “I only pay if everyone else pays”. Obviously unworkable with 300 million people, but very possibly workable if those people are represented at the local level, say, through employers or real estate owners! It all comes down to if you think 1000 people can get together and agree on something. Or maybe it only has to be 900. The chances are better because these representatives are entrepreneurs, so they are presumabely smarter than the average person.
  1. Probabilistic contract - People don’t want to free ride. They want to free ride GIVEN that the service is provided. If you have taken a probability course a light-bulb just went off in your head. So given that the good is provided, there is a certain probability that they will be able to free ride off this. Simply offer them a contract that binds them to this probability. See my thread for more detail.

I don’t think its good to focus on the time dimension. The contracts can simply be made really long term (think about buying a house, you have a very long term contract with the neighborhood association or real estate developer).

[edit] Sorry, I’m having some weird formatting bug. Had to ghetto format post.

5

I posted this exact question a ways back and never got a sufficient answer.

I’ve looked at this from just about every angle and can’t find a way to solve the free rider problem. And none of the above suggestions do it for me either.

I’ve pretty much chalked it up like this…the need for collective defense only arises because some other government steals people’s money and builds a massive military. If there was no government, there would be no need for military services. Can you really call the free rider problem in national defense an example of “market failure” when it only arises due to coercive government action? I really don’t think so.

6

You’re still going to need to provide large scale defense, because large scale attacks are still private goods for the attackers.

What don’t you like about the solutions? Can you go 1-2-3?

7

Thanks for that. Dominant assurance and payment based on the time of payment sound interesting and like they could influence.

But the problem still sticks out: economic robo-man won’t ever sign a dominant assurance contract, he’ll just try to free ride, he’ll go to the wall.

I saw your post and you seem to view ostracism as statist, and if you believe that then you will DEFINITELY think that I am a statist. I believe the best bet involves the utilities, which are naturally somewhat cartelistic, shutting off utilities if someone doesn’t pay their defense dues. The utilities can do this to the extent that they are actually cartelistic.

If you combine dominant assurance and time of payment contracts with legal discrimination against and more expensive utilities for nonpayers of “the defense-due”, combined this can work to make being a free rider a not very enjoyable experience. However because this isn’t a state, if the defense-due becomes too high then more people will become willing to become free-riders, and as more people become free riders the ostracism becomes less effective, so there is an in-built regulation for the rates. Ostracism depends on the ostracizing firms being cartelistic and / or the general public being ideologically willing to ostracize.

It’s unfortunate, but quite telling that anti-statism comes closest to breaking down or does break down when dealing with an entity that emerges from without the market, or outside of the system in which it operates. Like the person above said, I don’t think we can call the failure of a total market to defend against a state “market failure”.

8

Simple, the other insurers stop dealing with the under cutter. Its that easy. I can assure you that an insurer with no transactions with the market would quickly see his costs skyrocket. It’s far, far cheaper to chip in.

Of course, whether just setting up a grand, common military would be the best strategy, is still to be seen, but even if it is it can be pulled off.

9

Its not statist. It uses statist logic (you have to do something to harm people if they don’t go along with it). In practice, it would probably be very effective, but I wanted to shy away from ostracism because if you admit that you have to threaten people to get national defense provided, its a small step towards threatening them with violence.

Well, if anything becomes too expensive people stop wanting to buy it. It just depends what the payoff is… if its your life then people would be willing to contribute a lot. At the same time as they are torn to be a free rider because of the high cost, they are also torn to contribute to the public good because their life becomes more imperiled.

What did you think of my probabilistic contract? What did you think about my “centralist” analysis?

10

To Merlin:

I don’t understand. Lets take San Diego. The defense insurance agencies must defend all of San Diego, the entire city. They cannot just defend the insured blocks.

I don’t know what other than a collective standing army can stop the invasion in a comfortable manner. I do not doubt that guerilla defense would succeed, but all states would have to do is constantly send troops and make life in a stateless society miserable, like is being done in Somalia. The guerilla war argument satisfies ideologues like me, it won’t satisfy normal people.

This is also a barrier to selling the stateless society. People want stability, they don’t want to fight in their backyards for some “cause”.

11

Somalia is actually doing pretty good since anarchy. http://www.independent.org/newsroom/article.asp?id=1880

12

Here are some thoughts. The argument of just blocks being insured reduces a massive amount of the problem. It shows that the problem scales down to at most single cities. So from now on we only have to think about how a city deals with the problem. We can further argue that it is not in the interest of the attacker to destroy everything, there are priority targets like airports. These targets can be insured or protected singularily since they are often standing alone or so big that it is nearly impossible to hit other targets too. This argument goes similarily for infrastructure too. So there is not really a need to protect private housings since there i nearly no need to attack these with (heavy) weaponry. If, despite this assumption, there is a need to occupy these buldings, there is also the possibility to not protect single buldings from destruction, similar to the possibility to let a house burn down if the owner does not pay firemen to put out the fire. And finally there is the guerilla argument that people by themself will fight to protect their city wich is nearly identical to volunteer fire departments.

Finally, what incentive has a state to destroy an ancap city? The latter will rely heavily on trade and the former will just hurt itself by destroying the business relationships.

13

You make a good point.

But before we dismiss guerilla warfare, know that a guerilla movement fought by rich people would be terrifying to a military. The mere threat of it would act as a powerful deterrent. is a poor example, as the Somalis are not extremely rich, but try to invade even now, and you’ll see what I mean. Why did Hitler decline the honor? He knew that he would have to pin down lots of troops there. So he didn’t even bother.

But other than that, there would be very little incentive to attack a free city. Trade would be free, as would migration. I’m not saying that no state would be interested in attacking a free city, but that it would be the very last place they’d want to attack.

Second, the great miracle of this century: nukes. A couple of nukes in a collective insurance fund and no worries about even the most powerful military on earth invading. No need to keep even e single jet fighter than. A truly cost-minimizing solution. (I’d even say that shipping the nuke into the potential attacking country beforehand would be a smart thing to do).

Third, if the other guy attacks, and you have no nukes, just start printing his currency like crazy. Your, as a free economy, will move into commodity money (if not already operating on commodity money) quickly, while the other guys’ economy will be ruined within a short time. Not worth even trying to invade.

Fourth, paid mercenaries could set up bombs in the invader’s capital every single day. Leave the population without water and electricity, and see how much before a revolution seizes them. Heck, even the Serbs had to give up, let alone more sensible people.

We could think of many other techniques, and I’m sure that an insurer would hire competent analysts to see to such contingency plans, but the main idea stands: I’d say not one insurer would find it efficient to keep armies as we know them today. A nuke or a press machine are way, way scarier and cheap.

14

Yes the incentive argument is pretty powerful too. Monaco is defended by france. Monaco has a military of like 5000. Why doesn’t France conquer Monaco? Trade and PR. States can never be seen as predatory by their citizens.