When I wrote up some notes about Moldbug’s political philosophy last year, it seemed (when you strip away a bunch of flavor-text and non-load-bearing details) to reduce to a proposal to impose market discipline on governments by having them compete for citizens. I ended with the question “wait, how is Yarvin’s proposal any different than Anarchocapitalism?” They sound like they’re basically the same.” (I have since removed that line from the post, but it’s still there in the revision history.)

A few weeks ago, I read most of David Friedman’s The Machinery of Freedom and incidentally, I now know the answer to that question

The character of the overall political system—whether anarcho-capitalism degrade back into a collection of microstates— depends on the geographically-localized economies of scale to rights protection.

If rights-protection doesn’t benefit from large geographically localized economies of scale, we could end up with an anarcho-capitalist equilibrium of many different rights protection companies serving a similar local, and competing to better serve their customers, and generally relying on arbitration to settle disputes peacefully.

But if it’s a service that is sufficiently more efficiently provided in bulk to all of the individuals in a geographic area, rights protection companies will effectively be small, profit driven governments, who retain sovereignty in their domains.

I had previously thought that the degree to which right-protection services are excludable was also a factor, but thinking through the second and third order incentives, it doesn’t.

Excludability 

Consider fire protection. Fire has the important property that it spreads. If my house is on fire, that poses a danger to the houses of my neighbors. And because it’s easier to put out a fire when it is small, firefighters protecting my house, would be incentivized to fight even fires that start in my neighbor’s house, because it might spread to mine and be even harder to fight.

Accordingly, putting out my house has a positive externality on my neighbor. Putting out fires is a public good.

This poses an obstacle to private fire departments, who want to charge for their services: there’s a free rider problem. If most people in a neighborhood subscribe to a fire service, the remainder can safely forgo subscribing, because they’re protected by their neighbors subscription. 

Contrast this with other subscription services: if I pay a company to do my laundry, that does not automatically wash the clothes of my neighbors.

So a first key question is: are the dynamics of rights protection more like fire-fighting or more like a laundry service? How much is crime a public bad?

It could go either way, depending on the dynamics of crime fighting.

Maybe the generally efficient way to prevent crime is to install strong locks and surveillance systems in homes and businesses. If so, those kinds of interventions largely protect those specific buildings, without protecting nearby areas.

Alternatively, maybe the most efficient way to prevent crime is to find, catch, and arrest a small number of criminals who commit most of the crimes. In which case, crime-protection services are a public good with externalities on everyone, not just subscribers.

In that condition: the first order incentives are for a small number of people (those with the highest willingness to pay) subscribing to rights protection services, and effectively subsidizing their benefits for everyone else.

But this is an unstable situation. The various rights-protection agencies might reasonably respond by demanding a fee from everyone who benefits from their services. And if they’re in the business of demanding fees from people, they’re also incentivized to demand fees from people who aren’t paying for their services.

Effectively the rights-protection agencies, with their specialization in conflict, would just become a local government.

This is not the end of the story however: the possibility of rights protection agencies imposing fees/taxes on non-subscribers, imposes an incentive for those non-subscribers to subscribe to some other rights protection agency, for their protection from the other rights protection agencies!

This gets us back to the anarchocapitalist equilibrium of multiple rights protection agencies, competing for customers, who are incentivized to settle conflicts via arbitration (because destructive conflicts are wasteful).

But there is still a freerider problem, just on another level of abstraction: between the different rights protection agencies, each of which would prefer to save the expenditure in preventing crime, and free-ride on the work of the others.

But maybe market incentives work that out just fine? Some rights protection agencies will offer more proactive and effective crime prevention, for those that pay more. This will have some positive externality on everyone else, who pays less for less proactive policing. The market failure caused by that externality is very likely smaller than the massive inefficiencies of government.

Localized economies of scale

But, there’s still a question of the degree to which rights protection has localized economies of scale. 

For instance, it seems plausible that there are efficiencies to protecting the rights of the tenants of a  whole apartment building, rather than contracting with some of the tenants individually (but not others). That allows you to secure the entrances and exits, and will justify the costs of e.g. keeping a unit of police officers stationed in the building for faster responses.

So it might make sense to bundle rights protection and living space: you pick where you want to live, in part based on what kind of rights protection comes bundled, rather than contracting with a rights protection company separately from a domicile company.

But if there are economies of scale at the scale of an apartment building, might there also be economies of scale at the level of a few square miles? It seems possible. It seems likely that big fractions of the total cost of keeping an area safe are fixed costs, and the variable costs of insuring the safety of marginal people in that area is small.

If so, most (though maybe not all?) rights protection companies would not bother to offer their services outside of the geographic areas that they protect. 

If this is the case, then you get something much more like Moldbug’s patchwork of small sovereign states, governed as a profit-maximizing company, each of which maintains a monopoly on the legitimate use of force in their domain.

My guess is that whether this is the equilibrium in practice depends on the total costs of preventing crime, which depends in turn on how prevalent crime is. If there’s a lot of theft and assault such that it is important to actually deploy force to protect against those crimes, there’s probably stronger economies of scale, because it’s easier to establish a membrane and maintain peace and order within that membrane.

But if crime is mostly exceptional and force is only occasionally deployed to prevent it, it might not matter as much if your clients are geographically localized.

A patchwork would still be pretty anarcho-capitalist

The fact that these states would be small in area is still a huge improvement over today’s states, because that makes it more feasible to vote with your feet, by leaving one patch and moving to a nearby one. Close to the same forces of market discipline obtained as under more traditional anarcho-capitalism, which should get most of the same results most of the time.
Also, this patchwork world is compatible with some areas that function along the classic anarcho capitalist vision of multiple rights protection agencies all operating in the same local area. It might be somewhat more expensive, but there’s no reason why that couldn’t be an option offered to consumers to prefer that for some reason.