Do economies of scale exist in private protection? Evaluating Nozick's 'invisible hand'.

Author:Meehan, Brian
 
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  1. Introduction

    The possibility that competing private protection agencies could operate separately in a long-run equilibrium within a stateless society has been disputed by some libertarian scholars. Robert Nozick (1974) was among the leading proponents of this view, arguing that private protection agencies would converge into a natural monopoly through an "invisible hand" process. These converging firms would eventually resemble a government. Other scholars (Friedman 1979; Benson 1990, 1998; Rothbard 1973) have argued that numerous private protection agencies could exist within a stable equilibrium in a stateless society.

    Modern empirical evidence on protection agencies operating without government is limited. Somalia operated without a centralized government from 1991 through 2006 and had clan militias that offered private protection services for hire (Leeson 2007), but centralized state authority has now been partially restored. (1) Evidence from tenth- to thirteenth-century Iceland (Friedman 1979) suggests that it may be possible to have dispute resolution and protection produced privately without a formal government sector to oversee these services. European merchant law after the eleventh century evolved and was enforced through largely voluntary noncentralized mechanisms that did not rely on government enforcement (Benson 1989). Some forms of customary Native American law enforcement were also provided through mutually advantageous agreements between individuals, which were not enforced by a central authority (Benson 1991).

    In opposition to this view, Holcombe (2004) claims that while coercive government protection institutions may be undesirable, they will inevitably emerge out of anarchy. His contention goes further than Nozick's by claiming that mafia-type protection organizations will use force to establish governments in most cases. (2)

    This paper does not deal with the inevitability of violent methods for private protection firms to establish governments. Instead, it provides evidence pertaining to Nozick's thesis: that protection firms have a natural tendency to merge because of economies of scale that would lead to natural geographic monopolies. I cite empirical evidence from studies of the private security and patrol service market within the United States and from weak and failed regulatory states throughout the world. I follow Friedman (1979) and Benson (1990) in assuming that private protection issues are separate from national defense. National defense organization has little to do with the scope of this paper.

  2. Private Security Institutional Environments in US States

    The private security market within the United States provides a good platform to analyze the impact of different regulatory environments on private protection services. Within the United States, different states adopt different mechanisms to regulate the private security industry. In some states, private security guards do not come under any special regulatory institution; in other states, occupational licensing for private security guards exists and government agencies provide oversight. In some states where licensing exists, private-security-specific boards regulate this industry (Meehan and Benson 2015).

    Obviously, private security firms operating within the United States are very different from private protection firms operating without a state. But, the degree to which private security firms organize in less regulated states should provide some evidence of the natural tendency of protection services to organize as regulatory costs decrease. The question becomes: At the margin, does a less stringent regulatory institutional environment encourage Nozick's perceived natural monopoly tendencies in the private protection industry?

    If less regulatory oversight results in private security tending to produce geographic natural monopolies, convergence of smaller firms in this industry into fewer and larger firms should be observed in places where private security regulatory oversight is relatively less strict. Evidence from Meehan and Benson (2015) suggests that when private security licensing boards are made up of licensed private security guards, regulatory requirements tend to be relatively strict. (3) The implication is that oversight by existing private security guards tends to increase the strictness of regulations. Additional evidence from Meehan (2015) suggests that...

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