The concept of private production of defense is indeed a fascinating one. Why? Well, first of all, the idea that police protection is a public good and a natural monopoly is the foundation on which any government is built. Police and army forces are basically the source of power and legitimacy for the state.
Surprisingly, the subject of private protection is absent from economic textbooks and is very seldom treated at all. Few major works in this field have been written and have taken this subject seriously. Among these I would point out the works of Gustave de Molinari, Murray N. Rothbard and Hans Herman Hoppe.
Molinari was the first who recognized that the production of security must not necessarily be a government monopoly, suggesting that private agencies should be allowed to provide protection in a competitive environment. His argument was as simple and as decisive as could be – if everyone agrees that competitive companies can supply consumers with better services at a lower price than a monopoly, why wouldn’t the same principle apply to the defense sector? The principle of free competition is practically a fundamental law of economic science and it is virtually impossible to avoid it strictly from an economic point of view. The only possible way out is to try to somehow demonstrate that the production of security is essentially different from any other goods and services provided by the market. Of course, this argument is erroneous and if the a priori demonstration is not enough, the best empirical example that defense must not be a state monopoly is that private companies are already providing protection services as any other economic activity.
Another author who has seriously considered the private defense problem was Murray Rothbard in his two books, Power and Market and For a New Liberty. He tackled the most frequent questions which arose related to this subject and argued that public police is subject to inefficiency, bureaucracy and low quality offered at a high price – general symptoms of all government agencies. This happens because the government has no way of allocating resources in an efficient matter and no way of seeing if the consumer is satisfied with the services provided. As any other service that is funded through taxation, the production of defense is separated from the consumers, destroying the market mechanism which penalizes inefficient firms and awards efficient ones.
For the same reason, the incentive system in any government funded area is also destroyed. Why should a policeman improve the services he provides if he is receiving the same pay for being idle? Consumers have no way of boycotting that particular police agency and choosing another. Of course, different incentive systems can and have been employed, but these cannot be a perfect substitute for the market mechanism.
The last paper on this topic which I would like to mention was written by Hans Herman Hoppe. He has, in my opinion, the merit of describing a possible solution offered by the market. Hoppe argues that the ones who have the financial capability, the economic interest and the internationally developed network for providing efficient protection services are the insurance companies. Starting from this idea, he begins building a realistic society in which insurance companies provide protection and tackles the concrete problems which this system may encounter in practice. This is particularly useful because people in general cannot envisage a world in which security would be offered privately. However, in my opinion, the economic a priori argument that the free market will provide efficient services to consumers in any area, including security, is extremely strong even if it is difficult to mention exactly how will the market choose to serve consumers’ needs. After all, the human mind cannot even grasp the entire production process of manufacturing a simple pencil. How could one expect to give beforehand a detailed explanation on how the market will provide a complex good like security?
Bottom line here is that both theory and experience (practice) have proved that the market will react efficiently to consumer desires. Thus it is bound to react also in the case of protection.
Most people, when confronted with the idea of private police are often convinced that this will degenerate into anarchy. Thus, they more or less envisage private police guards running around shooting each other. Of course, it seems obvious that this kind of behavior does not make economic sense – private police guards would have a strong economic incentive to avoid any type of conflicts and to satisfy as best as they can their current and possibly future customers. To my mind, the market would also solve other related problems, such as protecting the poor people who currently cannot afford private protection services. Competition and deregulation would drive prices down and companies would also have incentives to offer services for free in some cases.
From Theory to Practice
However, regardless of how good a particular theory is, the economist who came up with it is confronted with a common question: That’s a good theory…, but can you show me how it works in practice? In my opinion, an interesting example would be the security agencies that are currently operating. I could not help noticing the impressive recent expansion of private security agencies in my home town, Bucharest, Romania. There is currently no street corner in Bucharest which does not have at least one or two private security guards, strolling around, waiting to answer to possible calls from their customers. Practically, all companies in town have subscriptions to private security agencies. Recently, more and more people from the consumer segment are buying subscriptions to private security agencies. Ironically, even the government is currently employing private security guards. Public parks, subway stations, concerts and different public manifestations are protected by private police agencies. The number of companies offering this type of services has visibly increased.
The important question is – Why is this trend taking place? Well, the obvious reason is that police forces are extremely inefficient and weak and people feel the need to buy real protection services. I know this for a fact. My house, which is placed only two blocks away from a police station, was robbed three times in two months. After I purchased a subscription to a private security agency the robberies immediately stopped. Thus, it is reasonable to infer that public defense services are inefficient and there is a general lack of trust in the police force. I have tried to find some hard data to prove this lack of trust but unfortunately I could only find unofficial information on different forums and websites. However, I did manage to find an interesting indicator at the National Institute of Statistics. This indicator is the turnover value index calculated monthly for services of protection and investigation offered mainly to other enterprises from 2000 until 2007. After analyzing the data, the monthly evolution of the turnover index looks something like this:
Chart 1, Source: National Institute of Statistics, http://www.insse.ro/cms/rw/pages/index.ro.do
Apart from the normal monthly fluctuations, which are characteristic for any kind of business, it is easily observed that this line of industry, which includes private guards, alarm systems, transport services and private detectives, had a clearly increasing evolution. Moreover, if we compute the sums, the yearly evolutions would look like:
Chart 2, Source: National Institute of Statistics, http://www.insse.ro/cms/rw/pages/index.ro.do
Thus, it is clear that in this country there is a huge demand for private protection. According to some sources, several private security companies have turnovers larger than 20 million Euros per year and profits that are in some cases larger than 4 million Euros. It can be clearly interpreted, to some extent, that private security agencies in Romania are an entrepreneurial success story.
I have given this example in order to show that private protection and defense is not a myth and that the market is capable of providing efficient services to consumers even in this sector, which is considered a public good that must remain a state monopoly. The logical deduction that private protection would lead to increased security and decreasing costs is also verified in practice.
The law of free competition, which states that freely competing companies offer better services at a lower price than an artificially created monopoly could offer, also applies in the case of defense. The public police system, like any other agency financed from public money, does not have the economic means to allocate resources efficiently and thus provide better services to consumers.
Private protection services are already offered on a large scale and can be considered an entrepreneurial success. It is thus clear that the consumers show a strong demand for this kind of services, largely due to the inefficiency of the public services provided by the state. The idea that private protection would promote chaos and not order can be refuted both theoretically and empirically. The free market is the only mechanism that can offer efficient services to consumers, even in the field of defense.
 De Molinari, Gustave - The Production of Security, 1849, http://praxeology.net/GM-PS.htm.
 Rothbard, Murray Newton – Power and Market, The Ludwig von Mises Institute, Auburn, Alabama,1970.
 Rothbard, Murray Newton – For a New Liberty: The Libertarian Manifesto, The Ludwig von Mises Institute, Auburn, Alabama,1973.
 Of course, the insurance company would want to avoid any type of aggression or theft against its own customers because it will afterwards have to pay penalties.
 Read, Leonard E. - I Pencil, Foundation for Economic Education, New York, 1958.
 Offering protection services for the poor would be in my opinion a very efficient type of promotional technique for those particular companies. This would be similar to what we call C.S.R. today.
 Unfortunately, more recent data were not yet available but anyway the years 2008 and 2009 would probably have an evolution affected by the economic crisis.
* The turnover value index is a type of Laspeyres index and it is calculated as a non-deflated weighted index. The reference year in this case is 2005. The index is calculated by dividing the value of a basket of goods in current prices by the value of the same bundle in base year prices.
** The yearly evolution was computed basically by summing up the individual monthly data.