Bryan Caplan and Edward Stringham expand in Networks, Law, and the Paradox of Cooperation (PDF) on Caplan's critique of the thesis by Tyler Cowen and Dan Sutter that the anarcho-capitalist ideal of private defense firms is impossible due to the structure that industry would form.#

Cowen and Sutter (1999) argue that libertarian doubts about the viability of collusion are inconsistent. How, they ask, can free-market economists be simultaneously optimistic about the private production of public goods, but skeptical about collusion? Collusion is, after all, a public good vis-a-vis competing firms. Cowen and Sutter's challenge may be dubbed the Paradox of Cooperation: Laissez-faire can cope with either the monopoly or the public good problem, but not both.1 Libertarians who dismiss concerns about collusion are at best over-confident.

Cowen (1992) goes further by claiming that in so-called network industries, libertarians are not just over-confident, but wrong: Laissez-faire leads to monopoly, not competition. Although his network industry argument poses a challenge for more moderate libertarians too, Cowen primarily employs it to expose the fundamental weakness of the radical anarcho-capitalist position (Rothbard 1978, Friedman 1989): An excellent example of a network industry is the very free market in defense services that anarcho-capitalists favor. In consequence, anarcho-capitalists are sorely mistaken about the consequences of their ideas if tried.

The paper very much follows the structure of the previously mentioned critique, but is expanded with references and detail.#

The authors bring up the issue of cooperations that are "self-enforcing":#

Cowen here conflates two radically different sorts of business cooperation under the generic heading of "collusion." Standardizing products is essentially a coordination game, fixing prices a prisoners' dilemma. As long as consumers want a uniform product, adhering to industry standards is self-enforcing. As long as consumers prefer to pay less rather than more, price-fixing is not. Ability to reach the cooperative outcome in the former in no way "implies" ability to reach it in the latter.5

The authors also mentions an important point about how to measure the success, or failure, of a collaboration and identify that is possible to have partial success in such endeavours:#

First consider the effectiveness of partial participation. Voluntary collaboration never yields unanimity. But howinjurious is the shortfall? This hinges on the elasticity of outsiders' behavior. Suppose that 50% of all firms in an industry join a cartel to restrict production. They will be unable to raise prices much because outsiders' supply curves will typically be elastic. Firms that refuse to join the cartel increase their output to exploit the situation. Indeed, if outsiders' supply is perfectly elastic, strict unanimity is crucial; any departure from 100% participation renders the cartel impotent. In contrast, if 50% of all people who benefit from clean air decide to "do their part" by buying low-pollution cars, they can make a significant dent in the problem. As long as the outsiders already pollute to the selfishly optimal point, an improvement in the level of air quality has no effect on their marginal incentive to pollute. Half of the drivers pollute less; half pollute the same; air quality improves. Of course, neither the cartel nor the clean air movement fully solves its public good problem. The point is that voluntary pollution abatement is a partial success, whereas the voluntary cartel is a full failure.

In July 1993, Bryan Caplan wrote Outline of a Critique of Tyler Cowen's "Law as a Public Good", in August 2004, Jay McCarthy read it.#

The summary provides a good picture of what the issue is:#

Many critics of free-market anarchism have argued that collusion rather than competition would prevail, making anarchism no more attractive than government. However, up to now very little attempt has been made to justify this claim. On its face, the idea that defense services are a natural monopoly is highly implausible, as David Friedman points out in his _Machinery of Freedom_.

It is for this reason that Tyler Cowen's recent critique of anarchism is a major contribution to the debate. For in his "Law as a Public Good: the Economics of Anarchy," Cowen puts forward a powerful reason to buttress the view that collusion would prevail. There are certain industries, which we may call network industries, that have a peculiar feature: competing firms must also cooperate (to some extent) with their supposed competitors in order to be in business in the first place. Normally, competitors have no reason to trade with each other -- why should one supermarket have any dealings with another? But this is not always the case: in industries like credit cards, banking, and franchises, competing firms must also cooperate. [...]

Well, so what? Why does it matter that in certain industries, competitors must also cooperate to a limited extent? The answer is that this industry structure can make collusion work. [...]

What does all this have to do with the viability of free-market anarchism? Cowen's answer is that the defense industry is a network industry. Just like the industries discussed earlier, defense firms must cooperate with their competitors (to a limited extent) in order to do their job. In the event of a dispute, competitors must agree to arbitrate with their rivals in order to preserve peace. (Moreover, all of the advocartes of anarchism have forcefully argued that any sensible businessman would do precisely that.) But the very possibility of peaceful cooperation between competitors indicates that we have a network industry on our hands; and such a network, immune to the usual checks against collusion, is likely to suppress competition in the mutual interests of the members. In particular, since the defense industry, taken as a whole, has a near-monopoly on force, the entire society would be in danger should the various firms in the industry succeed in colluding. The united defense industry could do whatever it wanted. Anarchy would be transformed in a state of the worst sort.

Caplan's critique makes us of a few points:#

• Competing Networks
• Private Supply of Public Goods for Self-Interested and Altruistic Purposes (This contained some insightful nuggets.)
• Varying Degrees of Network, due to:
  
  • Degree of Linkage Amongst Members
  • Lumpiness of Transactions
  • Service-Oriented or Member-Oriented Networks
  • Origin of Network: Designed or Evolved?
  • Independence from the Network
  • Propensity to Use Collusive Power

He then deconstructs a possible defense industry and tries to ascertain if it would be a powerful, collusive network industry. The resolution is "No." And it centers on the: local nature of crimes, general independence of criminals, its relation to common law, and the diverse variants of defense a firm may pursue (some that exist today.)#

Finally, Caplan makes an interesting observation and briefly describes his version of anarchy. I found the observation to be very insightful:#

As I suggested in conversation with Cowen, people seem to behave "altruistically" ("ideologically" might be a more neutral word) in one sphere of life but not the rest. In their role as private individuals, people give huge amounts of money to charity. But very few businessmen run their businesses like charities, even if they are charitable people. (Even there, though, most people wouldn't murder for a living, even if the pay were good.) Perhaps this is a way to solve Cowen's paradox, that if private supply of public goods works, then collusion works, and if collusion doesn't work, then private supply of public goods doesn't work either. If people are (somewhat) ideological qua private individuals, but profit-maximizing qua businesspeople, then both good results (non-collusion and private supply of public goods) can spring from the same group of people.

Another related observation: While in their business roles people are probably less charitable than in their private roles, most businesspeople still feel somewhat constrained by morality. Most wouldn't murder or steal to increase profits. In a way, the business role tends to relax some, but not all, of the moral constraints that they feel as individuals. (Not that this is a bad thing -- I agree with Milton Friedman that managers should be charitable with their own money, not their stockholders'.) Compare this to the governmental role: this seems to relax almost all of the moral constraints that people feel. It is a truism that the gentlest people will kill for their governments; but how many would kill for their employers? So perhaps this is another reason (and not just a deus ex machina) to think that ideological constraints on abuse of power would work better in an anarchist society.

In the Review of Austrian Economics, Tyler Cowen of The Marginal Revolution, writes The Costs of Cooperation (PDF) with Daniel Sutter.#

These costs associated with cooperation appear in situations where a group has the power to produce a public good, and thus also a public "bad."#

We focus on the link between an increased ability to produce public goods and an increased ability of some individuals to produce public bads. The same cooperative techniques which allow individuals to produce public goods also allow some individuals to combine and pursue their self-interest at the expense of others. By treating the beneficial and adverse consequences of cooperation separately, the extant literature overestimates the benefits of cooperative efficacy; in some cases increased cooperative efficacy brings net costs. 2

Examples of the costs of public goods production abound. The same mechanisms which support public goods production also lead to ostracism of minorities, discrimination on the basis of race, ethnicity, and gender, restrictive social norms, and collusive industrial practices. We use the term public bads to refer to collective products or outcomes which involve costs in excess of their benefits; such outcomes are public goods for some small, cohesive group but not for the broader society.

In the discussion of government involvement with this process, the authors make the point that governments are not completely coercive. While not essential to the paper's thesis, it is an interesting statement:#

Economists typically associate governments with coercive solutions to public goods problems. But government activity itself requires the voluntary production of public goods. Agents in governments must overcome collective action problems to achieve their ends. Citizens and government employees must cooperate voluntarily with government pronouncements. Tax systems rely on perceptions of government legitimacy to limit cheating and induce payment. The bureaucrats who enforce government regulations must believe that the regulations are beneficial or at least reasonable. Only easily monitored contributions to public goods production can be supplied through government coercion. Conscription can fill the ranks of an army, but inducing the conscripts to fight hard requires voluntary compliance. A government which does not receive significant voluntary contributions will be extremely weak. 8

Another interesting point related to government is the need for tight cooperative efficacy in order to constrain the power of government in the way that most libertarians would desire:#

While the anti-communitarian slant of our argument may be obvious, the costs of cooperative efficacy also challenge non-communitarian views, such as libertarianism and classical liberalism. Both libertarians and classical liberals favor relatively small governments, limited by binding constraints. The necessary means of limiting government to such levels, however, may imply a world with excess cooperative efficacy.

Libertarian views frequently ascribe large scale government intervention to the "concentration of benefits, diffusion of costs" logic presented by Olson (1965); Milton Friedman (1980) is one eloquent proponent of this view. In other words, libertarians believe that voluntary institutions do not necessarily produce the public good of mobilizing public opinion against excess government intervention. At the same time libertarians wish that this public good could be produced with greater effectiveness. If we translate this desire into a concrete trade-off, the level of cooperative efficacy must be higher if government is to be constrained.

[...]

Note that a government with low cooperative efficacy can coerce only through easily monitored contributions to public goods, like taxes. Such a government can be relatively unobtrusive. Libertarians with a strong revealed preference for privacy may well prefer provision of public goods through a large (but ineffective due to low efficacy) government to private provision through tight-knit communities. Similarly, in some cases libertarians should prefer a large and inefficient government to a smaller, more efficient government, given that the social structures needed to sustain the latter may involve excess cooperative efficacy.

This conclusion nicely sums up the position of the paper: Cooperative efficacy is a double edged sword that maybe desirable for the same reason public goods are desirable. The solution to public bads lies not in destruction of efficacy, but in a more accurate filtration system to ensure only authentic public good pass the gauntlet.#

Claims of institutional failure are more complex than first meet the eye. Solving most problems requires greater cooperation, but more cooperation does not always bring large benefits or even necessarily net benefits. Cooperative efficacy is not accompanied by a selection mechanism that filters out the public goods from the public bads. The costs of cooperative efficacy thus imply greater pessimism about our ability to improve the world through political change or superior provision of public goods.

Our analysis also suggests we should shift our attention towards mechanisms for selecting the outputs to produce and away from the level of cooperative efficacy per se. With imperfect selection (i.e., a mixed mechanism), increased cooperative efficacy leads to greater production of public goods and public bads. An improvement in the selection mechanism, on the other hand, filters out public bads without any corresponding offsetting disadvantage.