– January 9, 2020

Yes, this piece is yet another critique of Tyler Cowen’s State Capacity Libertarianism. Max Gulker’s and Richard Ebeling’s contributions were damning enough but my goal here is different — to elucidate a fuller spectrum of NGAs, or non-government alternatives to problems big and small. I have spent much of my post-Marxist life (hey, I’m far from alone!) trying to develop a positive theory of problem-solving. I have failed in that quest because I am too dumb/the world is too complex to pull it off, but, hobbit-like, I have learned quite a bit along the way.

We all face problems all the time, some more pressing than others a la Maslow’s Hierarchy of Needs. When allowed to operate, markets solve most personal problems more efficiently than alternatives. If we want food, water, a pet, a companion for the night, we buy or rent, using resources we gained by selling or renting our stuff to others. Some problems, like organ transplantation, are messier because most people consider a market solution repugnant, but voluntary exchange solves most pressing daily problems for us, which is why economic freedom and growth are so intertwined.

Yet problems continue to abound due to scarcity and the fact that humans seem to come pre-wired (by natural selection and/or the Creator) to perceive problems and pine for their resolution. Homo solver quaestio might be a more apt species name than Homo sapiens because truly wise humans would not assume that all problems can be solved by governments, or by for-profit corporations. Instead, they would study the conditions in which different types of problems are most efficiently mitigated.

That is an empirical question, with answers that do not come easily and can vary over time and space as transaction costs change with culture, regulations, and technology. But that very heterogeneity can provide grist for deeper understanding.

It turns out, for example, that not all government enterprises are destined for bloated inefficiency. When internal incentive structures match clear goals and markets provide competition, governments can hold their own with NGAs. 

Colonial Pennsylvania’s General Loan Office (GLO), for example, made thousands of mortgage loans that were repaid on time, with interest, enough to allow the elimination of some taxes. Its loan officers were flooded with applications but had long-term incentives to lend to the best borrowers, not political friends, and it did not monopolize mortgage markets, which remained dominated by individual lenders. Paper bills of credit that circulated as a medium of exchange constituted its liabilities but book credit, full-bodied coins, and the bills of credit of nearby colonies also circulated, so it did not monopolize money issuance either.

Of course, as I detail in Financial Exclusion, most government lending schemes end in disaster. South Dakota’s did because its loan officers had incentives to lend to friends, not the best borrowers. But at the same time, South Dakota owned a cement company that poured money into Pierre’s coffers for decades. Turns out that while the state owned the company, a management company ran it in exchange for a slice of its sensibly-calculated profits.

Most government-owned corporations (a.k.a. public corporations or state-owned enterprises), though, turn into disasters because they are given monopoly powers and/or their internal incentive structures are not properly aligned with their ostensible missions. The Ex-Im Bank, Amtrak, and the Pennsylvania Turnpike Authority (PTA) spring immediately to mind. The last mentioned monstrosity owns and operates a dangerous and expensive toll road system in the Keystone State, which almost leased it out to private interests in 2007-8 before the you-know-what scuttled the deal, leaving the PTA as deep in debt as it is in corruption.

Of course leasing government assets to private companies is not always a fit solution because a lessee will pay more for an asset that comes with monopoly privileges. So consumers often see little service or price improvement upon privatization and, in fact, can end up paying more/getting less if the lease is not carefully negotiated to protect their interests.

Federalism further complicates analysis. Even if one is convinced that government should provide service X, it often remains unclear which level of government — supra, national, state/province, county/parish, town/district — is most appropriate. National governments tend to have more resources but less information about local conditions. Over time that can lead to inefficient arrangements like local school boards that cave in to Washington’s decrees in order to keep the green sugar taps flowing.

Almost every service that government currently provides could be provided by the private sector, by which I mean markets or privately-owned organizations, from non-profits to mutuals to publicly-traded joint stock corporations. I can make that assertion because almost every government service is currently, or previously has been, in the U.S. or elsewhere, provided privately. 

Here is a quick and by no means complete run down:

Current government serviceNGA
American Indian supportAmerican Indians; charities; good attorneys
Medicare and MedicaidSingapore-like system; mutual life-health insurers
Social Securityprivate security: mutual funds; mutual insurance; real property acquisition
air traffic controlairlines
airport securityprivate companies
arts (fine)markets; NGOs
automobile licensing and registrationinsurers
bailoutsunnecessary and unwanted service
courtsarbitrators
drug safety testingpharmaceutical companies; independent doctors with incentives to help patients
economic growth and developmenteconomic freedom
educationnon-profits; professional partnerships
financial regulationSelf-Regulatory Organizations, like stock markets and freer entry
food inspectionPrivate food inspection companies
garbage removalproprietorships (residential); joint-stock corporations (commercial)
income redistributioncharities; mutual disability insurance
lender of last resortprivately-owned, publicly-traded central bank as in Switzerland and the early U.S.
moneybanks; mutual funds; other private concerns
orphan and elder carecharities; family trusts
prisonsnon- or for-profit corporations with incentives to reduce recidivism
real estate titlingtitle insurers
science (foundational aka basic)foundations; proprietors
space explorationElon Musk
technologyproprietors; for-profit corporations
truth-in-advertisingInternet
“War” on Crime, Drugs, etc.unnecessary and unwanted services

Many of these examples are straightforward and recently discussed by AIER authors and others. 

Some government services would be more challenging to replace completely but most can be made more tractable by unbundling them. For example, we do need a national military but keep in mind that most of the tools that our brave marines, sailors, and soldiers use are privately-made, albeit for way too much money due to the crony capitalism called the military-industrial complex by President Eisenhower in his farewell speech in January 1961.

Our current military model is only one of several. Many countries today, including advanced ones like Switzerland, use a more militia-like organization to protect themselves from ground invasion. Militias can be state or municipal level but also formally-incorporated NGOs, like the numerous non-profit militia companies that formed in antebellum Vermont, or even spontaneous units, like the private “legions” raised by rich Virginian Charles Dabney during the Revolution.

While air and missile defence is best left to supra-national organizations like NATO, naval forces could be reduced by reviving privateers, private enterprises given license by governments to depredate (seize and sell) the shipping of enemy combatants. It’s “green” because instead of sending ships laden with oil or other goodies to the bottom, the goal is to capture and reuse them. Traditionally, privateering was highly lucrative but risky. Some think that technological advancements rendered it impossible but the biggest impediment to its revival is actually international law and the widespread use of Liberian and other neutral flags/ship registrations.

Many other NGAs get blocked not by economic realities like transaction costs and asymmetric information but rather by regulations, politics, and just plain ignorance. Before Social Security there was private security and it worked great for most, especially those who insured against death and disability with mutual insurers like The Guardian nee Germania. Mutuality (ownership by policyholders, depositors, or other customers) reduces many of the problems associated with asymmetric information (adverse selection and moral hazard) but changes in regulations and the tax code has reduced interest in this most interesting type of NGA. Today, it is difficult to find anyone who even understands mutuality, much less who stands ready to organize a new mutual.

Many people, even businesspeople, confuse mutuals with non-profits, or non-government organizations (NGOs) as they are increasingly known. Mutuals are for-profit but the profits accrue to their customers, not a separate group of stockholders. That raises some governance problems, but ones that successful mutuals have learned to mitigate through market competition and internal incentive alignment.

For many problems, though, non-profits have trumped governments and for-profits, including mutuals. People need to remember the non-profit option before turning to governments or for-profits for aid. 

But they also need to keep in mind that non-profits with independent incomes may become problems themselves. If not properly governed, they can bloat like a government but, due to their market power and unaccountability to an electorate, also sting like the worst predatory for-profit or authoritarian government. I would provide ample examples but am currently too short on cash to get sued, which sounds like the punch line to a bad joke: “You know you are dealing with a predatory non-profit … wait for it, wait for it … if it sues you and you work for it.” I believe some unnamed non-profit hospitals sell barely overdue bills to collection agencies surreptitiously owned by hospital executives to get around the non-distribution constraint. If all this sounds too conspiratorial, check out an oldie but a goodie, Unhealthy Charities: Hazardous to Your Health and Wealth by James T. Bennett and Thomas J. DiLorenzo.

In short, nothing is perfect, but some organizational forms and ownership structures are better than others at ameliorating specific problems. Humans solve many problems with market exchange but currently are not very good at solving complex social problems, leaving a lot of money on the sidewalk by trying to shove every problematic peg into either the government or big business holes and then castigating proponents of the other view. Potential solutions run along a broad spectrum from national government to local charity. 

Matching problems to appropriate solutions is key. Such matching can take place through competition and/or experimentation, especially if we can use reason, experience, and binding budget constraints to eliminate obvious losers, like car washes owned and operated by the U.N. But it seems almost nobody thinks in these broader terms anymore, perhaps because of overspecialization in our business and policy schools.

Robert E. Wright

Robert E. Wright

Robert E. Wright is the (co)author or (co)editor of over two dozen major books, book series, and edited collections, including AIER’s Financial Exclusion (2019). Robert has taught business, economics, and policy courses at Augustana University, NYU’s Stern School of Business, Temple University, the University of Virginia, and elsewhere since taking his Ph.D. in History from SUNY Buffalo in 1997.

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