Insurance-funded stateless military: a defense

Fringe elements posted a video recently explaining the difficulties with different proposals for how a stateless society will deal with military defense. He looked at militias, PDAs, and drew a nuclear arsenal insurance agencies, and explained problems with each of those approaches. Then, he described a scenario that he believes is the most viable. In his idea, as I understand it, there’s a rule, one armed with near-universal acceptance, that becomes common law. The rule is that in order to secure legal defense, you have to pay for national defense. I think this is a decent solution, and I can imagine it working.

The purpose of this video is to defend the insurance company approach and to show that the free rider problem, which certainly is a problem, doesn’t necessarily mean that the insurance approach is unworkable. I’ll try to do this based on the ideas from the book "Chaos Theory" by Robert Murphy. I came across this just recently, and I’ll add a link to a YouTube reading of the relevant chapter of that book.

For the sake of simplicity, we can start off by imagining a situation in which there’s a stateless zone with no standing army, and the neighboring states haven’t invaded yet. This may sound quite artificial, but please bear with me. The idea is to explain a principle rather than to give a realistic account of what would happen.

So in the state of Sloan, the people who would be willing and able to pay the most to be insured against war damage to their property would be the owners of the biggest firms. They own factories, apartment complexes, etc. At this point, there are insurers in the state of Sloan who are offering war damage insurance, but none of them are funding. Allow me to explain—the stable zone has no army yet because the lack of an army means that the risk of invasion is very high. The premiums for war damage insurance are also very high, especially for the owners of the big firms, since the insurers realize that the assets of those big firms are very tempting targets for any invading force.

An entrepreneur recognizes an opportunity. He realizes that he could offer lower premiums to those big firms than what they are currently paying if a defensive military existed. Because he’s been paying attention, he also realizes that if his new insurance company funds the army that will be necessary, he’d be creating a positive externality that would enable other insurers, who aren’t contributing to the military, to lower their premiums by an even greater amount, which is the free rider problem.

But if nothing changes, then the entrepreneur isn’t going to make any money. So he makes a plan, and he draws up a proposal for presentation to the owners of all the biggest firms in the stateless zone. If they all commit to signing up for his long-term insurance deal, he’ll be able to offer them all dramatically reduced rates compared to what they’re paying now, and he’ll do this by reducing the risk of war damage by using their subscription fees to build and maintain a defensive military.

So it’s true that this will create lots of free riders. The smaller insurers and their clients will be benefitting enormously from the positive externality of the reduced threat of being attacked. But since the big firms will benefit from having their infrastructure protected and reduced costs, they don’t really care about that. And since the entrepreneur will be making a large amount of money from the deal, he’ll be happy too. Because he presents it as a package deal, it means that all the big firms have to get on board; otherwise, none of them will get the insurance that they actually want.

So the owners of all the big firms do all sign up, and the state of Sloan gets its army. Of course, there may be details that would hamper a plan like this from becoming realized in practice. But I reckon that the above scenario at least shows that the free rider problem is not necessarily a blocking problem as far as the creation of a stateless military via an insurance firm or firms. Thus, by solving a collective action problem through some kind of pledge system, I think it’s possible to live with free riders without their existence meaning that national defense has to be forfeited.