When in Doubt, The Answer is Opportunity Costs

One of my economics professors[1] frequently tells his students that when in doubt, always guess "opportunity costs." Chances are, you will get the correct answer, at least in economics courses. It's surprising how often the method works.

This is a somewhat awkward way of introducing a lively debate I've been having with a fellow named Fyodor. The debate began when Radley Balko linked to a post by Glen Whitman about how the War on Drugs causes violence. Glen aptly observed,

The illegality of drugs and prostitution means the justice system cannot help people enforce their contracts and property rights in those markets. And that?s exactly why black markets are typically characterized by violence. If a drug dealer wants people who transact with him to know he won?t put up with being defrauded, he has to hire thugs to punish those who defraud him. If a prostitute wants to be sure she?ll get paid for her services, she hires a pimp to pressure the recalcitrant johns. People with a comparative advantage in violence naturally get pulled into these professions, with predictably brutal results.

Few libertarians--indeed, few reasonable people of any political affiliation--would object to Glen's argument. Glen is entirely right: prohibitions create black markets which are characterized by violence. Simple cause and effect.

Fyodor, however, learns an additional lesson from Glen's argument:

Interesting that as much as Glen's reasoning argues for libertarianism, it argues against anarchy, because it posits the peace keeping nature of state enforcement of property rights.

Now, anyone who has ever engaged in the age-old minarchist vs. anarchist debate will know what happens next, so I won't bore you with the gory details. But in the course of my back-and-forth with Fyodor, I remembered the words of my economics professor: I did not forget about opportunity costs.

Fyodor wrote,

I would still submit that black markets do indeed imitate anarchy because I see no reason why depending on private law enforcement in lieu of a state would be any different from depending on private law enforcement while there's a state saying you're not supposed to.

To which I responded,

Here is a little thought experiment for you: Consider the fact that parents who send their children to private schools must take into account the opportunity cost of giving up a "free" public education. Any payment for private tuition is on top of this opportunity cost. Do you think it would be easier or more difficult for private schools to stay in business if public schools were abolished?

To make the analogy a bit more cogent, consider the fact that those who want to purchase private law enforcement under the current regime must take into account the opportunity cost of "free" public law enforcement, even if they don't want it. Of course, this is not such a big problem for drug dealers operating in a black market, as public law enforcement isn't a very useful tool for resolving their disputes. However, taxes imposed upon those who would prefer private law enforcement is a cost, just as paying for public school is a cost to parents who prefer to send their children to private school. Further, private law enforcement is currently illegal--the very definition of a state is an organization that claims a monopoly on the legitimate use of violence (i.e. enforcement of law) within its territory. This state prohibition serves as a costly barrier-to-entry for any potential law enforcement competitors. This is the primary reason why few if any private law enforcement agencies currently exist.

Imagine how much more expensive and difficult sending your children to private school would be if the government claimed a complete legal monopoly on education--a monopoly even more monopolistic than it is now were the state to prohibit the very existence of private schools instead of just tolerating them with not-so-thinly-veiled contempt. Who among us--other than Vito Corleone and Washington politicians [Is there a difference?-ed. Does the Pope shit in the woods? Do rhetorical questions always need smartass answers?-ed. Yes.]--would still be able to send their children to a school of their own choosing? Few, I gather. The opportunity costs associated with private law enforcement agencies are just too great in the present time. The opportunity costs associated with private school are too great for those parents who would eagerly remove their children from public schools if given the means to do so.

fn1. A professor who, incidentally, is speaking tomorrow night to the College Libertarians at Georgia Tech. Any Catallarchy readers in the area are invited to attend. The relevant info is:

Tuesday (April 20) at 6:00 p.m. in room 115 of the Instructional Center.
Professor Derek Tittle
Topic: the Great Depression and the Crash of '29.

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A major difference here is

A major difference here is that in the force market government tends much more strongly to crush competitors by force. It's that more than the opportunity cost that dissuades most from contracting with another producer.

odd... do you guys celebrate

odd... do you guys celebrate mayday as a labor holiday or what?

On this issue it seems like you might be barking up the wrong tree. For most drug dealers, the answer isn't opportunity costs because they often don't pay taxes on their income. Fyodor is right.

Are taxes the only form of

Are taxes the only form of cost?

The opportunity costs

The opportunity costs associated with private law enforcement agencies are just too great in the present time.

Hmmm... maybe not. They aren't fully "law enforcement agencies" in the anarchist model, but I can think of several situations that approach private law enforcement agencies from different directions:

1) Arbitration boards, which seek to avoid the high costs of contract litigation by resolving disputes outside of government civil courts.

2) Companies which choose different regions in which to establish contracts (eg. Delaware, or the Netherlands) so they can have them enforced in a manner and at a cost that suits them.

3) The international arena in which nations are sovereign and must resolve their disputes using the economic, diplomatic, and military resources at their disposal.

Case (2) is sort of messy, because tax avoidance is a large part of the reason for choosing the region where they are enforced. Case (3) is even messier, because the parties in dispute use internal acts of force to maintain power. But if you look at them as "black boxes", the only reason for these parties to avoid military action is because they think it is too expensive a way to reach resolution. I bet you could base an argument starting with the observation that "two democracies have never been at war" and persuade me that the less internally corrupt the law enforcement agency was, the more likely they would be to resolve disputes peacefully.

The state crowds out most

The state crowds out most private law-enforcement efforts, leaving only niche markets for Don Corleone and the like.

I would add that some of the crowding out is ideological. For the last century or more, people have absorbed the government schools' lesson that law enforcement is one of those things "provided to us" by government. So they are completely out of the habit of thinking in terms of decentralized, bottom-up alternatives.

Matt, For most drug dealers,

Matt,

For most drug dealers, the answer isn?t opportunity costs because they often don?t pay taxes on their income. Fyodor is right.

Notice where I said,

    Further, private law enforcement is currently illegal?the very definition of a state is an organization that claims a monopoly on the legitimate use of violence (i.e. enforcement of law) within its territory. This state prohibition serves as a costly barrier-to-entry for any potential law enforcement competitors. This is the primary reason why few if any private law enforcement agencies currently exist.

Two reasons why private law enforcement doesn't work right now is, among other reasons, because people already have to pay for public law enforcement whether they want it or not, and because, as JTK put it, the "government tends much more strongly to crush competitors by force."

Titus,

Are taxes the only form of cost?

No. "This state prohibition [on private law enforcement] serves as a costly barrier-to-entry for any potential law enforcement competitors."

Mark,

True, there are some alternatives, but notice that none of those alternatives you listed would help resolve conflicts in a black market.

so then what's the

so then what's the opportunity cost- the cost of driving another monopoly out of the market? While I'm sure these discussions are rather common around here, it seems to not bode well for the future because it's actually sort of an inequality problem.

Matt, I'm not sure if I

Matt, I'm not sure if I would consider the high costs of entry to be opportunity costs. The notion of opportunity costs reminded me of public schools because parents must bear the costs of paying for public schools even if they choose to send their children to private schools. These opportunity costs explain why many parents do not send their children to private schools, and those who do tend to be wealthy enough to pay for both schools while using only one. This I connected to the private law enforcement issue, since there is little reason for people to pay for private law enforcement when they are forced into paying for (and using) public law enforcement.

This I connected to the

This I connected to the private law enforcement issue, since there is little reason for people to pay for private law enforcement when they are forced into paying for (and using) public law enforcement.
that's what I thought- see my first comment about dealers not paying taxes.

But dealers are not the only

But dealers are not the only ones who would benefit from private law enforcement or would choose to purchase it over the current alternative if given the option. Those not working solely in the black market do pay taxes. Nor are dealers immune from taxes altogether.

That's not what Fyodor was

That's not what Fyodor was talking about. He didn't say that the presence of Black Markets meant that the world was libertarian. He said that it provided a little model.

And I argued that a black

And I argued that a black market in drugs is not an accurate model of a truly free market because of opportunity costs and the prohibition on private law enforcement. So too, the current private school market is not an accurate model of a truly free market because of opportunity costs of parents having to pay for public school even if they don't choose to use it.