Would PDAs form in an ACS?

Many anarcho-capitalist thinkers claim that <a href="http://en.wikipedia.org/wiki/Private_defense_agency">private defense agencies (PDAs) would exist in an anarcho-capitalist society (ACS). <a href="http://www.daviddfriedman.com/Academic/Law_as_a_private_good/Law_as_a_private_good.html">David Friedman is one example. But why do we think this? That's what this article is about.

Suppose there are two key actors and one does something the other doesn't like. If the degree of the offense is perceived as sufficient than the offended party might attempt to coerce the other party into behaving in the desired way. They could engage in direct physical violence, indirect physical violence through third parties, direct peaceful resolution, or indirect peaceful resolution.

The likely outcome is indirect peaceful resolution. Direct physical violence is costly for at least three reasons. There is a risk of death, the expense of purchasing weapons and training and so on, and opportunity cost. Direct physical violence is unlikely to occur because it is likely the case that each individual could pay someone else, such as a specialized military firm, to conduct violence instead. The specialized firm would be able to produce a larger quantity of force for a much smaller cost.

The expected result is that people will contract private security firms rather than engage in personal conflict. This is reflected in the real world already. We see many more business owners that hire private security firms compared to the number of business owners that prefer to personally patrol the premises of their businesses. We also see that many people are unhappy paying taxes, but they would prefer to pay taxes than to have to personally enter a war.

The security firms, however, start to notice something. People don't want to die, and bombs are not very reusable, so supplying additional labor and capital gets expensive very quickly for the security firms. It is much cheaper for opposing security firms to arrange prior agreements with one another. Should we be forced to go to war, for example, we will limit the number of troops.

In fact, security firms need not send any troops or weapons at all! The entire system can just become a system of prior arranged contracts. This is now a private legal system and the security firms are also creating private law amongst themselves.

However, there is always the risk that the other firm or firms, as there can be multiparty situations as well, will falsely enter into an agreement. For this reason, a certain amount of force is always kept on reserve, but it is to act as an insurance policy and a deterrent for contract breaking, rather than being kept with the intention of actual use.

The need to exercise force will be even further reduced by the power of reputation or social capital through a mechanism called the discipline of constant dealings. The discipline of constant dealings is an idea which states that two firms which expect to interact with each other repeatedly over time have an incentive to fulfill their agreements with each other. This is because the profit gained in the long run from successful trade is expected to exceed the profit gained in the short run from cheating or lying.

The discipline of constant dealings is easily expanded into a general value for reputation or social capital. Suppose two actors do not expect to deal with each other repeatedly over time. It is still the case that each actor will have an incentive to fulfill their contracts due to the effect lying has on their public reputation. If a firm gains a public reputation as a dishonest firm they will lose business.

Lastly, these security firms may specialize into separate firms, or the may not, depending on the value of the economies of scope in the production of their various services. A security firm might break into separate law producing firms, case-hearing firms, enforcement agencies, insurance agencies, security agent training firms, weapons manufacturers, prison system managers, and so on. Other firms might find it cheaper to produce several of these products in-house.

When I speak of 'legal firms' in ACS society, I am referring to the collection of firms responsible for law creation, adjudication, and enforcement.