Free Market Defense Problem

I was recently reading a thread on Mises.org, and a member had a question regarding Rothbard's novel,"For a New Liberty" and a situation posed to him by a "socialist friend." Theoretically, a free society would be able to handle violent disputes or "wars" through private means. The poster's friend was wondering what would happen if say, Microsoft grew so large in size and had such a massive amount of money that it could easily fund a private military and act against the population of the society - "take over." Couldn't the "Microsoft Military Force" have the funding to knock out any other private military's? How could the society prevent such a situation without a state (government apparatus)?

The theory of Economic Calculation by Ludwig Von Mises would explain why no entity could ever grow so large as to "take over" the population of the Earth - but that's a post for another day as well.

First, I would like to point out that just because a military force may have the most "funding" or resources, compared to its opposition, doesn't translate to an expected triumph.

I felt that the following response was most qualified to answer the poster's question:

"The argument is flawed in many respects.
1. Irony: Does your socialist friend realize that his concern is basically that Microsoft will turn into his government? You should point that out to him immediately.
2. Absurdity: By his own line of reasoning, Microsoft can buy anything it wants. It can buy all the bakeries and have a monopoly on bread and then starve everybody, or perhaps it can buy all of the shoes and have a monopoly on shoes. Then we'll all be at the mercy of Microsoft begging for bread and shoes.
3. Incentive: War is costly. Unlike a government, which can externalize the costs of its action to all of its subjects, a private entity would have to bear the full cost at its own expense. So the incentive for such costly aggression is very much working against you.
4. Market Reality: Our starting point is a successful enterprise such as Microsoft. As successful as it may be, as long as consumers have other wants in their lives except for MS software (do we still have to eat?), it's capital value is only going to be a fraction of the total capital value in the market.
5. Financial Reality: The funds to buy all of these weapons and soldiers will just not be there. Keep this in mind: the capital value of the firm is a function of its money making potential. So now, where would it get the funds?
A. Profits. Profits are always temporary and are never secured. As successful as we can imagine Microsoft to be, the total profits is likely to be a small fraction of the total capital value of the firm. Any annual profit will simply not be anywhere near sufficient to fulfill this fantasy of initiating and conducting a war. it's simply absurd. If the firm was to plan a gradual buildup of arms, it must divert its profits/savings away from those same productive investments that have made the firm profitable in the first place. The firm itself would be seeding its financial destruction making the whole endeavor impossible. The diminishing profits and even before that, the expected diminishing profits as a result of the firm's non-productive investments, e.g., arms buildup, will make the firm's capital value tank.
B. Capital Value - What if the owners collude and sell their shares to raise the funds. In this case, we are no longer talking about Microsoft the firm taking over the world, but a bunch of idiots who have sold their shares just so they can consume it. And on what? weapons? armed men? How much fire power can they buy and how long can they sustain this army for, with nothing but a fixed amount of cash? Remember, we are no longer talking about Microsoft but a bunch of individuals who have raised some cash in order to go on a criminal endeavor, which according to your friend is likely to conquer the world.
Your friend fails to realize the difference between political power and economic power. The first is gained by the initiation of force or threat of force and the latter is gained only by voluntary consent. To transition from the latter to the former is not so easy as it seems. In fact, without the public supporting such an institution, it is hard to see how it is even possible."


This response was made by the user "DD5" from Mises.org.
The thread can be found at this link: http://mises.org/Community/forums/p/14160/301265.aspx#301265
Photo courtesy: afhub.com

-Jeff


Unlike Jeff, I don't know how to read. Sorry guys, you won't be seeing me quote much.
-Ashley