Chapter: 2

Frequently Asked Questions–Imagine a World Without the State

Q         Would there be anarchy without the state to enforce law and order?

A         Anarchy is always a transitory condition because security is absolutely essential to human beings. Andrew Galambos defines security as the lowest form of happiness in that without security no one feels safe in their persons and property. To accept the state as the only alternative to anarchy is to accept the enormous violence caused by states throughout history. More harm, death and destruction have been wrought by states than has ever occurred in all the conditions of anarchy that ever existed. Out of anarchy a new state has always come into existence. Providing security without the state would be the role of proprietary, profit-seeking government. Human society without the state can be far more peaceful and prosperous than it ever could be under state rule.

As Alvin Lowi 1 has observed, it is the state itself that causes anarchy, in that anarchy arises when a state fails and disintegrates, as do all states because they are inherently self-destructive. The self-destructiveness of all states that ever existed is described in the chapter of this book entitled “Civilization in Crisis.” This characteristic of self-destructiveness is observable in the United States and is described in the chapter of this book entitled “Political Democracy in America.”

Q         What is proprietary, profit-seeking government?

A         We already have it to a limited extent. It is embodied in the insurance industry and the security industry.

Q         How could insurance companies and security companies protect people from domestic crime, as distinguished from attacks by foreign aggressors?

A         Insurance companies make payment for losses from a variety of causes such as theft, robbery, physical injury, and death caused by criminal acts. Insurance companies also make payment for loss caused by non-criminal phenomena such as automobile accidents, fires, storm damage, etc. Security companies guard against loss happening. The two industries—insurance and security—are complementary. Benjamin Franklin epitomized this idea with his maxim that “an ounce of prevention is worth a pound of cure.” Security companies seek to prevent losses that the insurance company would otherwise have to compensate. The more successful the prevention, the lower will be the incidence and cost of losses. Lower loss rates will reduce the cost of insurance in a competitive market. Private security includes not only human beings acting as guards and protectors, but also includes the technology and apparatus of security, such as locks, alarm systems, sensors, surveillance systems, computer security, and many other forms of equipment and technology.

Q         Would there always be a competitive market for insurance and security services?

A         Competitive markets for insurance and security have developed over time and seem likely to develop further. In the year 2013 there were over 5,000 property and casualty insurance companies operating in America. 2 America in 2013 “. . . had more than 10,000 private security companies that earn revenue of more than billion each year. Those employed by private security companies far outnumber public police employees, and the number of private security guards employed in the United States is expected to increase faster than that of other businesses.” 3

Q         How could insurance and security companies provide for national defense?

A         At present they do not. But they could. National defense has been the monopoly of the state. The constant wars in human history demonstrate that the state does a poor job of national defense. Insurance companies exclude war losses from property and casualty insurance because they cannot estimate the amount of such losses or protect against them. However, private security companies could provide defense against external attacks. If they did, then insurance companies could provide insurance against losses from such attacks. In the insurance industry there is no such thing as a risk that is not insurable provided the payment for the insurance is adequate. Higher risks mean higher costs. Lower risks mean lower insurance costs. The more efficient the private security is, the lower the costs of insurance against loss would be. The insurance companies would estimate the risk of loss; they would know the amount of insurance customers decide to buy against such loss, and would price the insurance to allow profitable operation. That is how insurance companies operate. Profitable operation is necessary for an insurance company to honor its commitments, stay in business, improve its service, and compensate its investors.

Q         How could private companies afford to defend an entire country against external aggression?

A         Only private companies and individuals can afford to defend a country. The state has no money to defend its citizens other than the tax money it takes from private citizens and companies.

In World War II, by far the largest foreign war that the U.S. has participated in, although American soldiers, sailors and aviators fought the war, it was private companies that enabled the U.S. to emerge victorious against the large, determined and capable military forces of Germany and Japan. That is documented in the book Freedom’s Forge: How American Business Produced Victory in World War II (2012) by Arthur Herman.

The U.S. was unprepared for WW II even though it should have been obvious five years preceding U.S. entry into the war in December 1941 that Nazi Germany and Imperial Japan were bent on world conquest. When the President of the U.S. decided the country must prepare he called upon leaders of American industry to organize and supervise war production by American companies, large and small.

At the beginning of 1943 the outcome of the war looked very much in doubt. By the end of 1943 it was clear that America and its allies would emerge victorious. In the year 1943 America out-produced the combined war production of Japan and Germany by a two to one margin. Some of American production went to England and Russia to help them. At a summit conference of President Roosevelt, British Prime Minister Winston Churchill and Russian dictator Stalin, at Tehran, Persia [Iran], in 1943, Stalin “raised his glass in a toast ‘to American production, without which this war would have been lost.’” Herman, Freedom’s Forge, page 336.

Q         How could private companies organize national defense without the central authority of the state?

A         It is possible for private companies to work together to organize operations on a scale suitable to achieve joint goals, provided the state does not prevent such cooperation. For example, in 1965 five oil companies—Texaco, Humble Oil (later part of Exxon Mobil), Union Oil, Mobil Oil and Shell Oil—formed a joint venture to build four artificial islands in San Pedro Bay off the coast of Long Beach, California in order to tap into an offshore oil field. Insurance companies and security companies could and would cooperate to organize large scale national defense if there were no state claiming a monopoly on such activity. The managers of such companies would have a huge incentive not only to defend themselves, their families and their country, but also to organize an effective deterrent in advance of anticipated foreign aggression in order to minimize the risk of actually having to finance and engage in defensive military action.

Q         Without the state, how could a country be kept secure from unwanted people coming in from outside?

A         In America, the federal government has done a poor job of excluding unwanted people from entering the country. In a stateless society immigration does no harm provided immigrants have no more ability than home grown criminals to commit successful acts of crime. Immigration to the U.S. was allowed without restriction until after World War I. In the period from 1781 to 1914 immigrants helped build up the country to the point where by 1914 it was the wealthiest and most powerful nation on earth.

Q         Without the state, who would pay for the costs of services to immigrants?

A         Immigrants would pay for the services they use, just as immigrants did in America before World War I.

Q         How could a country function without passports to identify visitors?

A         No passports are required of citizens of member countries within the European Union. Until 2009 no passports were needed for Americans and Canadians to cross the border into either country. Because of a change in U.S. law passports became required for Americans and Canadians to enter either country.

Q         Without the state and border controls, including a passport requirement, how could a country secure itself from potentially dangerous entrants?

A         To enter America most people would ride in an airplane, train, automobile, or bus. All of those means of transportation will be privately owned. The owners will have the right, the ability and the incentive to exclude anyone whom they think presents a danger. The incentive would be a potential boycott of a transport company that fails to provide adequate security against dangerous entrants. Out of necessity, transportation companies serving the state of Israel screen would be travelers to exclude potentially dangerous people. That could occur without a state. Someone could walk into America, but that person would be on private property at all times, and would have to receive permission from the owners of private property to enter or occupy such property.

Q         In a stateless society what will become of what are now nations, such as France and Germany, for example?

A         France and Germany both have a unique culture and language that was built up over time by their people, not the state. Without a state the French and German people would continue to exist, as would every other people. States are not permanent. They come into existence, go out of existence, and change boundaries. Germany is an example.

Until the middle of the 19th century there was no centralized state authority in Germany. The German people lived in a number of confederated principalities and dukedoms that were united under the control of Prussia by Otto von Bismarck in the period 1864-1871.

The Prussian-dominated German state started five wars between 1864 and 1939. As a result of these wars the borders of Germany changed five times and the form of political state changed four times.

Furthermore, the aggressive wars of Germany cost the German people dearly in military and civilian deaths and injuries during World Wars I and II and in enormous damage to Germany’s cities and industries during WW II. The total German military and civilian deaths due to World Wars I and II combined was 7.3 million military deaths and 1.2 civilian deaths out of a population that numbered 65 million before WW I and 79 million before WW II. Yet the German people and culture survived the catastrophes caused them by the German state. In the 21st century the German people have a thriving society and a population of 82 million people despite, and not because of, the state. People and their culture are far more permanent than the political states that rule them.

Q         How could people be protected from an insurance company or a security company becoming a new state?

A         Unlike the state, a private company cannot compel anyone to pay for its services. That alone would be an impediment to a private company becoming a state. A private company that acted like a state would be committing crime. Such a company and its personnel would be no different than any other criminal. With the possibility and likelihood of multiple insurance companies and security companies in existence, other insurance companies and security companies would have a huge incentive to protect themselves from any company that was trying to impose a monopoly of coercion, because that would put all the rest of such companies out of business. Customers of such a company would have a huge incentive to stop paying such a company because if it succeeded in becoming the state they would have no recourse to this new state attacking them and their property through taxation and the myriad other ways that states coerce people.

Q         Could insurance companies and security companies coalesce and cooperate to form a single criminal organization and thereby become a new state?

A         Perhaps some people in such companies might consider that idea, out of the all too human desire for power over others. However, the likelihood of success for such a criminal venture seems extremely remote. The existence of such an agreement to commit crime could not be kept secret. The insurance companies and security companies that refused to join in the criminal organization would soon get all the customers of the insurance companies and security companies that had unified to commit crime. The offending companies would have no business left. Such an outcome would fulfill the vision of the Declaration of Independence that

“Governments are instituted among Men [to secure Life, Liberty and the pursuit of Happiness], deriving their just powers from the consent of the governed… [W]henever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”

Q         Without the state how could individuals be protected against outrageous costs for private health insurance?

A         Health insurance costs are outrageously high, and going higher in early 21st century America. There are causes for high costs in health insurance that are related to laws enacted by the federal state and the local states.

Starting after WW II employees covered by employer-paid health insurance were granted tax benefits that made employer-paid insurance relatively cheaper than insurance issued directly to individuals. Employer-paid health insurance became the norm because of this tax benefit. Over decades, employees became accustomed to health insurance paying for most of their medical expenses. State legislators mandated specific benefits in health insurance. There are around 2,000 such mandates among the various local state regulatory schemes.

These factors combined to cause steady and rapid increase in the use of and demand for medical services. Individuals were the users of medical services but not the customers of medical service providers. Insurance companies were the customers. Insurance companies were glad for these increases in use and demand for medical services because they allowed insurance companies to grow their businesses—and their profits—even though the ratio of profits to revenues in the health insurance business has been lower than the corporate average ratio of profits to sales.

Without the tax subsidy for employer-paid health insurance individuals would have acted as they always do when shopping for goods and services. That is, they would weigh the tradeoffs between the price of insurance and the benefits to be received. Buyers of health insurance would act just like buyers do with homeowners insurance and auto insurance. They would choose the coverage that seemed the best tradeoff between the costs and the benefits of having the insurance.

The way health insurance has evolved, the user of the services has been virtually eliminated from the process of determining price. In homeowners’ insurance the homeowner doesn’t buy insurance to pay for routine maintenance, such as cleaning carpets, re-painting the exterior of a house, or installing a new roof. Insuring those things would make the insurance very expensive. Auto insurance customers do not carry coverage for routine maintenance such as replacing tires and batteries. To do so would make the insurance too expensive. But the way health insurance has evolved, customers don’t pay the price; the insurance companies do. Customers have no incentive to economize. Neither do the insurance companies as explained above. Those perverse disincentives to keep prices reasonable are most of the explanation for the escalation of health insurance costs.

For a complete and fascinating analysis and discussion of this issue, see Catastrophic Care: How American Health Care Killed My Father—and How to Fix It (2013) by David Goldhill. For a summary review of Mr. Goldhill’s book go to the Post entitled America’s Health Care Catastrophe in the blog portion of this website at

Q         At the very least, does not the financial crisis of 2008 show that America needs the state to regulate the banking and financial services industry?

A         No, it does not. To the contrary, the banking and financial service industry is one of the most highly regulated of American industries. State and federal laws and regulations dating back to the early 20th century created a setting in which lenders and borrowers made miscalculations and errors in judgment that were the largest factor in causing the financial crisis of 2008.

A bit of history is necessary for this answer, because the genesis of the financial crisis involves several important factors that developed in America during the course of the 20th century.

During World War I there was a large demand for American agricultural products in Europe, where food production had plummeted because of the war. American farmers expanded their production capacity to meet this demand.  European farming recovered In the 1920s so that the demand for American agricultural products fell.

Farmers were among the first victims of high federal tariffs (taxes) on imports enacted in 1922 and 1930. Urged on by American manufacturers Congress enacted the tariffs to protect American manufacturers from foreign competition. Note that the manufacturers enlisted the aid of the state to fend off competition, and the state was only too ready to help them—to the detriment of American consumers.

The tariffs reduced the amount European and other countries could sell to America. To buy American products foreign individuals and companies must earn dollars in trade with America. Due to the high U.S. tariffs on imports these foreign consumers bought even less of America’s food production because they had fewer dollars to spend.

Nearly 2,000 mostly rural banks failed in the early years of the Great Depression of the 1930s because these banks were not allowed to have more than one office and thus could not diversify their lending away from agriculture. This created a demand for state action to protect bank depositors, even though there had been few bank failures outside the multitude of small banks in rural areas.

In 1933 and 1935 the U.S. Congress created federal deposit insurance. The original amount insured was $2,500 per account. This was raised soon to $5,000 and thereafter it was increased over time to the $250,000 per account limit established during the 2008 financial crisis. The existence of federal deposit insurance removed the incentive of depositors to confine their deposits to the safest banks.

In the 1930s there were widespread defaults on real estate mortgages and it was difficult for would be purchasers of a home to obtain mortgage financing.

To stimulate the housing market in the mid-1930s, Congress created the Federal Housing Administration (FHA) to insure home loans, and the Federal National Mortgage Corporation (FNMA or “Fannie Mae”) to buy mortgages from banks, thereby creating a large source of funds for bank mortgage lending.

Under FHA loan terms were more than lenient. A borrower was required to put up as little as 3% of the purchase price out of his own funds to qualify for FHA mortgage insurance. However, for a long time lenders, with the Great Depression experience in mind, usually required a down payment of 20%.

In 1977 Congress enacted a law requiring banks to make “affordable” loans—meaning loans to people who could not qualify for a loan under then conventional loan standards. In the 1990s Congress required that banks issue even more such “affordable” loans; this requirement was enforced vigorously by the Federal Reserve. Because of the growing number of such loans they were given the euphemistic name “subprime.”

Starting in the 1980s federal regulators of banks adopted a de facto policy of  “too big to fail,” meaning the state would intervene to prevent a bank from failing if it was considered big enough, in the opinion of regulators, that its failure would threaten the stability of the entire banking system of America.

The “too-big-to fail” policy had the effect of encouraging banks to become reckless in their lending. By being aggressive and even reckless, at first banks could report bigger profits, and bank executives could persuade their boards of directors to pay them huge salaries and bonus compensation. It was truly a “heads I win, tails you lose” situation for the banks’ executive officers vis-à-vis the state. If the bankers reported big profits in the present they would get lavish compensation. If the supposed “profits” later vanished and became losses due to loan defaults over time causing the banks to become insolvent, or even bankrupt, the state would pay off depositors, and the bank executives were allowed to keep their huge pay.

The banks could limit their losses on real estate loans by selling most of the loans to the state-sponsored mortgage finance companies, namely Fannie Mae and the Federal National Mortgage Corporation (“FNMC,” “Freddie Mac,” or simply “Freddie”) an agency virtually identical to Fannie Mae that was created by Congress in 1970. At that time Fannie and Freddie were ostensibly converted into private companies with shareholders. The U.S. guaranteed a limited amount of their debt.

Unfortunately, most bankers believed that the debt of Fannie and Freddie would always be safe due to an implicit federal guarantee of all (100%) their debt, 4 so after selling mortgages to Fannie and Freddie, the commercial banks committed much of the sale proceeds to debt of Fannie and Freddie. This was an unwise decision as both Fannie and Freddie were at least as reckless in their lending as the banks, and became insolvent in 2008 when the federal state had to, and did, take control of Fannie and Freddie in order to prevent a complete shutdown of the market for residential real estate lending.

These factors, plus one other, gave enormous state encouragement to risk taking in the real estate market, especially residential real estate. The other factor was the extremely low interest rates on bank deposits caused by efforts of the Federal Reserve (the Fed) to stimulate the real estate market after a major downturn in real estate in the late 1980s, and a major downturn in the economy after 1999. These low interest rates engineered by the Fed were a big factor in expanding the real estate bubble that developed in the decade of the 2000s.

The essence of the real estate bubble was the rise in prices of residential real estate to a level that could not be supported by the real economy in which all too many Americans got in over their heads in real estate mortgage debt that they could not pay when economic recession struck in late 2007.

The consequences of all the foregoing was an economic environment for real estate lending in which: (1) requirements of adequate income and good personal credit for getting a loan virtually disappeared; and (2) the too-big-to-fail policy was put to work in earnest when twelve of the thirteen largest U.S. banks would have failed but for bailouts by the federal state. 5

One other factor contributed to the ineffectiveness of whatever regulation there was that—with adequate enforcement—might have mitigated the financial crisis. That is the cozy relationship that developed between the regulators and the regulated. Over time the regulated banking industry developed a symbiotic relationship with federal regulators, epitomizing what has been called “crony capitalism.”

Legislative oversight of bank regulation was also compromised by crony capitalism. Fannie Mae and Freddie Mac spent enormous sums lobbying key federal legislators to relax their capital requirements, allowing these mortgage giants to make hundreds of billions of dollars of questionable loans.

Countrywide Financial, one of the larger banks to fail in the real estate mortgage meltdown, regularly issued “sweetheart” loans to federal legislators. 6 The chairman of the Senate Committee charged with oversight of bank regulation chose not to run for re-election due to adverse publicity about him being the beneficiary of two such sweetheart loans. 7

The chairman of the committee of the House of Representatives that had oversight over Fannie Mae and Freddie Mac over a period of nearly 20 years repeatedly opposed initiatives to rein in their risky lending. 8

Regulators not infrequently leave the state to take jobs in the banking industry at pay which is a large multiple of their pay from the state. Those regulators remaining in state employ are not only conscious of this possibility but tend to have friendly relationships with an industry populated in part by executives who were former colleagues in the regulatory agencies.


  1. Alvin Lowi, a professional engineer, was one of two lecturers, the other being Andrew Galambos himself, who in the first three years of the Free Enterprise Institute (1961-1963) presented the original lecture course that was the predecessor of the V-50 lectures.
  2. See U.S. Property Insurance and Casualty Insurance Companies at 
  3. Quoted from “The History of Private Security,” by Chris Carson, eHow,
  4. The actual federal guarantee was only billion
  5. According to Mike Mayo, a financial analyst of the banking industry, who is widely respected for his knowledge and integrity. Mayo’s statement regarding 12 of the 13 largest banks appears in his book Exile on Wall Street (2012), page 5.
  6. See “Countrywide issued hundreds of VIP loans to buy influence, report says,” by Les Christie and Rebecca Stewart,
  7. See “Chris Dodd to step aside,” Op-Ed, “The Fix,” by Chris Cilizza,
  8. See “Fannie Mae’s Patron Saint,” Editorial, The Wall Street Journal, September 8, 2008

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