Practical Anarchy Part 4 - Introduction to DROs

DISPUTE RESOLUTION ORGANIZATIONS

An essential part of economic life in any society is the capacity to enforce contracts and resolve intractable disputes. How can a stateless society achieve this without a coercive government?

Contracts are a form of insurance, in that they aim to minimize the negative effects of non-compliance. If I enter into a mortgage with the bank, I will attempt to minimize my risk by requesting a fixed interest rate. My bank will minimize its risk by maintaining ownership of my house as collateral.

In a world without risk, there would be no purpose for contracts, and all agreements would be by word and handshake. However, people can be confused, dishonest, manipulative, and false, thus we require contracts to spell out the penalties of non-compliance in agreements.

In modern statist society, contracts are enforced through the court system. In terms of real-world practicality, however, very rarely are contract disputes brought to court – rather they are enforced simply through the THREAT of the court system. In most disputes, the prospect of taking the matter to court is enough to motivate both parties to resolution, as the court process is notoriously slow and can cost hundreds of thousands of dollars in fees. Court compulsion is thus hardly ever required.

Considering that most disputes, even in a statist society, are resolved without the use of force, this bodes very well for an anarchic society!

In a free-market society, there is great incentive to resolve disputes among business partners, thus entrepreneurs in a stateless society will be tremendously motivated to develop methods of non-violent dispute resolution, as providing a means to do so would be extremely profitable. Such a business would be similar to most insurance companies, in that the greatest profits are yielded if a dispute is PREVENTED rather than resolved after the fact.

To take an example, let’s say I’m seeking a loan of $10,000 from a bank. The bank will be very happy to lend me the $10,000 provided I pay the interest and capital back on time, since that is how the bank profits. Of course, such a guarantee is impossible, since people are unpredictable, and even if they fully intend on paying back their loan, there’s always the risk they could unexpectedly die.

Thus in order to assess the risk of the loan, two questions will need to be answered.

1. Have I consistently paid back loans in the past? (Credit rating)
2. Do I have collateral for the loan?

These two questions are related. The more reliable I am at making my payments, the less collateral the bank requires. The more collateral I have, the lower my credit rating can be.

My credit rating indicates to the bank how much they can trust me. If I have taken loans out for hundreds of thousands of dollars in the past and consistently paid them back, it is highly unlikely I am going to steal $10,000 from them.

If the resulting trust due to my credit rating lowers my interest rate by two percentage points, and I require hundreds of thousands of dollars in loans over my lifetime, clearly my consistent reliability has saved me thousands of dollars. In effect, if I were to steal that $10,000 and severely injure my rating, I would lose money in the long run.

These sorts of calculations happen all the time in a statist society, and do not depend on violence for enforcement. They are simply intelligent business practice.

There are some high-risk loans which some businesses may still be willing to make. Loans to young people, for example, are quite risky, as they tend not to have much property for collateral and no credit history. There are two approaches to managing risky financial situations: hedging and insurance. Hedging is when you bet both for and against a potential outcome. In currency trading, this means possessing some dollars and some other currency, in case the dollar falls. In horse racing, it is when you bet on multiple horses. Clearly your potential reward is smaller, but so is your risk.

Insurance tends to be used where hedging is impossible. An example of this is life insurance. It is rather unreasonable to bet on one’s own death in hopes of payoff.

These strategies are abundant in our current quasi-free-market society. In terms of one-to-one contracts, however, the courts reign supreme. For example, employees cannot currently buy insurance for the eventuality of their employer going out of business.

BREAKING CONTRACT

Let’s consider an example of how contract disputes can be resolved in a stateless society.

Let’s say I agree to pay you $15,000 to landscape my garden, but you never show up for work. Ideally I would be reimbursed my $15,000, with perhaps some extra for my inconvenience. In a stateless society, when we form our contract, we can include a third party, and in the event there is a dispute regarding our contract, we can both agree to abide by the decisions determined by this third party. This third party would be a Dispute Resolution Organization, which would profit by charging a small fee for this sort of service.

An alternative, and likely more common sort of agreement, would be as follows. Since I am not an expert in hunting people down and demanding payment, I may make a deal with the DRO to recompense me should the deal go awry. If you run off without doing work, I simply submit my “He did not work” insurance claim to the DRO, and I am paid the $15,000, $20,000, or however much we agree upon.

When I first enter into this agreement with the DRO, they will charge me a fee depending on their measurement of risk in the agreement, just as insurance companies do. If you have cheated your last ten customers, the DRO will not insure my contract, and greatly discourage me from doing business with you. If you have a spotty record, the DRO may charge me a very high fee, as its risk is very high. If, however, you have consistently shown up for work for the past twenty years, the DRO will charge me very little, as their perceived risk is low.

This sort of contract insurance is an extremely powerful incentive for honest business. The cost of insuring a contract is directly added to the cost of doing business, and so if it can be kept as low as possible, the financial benefits of both parties are clear.

In addition to a good record in keeping contractual obligations, collateral can be used to insure a contract. If I agree to pay you $15,000, and the DRO agrees to pay me $20,000 if you breach your contract, you could agree to pay the DRO $25,000 if you breach your contract. The risk for the DRO would then be profoundly lower, and the cost of insuring the contract could be kept low for both parties.

In this way, contracts can be enforced without resorting to violence and lengthy, expensive court battles. The risks of entering into the contract are clearly communicated up front, as well as the consequences for breach of contract. Honest people will be rewarded for their honesty, and dishonest people will find business extremely difficult.

Unfortunately I don’t think this sort of justice is mimicked by our current court system.

REFUSAL TO PAY

Suppose I have a contract with a DRO to pay restitution if I cannot fulfill my business obligations in some way, and wind up owing them $100,000. What happens if I cannot pay, or simply refuse to pay?

Currently, the state will use violence against me. While this may be a satisfying means of Medieval-style vengeance, throwing me in prison will not produce the $100,000 I owe. In a stateless society, what options are available to the DRO to get its money?

In any modern society, individuals are bound by dozens of contracts in their lives, from apartment leases to gym memberships to credit card contracts and insurance agreements. The costs of doing business with people known for honoring contracts is far lower, which is why it would seem likely another business would arise in a stateless society – The Contract Rating Agency (CRA).

CRAs would be independent entities that objectively analyze the contract history of individuals and profit by sharing this information with banks, DROs, etc. If I become known as a man who regularly breaks his contracts, this history will be a public knowledge, and it will be more and more difficult for me to operate in a complex economy. This form of economic ostracism is an extremely effective – and non-violent – means of encouraging individuals to follow through on their agreements.

If an individual chooses to egregiously violate social norms, then society, through this system, has the option of ceasing all economic affiliation with that person altogether.

If I violate a tremendously expensive contract with a DRO or other individual, the CRA may revoke my contract rating completely, prohibiting me from doing business with hardly anyone. I will be unable to lease an apartment, buy a night in a hotel room, get a job, or participate in any aspect of society involving contracts.

DROs would likely develop provisions prohibiting the enforcement of contracts on anyone whose contract rating has been revoked. In other words, if I run a hotel, and an “outcast” wants to rent a room, and I give it to him, and he decides to steal the TV, destroy the bed, and carve swears into the walls, the DRO would not honor my insurance claims. As such, if you were a hotel owner, and such an individual asked to rent a room, do you think you would rent it, or regrettably inform him the hotel was full?

Even practical businesses would be less than willing to associate with such a person. Taxicabs, grocery stores, bus companies, electric companies, water companies, restaurants, gas stations – no one would wish to associate with them because, should they misbehave in any way, there is no protection from them. Committing crimes and becoming an outcast in a stateless society results in a tremendous amount of discomfort, and it is all achieved without raising a single gun.

Now, if an outcast is willing to repay his debts and make good on his crimes, his contract status can be restored, at least in a minimal capacity to let him find a job, rent an apartment, and buy food. If he finds a job, his wages can be garnished until his obligations have been fulfilled. DROs, which always prefer to prevent recurrence rather than punish (since it’s more profitable), may reduce the outcast’s burden if he agrees to attend psychological and credit counseling sessions.

In this way contracts can be enforced without resorting to violence. Economic and social ostracism are extremely powerful methods of discouraging immoral activity, and have been used for millennia. There is no need to throw people into “debtor’s prisons,” condemning them to a life of torture and their lenders to severe financial loss. All that is needed is to publish the crime for all to see and society will respond accordingly.

Ah, but what if the “outcast” has been treated unjustly, and a DRO or CRA is abusing its influence?

Well, remember, in an anarchist society, there are two chairs at the negotiating table. If you are concerned with such a problem, what stipulations would you place in your contract with DROs to prevent this from happening? You are not required to do business with any specific DRO unless you want to. Those DROs which are most honest and reliable will be the most popular, and thus do the best business.

ALTERNATIVES TO THE STATE – AN OBJECTIVE ANALYSIS

When talking about the following, please keep in mind that these are only possible ways a stateless society could deal with these problems. I’m sure you will have some ideas of your own! The possibilities are limitless, and there are many people much smarter than I am. The purpose of this is not to create a final blueprint for the stateless society, but merely provide examples of how incentives and freedom can create powerful, productive solutions to complex social problems in ways completely unavailable to a statist society.

In almost all western societies, the state chooses:

-Where children go to school and how they will be educated
-The interest rate we can borrow at
-The value of currency
-How employees can be hired and fired
-How more than 50% of the citizens’ time and money is used
-Who the citizens may choose as a doctor
-What kinds of medical procedures can be received – and when
-When to go to war
-Who can live in the country

Just to touch on a few of the big ones.

Now why do so many people believe that a coercive and monopolistic power is required for society to function? Well, there are many answers, but they tend to revolve around four points.

1. Dispute resolution
2. Collective services
3. Pollution
4. Crime

We have discussed dispute resolution in some detail already. Courts are time-consuming and costly, often costing hundreds of thousands or millions of dollars, and thus are usually only available to the very wealthy. With divorce cases, private mediators are the norm. With union disputes, there are grievance processes. An entire career class has formed in the realm of private dispute resolution because the courts are so inefficient. Clearly a state is not required to achieve dispute resolution.

COLLECTIVE SERVICES

Roads, sewage, electricity, and water are all cited as reasons the state must exist. How roads are to be paid for in the absence of taxation is such a tremendous mystery to people, and I don’t really know why. Certainly tolling every single crossroad to pay private road owners is utterly impractical, but there are numerous other ways currently available to conceivably pay for roads, and likely countless others to be developed by future entrepreneurs. Electronic tolls, GPS charges, roads paid for by the businesses they lead to, a communal organization united by contract, and so on. We have already discussed the issue of water in the FAQs, and sewage and electricity are very similar in how they can be managed. These arguments for the state are all ex post facto explanations used simply to avoid discussion of alternatives, as such discussion may lead to consideration of or, heaven forbid, acceptance of anarchism.

The free market can be defined simply as such – trade in the absence of violence. There is no gun telling you what you can and cannot buy and sell. It is completely absurd to argue that free-market relationships are “bad,” because they are entirely voluntary. If voluntary relationships are bad, how can coercive monopolies possibly be better?

State provisions of public services inevitably lead to the following:

-A granting of favorable contracts to political allies
-Tax-subsidized costs that lead to over use and intergenerational debt
-A lack of renewal investment in infrastructure that leads to costly deterioration
-A growth of pro-union legislation which leads to inefficiency
-A general lack of innovation and exploration of alternatives to existing systems
-A dangerous social dependence on a single provider

Considering the many free market alternatives to dealing with “carrier costs” already presented, those carrier costs cannot be continued justification for the existence of the state.

POLLUTION

This is perhaps the single greatest problem faced by free-market theorists. It is worth taking a look at the worst possible scenario to see how a stateless society could deal with it; particularly since governments are by FAR the worst polluters in the world (the military alone produces unimaginable amounts of extremely toxic chemicals, and leaves environmental destruction wherever it makes camp).

The most polluted land on Earth is all state-owned, for the obvious reason that states do not profit by maintaining the value of their land. Furthermore, the distribution of drilling, mineral extraction, and logging rights are skewed towards bribery and corruption, because states do not sell the land – merely the resource rights. It is therefore most profitable for such resource extraction businesses to remove absolutely everything and disappear when it comes time to “re-seed.” If they owned the property, they would profit best by renewing the resource, extracting it only at the rate at which it recovered. The greatest incentive you can give nature-destroying industries to not destroy land is simply to sell them the land and let them financially benefit from its preservation. Otherwise they will simply lobby congress for resource rights and screw everyone, including themselves, for the sake of short-term gains.

Ah, but what about air pollution? Well… if we can talk about history for a moment, the problem of air pollution is a phenomenon which can largely be blamed on the state. In England, during the early industrial revolution, when factories first began spewing smoke into the air, it tended to settle in nearby apple orchards. The farmers who owned the apple orchards took the factory owners to court, citing the common-law tradition of restitution of property damage. Unfortunately, the capitalists got to the state judges first, negotiating with copious amounts of bribe money. The judges argued that the “common good” of the factories out-weighed the “private desires” of the farmers. The free market did not fail to solve the problem of air pollution – it was forced into submission by the rule of a corrupt government.

Since this is such a sticking point, we should talk about just how the free market CAN solve this problem. Let us take a common example – a neighborhood of houses downwind of a highly polluting factory coating them in soot.

Now, when an individual buys a house, would it not be important to have contractual guarantees that their property will not be covered in someone else’s refuse? The desire for a clean and safe neighborhood is obviously a very strong one (since so many people are obsessive about the environment), thus entrepreneurs who can find a way to provide a clean environment stand to make a tremendous amount of money!

A neighborhood concerned with pollution may invest in pollution insurance – a natural response to any situation where the circumstances are unpredictable, but the consequences dire.

Let’s say that John buys a house along with pollution insurance, and his insurer agrees to pay him $2 million if the air around his house becomes polluted. This means that so long as the air surrounding John’s house remains clean, the insurance company profits.

One day, a plot of land up-wind of John is for sale. Obviously John’s pollution insurance company will take great interest in who buys this land. If the purchaser is a YMCA, all is well. If, however, the company is Sally’s Spewing Smoke Stacks Inc., the insurance company will spring into action, taking one of three actions:

1. Out-bidding Sally and purchasing the land itself before selling it to a non-polluting business.
2. Getting assurances from Sally that she will not pollute.
3. Paying Sally to enter into a non-polluting contract

Let’s say that the insurance company is lazy, and Sally goes through with purchasing the land and building a highly polluting factory. What happens then?

Well, then the insurance company is on the hook to pay John $2 million (assuming John is the ONLY ONE who bought insurance), thus the insurance company can afford to pay Sally up to $2 million to stop her from polluting without going deeper into the red. This payment could take many forms, from purchasing pollution-reducing equipment to subsidizing her to produce less pollution.

If the $2 million is not enough, then John is paid $2 million and he has the option of moving to a non-polluted neighborhood. This is an unlikely scenario, as the chance that John is the only individual with pollution insurance is slim. Smoke can settle over entire towns, and since so many people are afraid of pollution, many people will buy insurance for it. If the insurance company cannot prevent pollution, it stands to lose billions.

This is the view from the pollution insurance company. What about the view from Sally’s factory? Well, Sally, like everyone else, must be a member of a DRO. A DRO would frown upon Sally’s tendency to pollute, since pollution results in property damage, and many claims will be filed against her for this reason. It is unlikely any DRO would be willing to insure Sally unless she could guarantee she would not damage the property of those around her. Without a DRO membership, of course, Sally would be unable to hire employees, form agreements with other companies, borrow money, etc.

Finally, even if John does not have pollution insurance, he can go through the DRO system and complain, since DROs have reciprocity agreements. John wishes to be protected from Sally’s actions just as Sally wishes to be protected from John’s actions.

Thus, in a truly free society, there are many people actively working to prevent pollution. It can also solve disputes that simply cannot be solved in the government system of today. If John’s house was hundreds of miles away from the factory which damaged it, a complaint to his DRO would result in an analysis of air currents. Non-volatile chemicals may be placed in the smoke stacks of several factories to see where their pollutants land. DROs have a tremendous interest in satisfying their customers. Can you imagine politicians taking such an action, particularly when the factories can easily bribe them, and they tend not to value property rights to begin with? I think the fact that this NEVER occurs in politics is answer enough.

The problem of international pollution may seem challenging, but it is easily solvable. If country borders will exist in an anarchist society, there is no reason why DROs in one country cannot communicate with DROs in another, just as banks communicate internationally, as do many other businesses. Negotiations between international DROs can take place just as they would within the nation, and resolutions can be found the same way. Furthermore, DROs stand to profit tremendously through international cooperation in ways that states do not. If a factory in Michigan produces smoke which generally travels north into Canada, the US government has little incentive to control that factory, since they are not extracting taxes from Canadian citizens. DROs, however, would have tremendous interest in maintaining good relations with DROs across borders, as they both stand to profit from cooperation. The best way to win favor with another business is to help them please their customers.

VARYING COMMUNITIES

Before talking about crime, since we’ve been talking about home ownership and DRO enforcement of various kinds of contracts, I’d like to briefly mention community choice.

If you purchase a condominium in a building, there are usually several rules you must obey, even though the condo is your property. Some buildings allow pets, while others do not. You are not permitted to turn your condo into a brothel, nor can you throw all-night parties all week. This is an example of a community with rules agreed upon by contract, rather than forced through violence. Without the blanket of a coercive government, a wide array of unique communities becomes possible.

For example, some people are very much in favor of gun ownership, while some are adamantly against it. Currently, a battle rages over control of the government so that one group may impose its rules upon the other. This is completely unnecessary. With DROs and contracts, it is easy to form communities around particular preferences. If you want a neighborhood with no guns, you can form one. If you want a neighborhood with guns, you can form one. Marijuana can be permitted or forbidden. You can all agree to devote half your incomes to social programs, or you can keep all of your money to yourselves. Sunday shopping can be allowed, or forbidden. It is completely up to you what kind of society you want to live in, and the ownership of property in these communities is contingent upon adherence to certain rules. If you break these rules after signing a contract obligating you to follow them, then your contract rating will decrease, and life will become more difficult for you. This is obviously preferable to the current system, which relies on a “social contract,” which is applied to you at birth without your consent and enforced on you through violence.

As another positive, each of these societies could serve as little laboratories in which various social theories can be tested, thus contributing to the public knowledge of effectiveness of various social policies.

It’s amazing what choices become available when you simply don’t allow people to shoot each other.

Thanks for reading!