A praxeological treatise on proprietary governance
by G. A. Kerpestein
I have aimed to make this treatise as concise and understandable as possible. In my personal, albeit subjective experience, a significant portion of writers tend to use overly sophisticated wording and excessively long sentences to provide explanations of concepts that could otherwise be expounded in a more easily comprehensible manner. This is what I have tried to prevent.
It should be the aim of the writer to deliver something of value. For some, this may be the experience of ‘being an intellectual’, involving the consumption of useless information and drivel written in long, prosaic sentences. For those seriously devoted to the sciences, however, it is to be able to understand as quickly and easily as possible concepts that are both innovative and important. With respect to writing style and superfluous information, these different preferences are at odds with each other. I have written this treatise for the latter class of readers.
About proprietary governance, a.k.a. ’Free Private Cities’
All political systems are flawed, yet some are more flawed than others. During the previous centuries, many innovations have been made in the domain of governance. These innovations have enabled great improvements in human living conditions. The value of these innovations is illustrated by the impressive recent improvements in living conditions in the western world and special economic zones in China, the UAE and many other countries. The rule of law, the fair trial, the separation of powers, the principles of subsidiarity and legality and the many checks and balances built into government systems have enabled many countries to reach new heights in many respects. Many issues are, however, still endemic in the dominant political systems of today. Inefficiencies, rent-seeking, scaremongering and race-hustling politicians, and other issues that arise from the political economy of representative democracy with universal suffrage, are still rampant.
Recently, the concept of proprietary governance, a.k.a. free private cities[i] or entrepreneurial communities[ii], has been explored by a small but growing circle of free thinkers and libertarians. The concept was originally ideated by Spencer Heath and has slowly grown in popularity over the years. It is this concept that I believe is not only the solution to all problems just mentioned, but also holds the key to the best form of government possible. In writing this treatise I attempted to prove how proprietary governance under certain conditions will result in ‘proprietary democracy’, and why this is indeed the best form of government possible. I have also described what those conditions are and how to ensure that they hold, so that proprietary democracy can fulfil its true potential as the most valuable and successful form of government yet.
1. The Definition of Proprietary Governance
The proper definition of proprietary governance is simply ‘private property in the right to rule’. This can regard anything political governance usually regards, which includes lawmaking, enforcement, taxation, procedural laws, the rule of law[iii], the organization of government and setting all kinds of rules.
But let us take a step back and look at the textbook definitions of proprietary and governance. Proprietary is defined as something of, relating to, or characteristic of an owner or title holder. Something proprietary can be something that is used, produced, or marketed under exclusive legal right of the inventor or maker.[iv] A definition that is familiar for products. Meanwhile, governance is defined as the act or process of governing or overseeing the control and direction of something (such as a country or an organization).[v] Under these definitions, ‘private property in the right to rule’ stands firmly.
This definition for proprietary governance will be used throughout this paper and includes the limited proprietary governance that exists in the proprietary communities described by Spencer Heath and Spencer Heath McCallum. These communities include industrial parks and shopping centres. Their rights to rule are limited by their ‘host nations’.
The concept has also been described in other ways, such as by Titus Gebel in his book ‘Free Private Cities’. Like some, including me, he supports letting private entities compete in what until recently[vi] has only been the domain of nation states.
2. Public Goods and Private Property
Public goods are goods that are non-excludable and non-rivalrous. The former means that it is impossible for the owner of such goods to exclude anybody from using it. The latter means that the consumption of the good by someone does not impair the consumption of it by another. In law, private property is considered to be a “bundle of rights” over an asset, that allow the owner of the asset to control it and decide on its use, claim the value generated by it, exclude others from using it and to transfer this set of rights to another holder.
The economically most efficient definition of private property rights is, in practice, impossible to enforce. Full private property rights should include full liability to the owner for all costs created by his property and full rights to the value created by it.[vii] Many of these costs and economies are external and the magnitudes of these are impossible to calculate accurately. Because of this, it is difficult if not impossible to enforce property rights as defined above efficiently.
However, as stated above such a definition of property rights would be most efficient in economic terms. Enforcing it would lead to economic outcomes most preferred by consumers.[viii] It is therefore in the interest of proprietary governments to engage in agreements with each other that allow for such property rights to apply to and transcend both their jurisdictions. Insofar these are enforceable, proprietary governments can support economic calculation efforts by determining and developing practices that can be used in case of a dispute arising from externalities. Assuming this is not possible, we will first focus on a definition that does not consider externalities. This is because it can be shown that full property rights may not be necessary for internalizing positive externalities.
3. The Value Principle
Proprietary governance turns public goods into private property and thereby into private goods. The government, as the private owner of otherwise public goods, can exclude anyone from using it by controlling immigration and travel into the jurisdiction and by being able to expel its subjects. The term ‘subject’ is defined here as a person or other entity that is subject to the government’s rule. The subject is in ‘subordination’ to his government. ‘Subjects’ include citizens, visitors, companies and other institutions operating within its jurisdiction.
One could argue that the term ‘subject’ is not appropriate in this context, because the subject is simply a client of the government. However, as will be shown later in this treatise, this only applies when subordination is voluntary. It therefore depends on several conditions whether the subject is truly a client. The excludability of its goods and services enables the government to capture all value generated by them. This yields the following principle:
A proprietary government can capture all value it creates for its subjects.
This of course includes subjects that do not reside in the government’s jurisdiction but who still make use of its services, such as consulate services. If the government creates positive externalities that transcend the boundaries of its jurisdiction, it does not necessarily capture all the value it creates. In that case, the government creates value for others outside its jurisdiction. When the net value created by a policy or project to its own subjects is positive (i.e. when the positive externalities exceed costs, including external costs), it will be profitable for the government to pursue this regardless of the value derived from it by others. A free-rider problem then arises: Governments that do not contribute to positive externalities can still benefit from them.
However, the government is able to know this in advance. If the other jurisdictions affected are also privately governed, the government can speculate on the positive external value added to the jurisdiction of its competitors. The proprietary government can then still capture the value it creates. In principle, it is in the unique position of being the first to know of the positive externalities it will create. The only impairments are transaction costs resulting from such speculation and the possibility of other investors to foresee the government’s intentions and speculative activities, which could result from a breach of company secrecy or so-called piggy-backing.
A problem arises when we consider negative externalities, also called external costs. By creating these, or merely by threatening to do so, a government can obtain leverage with which it can negotiate to be compensated for foregoing such activities. This creates costs for the (potential) victims of such negative externalities. This is not economically efficient, since it deviates from the situation that would result from full property rights, in which the creator of external costs would be liable for them.
A solution to this may be to make governments liable for all external costs created within their jurisdictions that affect other jurisdictions. It would then be most economically efficient and profitable for proprietary governments to extend this liability to those creating these negative externalities. Global governance and dispute resolution institutions already do this in many ways. The International Labour Organisation, World Bank and the United Nations all ‘police’ governments insofar it is possible. The New York Convention already establishes international arbitration enforceability in most of the world. These institutions may not be sufficient, but they show the importance of the solution they aim to provide. Not extending this liability would hamper economic efficiency and would result in the government bearing these costs.
In short, in case full property rights are enforced, including the right to external economies and liability for external costs, the following principle holds:
A proprietary government can capture all value it creates and is liable for all costs it creates.
However, as has been shown above, this principle also applies when both of the following criteria apply:
- The proprietary government is liable for all external costs affecting other jurisdiction and created within its own jurisdiction.
- The jurisdictions benefiting from external economies created by or in the proprietary government, are themselves ruled by proprietary governments.
From here onwards in this treatise, this will be called the value principle.
When the value principle holds, the profit motive will incentivise proprietary governments to maximise value for all subjects, including those of other proprietary governments. Then, the proprietary government can profit from any policy that creates more value than costs, regardless of how these are distributed. In a perfect market, the gap between this value and these costs (i.e. the value added) will accrue to the government.
4. Implications of the Value Principle
In this chapter, corruption includes rent-seeking and special privileges that protect companies from competition (excluding, of course, intellectual property rights). Let us consider the following reasoning:
Rent-seeking allows a company/entrepreneur that otherwise would make X profit, to make an additional profit (which we call Y).
To be able to charge monopoly prices, the entrepreneur will have to pay an amount (that we call Z) to the proprietary government or any of its agents. In return, he will receive privileges in the form of, for instance, protective measures that give him an unfair advantage over his competitors.
The prices charged by the entrepreneur thus increase to X + Y + Z. Y would accrue to the entrepreneur and Z would accrue to the government or a government agent. The consumer would pay an extra Y + Z.
Such a deal would, however, not be in the interests of the government. The government would be better off by not granting the privilege to the entrepreneur, but instead charging a tax of Y + Z to the consumer. This would not be worse for the consumer than its situation in case of corruption, but would be more profitable for the government. Note that this also holds when Z = 0.
However, as has been shown in chapter 3, when the value principle holds such a tax would only be in the interests of the government if it is in the interests of its subjects. Thus, it is then not in the interest of a proprietary government to engage in or to allow any corruption. In fact, any corruption will decrease the government’s profits. It would create an extra cost for its subjects and thereby decrease the value of subordination to the government. This holds regardless of whether the entrepreneur and the government agent are the same person or not. When the value principle holds, it is in the interest of a proprietary government to minimise corruption insofar the value created by such minimisation does not exceed the costs of doing so.
When the value principle holds, it is in the interest of proprietary governments to engage in subsidiarity (i.e. the delegation of authority to sub-governments) insofar it maximises value for their subjects. Subsidiarity may lead to less economies of scale, but also allows proprietary governments to offer a wider range of laws, policies and services within their jurisdictions. This allows them to serve more kinds of subjects who may desire different policies. In a perfect market wherein the value principle holds, subsidiarity is applied insofar it maximises value. The principle of subsidiarity (i.e. maximising the decentralisation of government services whenever possible) is currently dogmatically pursued by many governments, which is sub-optimal.
Let us consider a comparison with the automobile market. Currently, automobiles are offered in many shapes, sizes and colours. Consumers can also choose between more or less powerful engines and can choose for extra features to be added to their automobile. Such an offering may not capture all potential economies of scales in production, yet these are not all-important. One size does not fit all – consumers have different preferences. When the value principle holds, the balance between optionality and economies of scale that maximises value for consumers is the one that maximises profit for producers. This applies to the automobile market and likewise will apply to a market for proprietary governance.
4.3 Market Interference
Save for cases in which consumers are irrational, maximising consumer sovereignty within the proprietary government’s jurisdiction maximises value for its subjects. It is therefore in its interest if the value principle holds. This does give us the following paradox, however. If a subject voluntarily chooses to be governed by a government that limits his freedom in making consumption choices (e.g. by a ban on hard drugs), does that violate consumer sovereignty? In other words: Does it violate consumer sovereignty if the subject voluntarily agrees, as part of its consumption in the market of governance, to a limitation of his own freedom of choice in other markets? Here it is not considered so. When boarding a flight, a passenger voluntarily subjects himself to the crew’s command and the limitations this puts on his freedoms. This is not seen as a violation of his liberty. Correspondingly, when subordination is voluntary, limitations of freedom in consumption choices would not violate consumer sovereignty. It can be assumed that the consumer, by voluntarily limiting his own freedom, does so to maximise value for itself.
Insofar it maximises value for subjects, it is also in the interest of a proprietary government to maximise competition within its jurisdiction. This does not apply to the market in which the government itself competes, i.e. governance. Competition in the latter will damage the government’s profits. Maximising competition includes competition between local governments, which through subsidiarity may have been sold or given a limited or unlimited right to rule in a part of the over-arching government’s jurisdiction. Moreover, if the value principle holds, whether the proprietary government would pursue antitrust policies depends on whether it would maximise value for its subjects. With regards to regulation, the implication of the value principle is straightforward: A profit-maximizing proprietary government would regulate markets or delegate such regulation insofar it delivers the most value to its subjects. As shown in chapter 4.2: Subsidiarity, it is most profitable for the government to pursue subsidiarity in such a way that it strikes the right balance between economies of scale and diversity of offering. The right balance being the one that maximises value for subjects.
Different governments and sub-governments may have synergies, e.g. regarding infrastructure. For instance, a highway or train line connecting multiple jurisdictions may make it more attractive for people and firms to move to them. If projects spanning multiple proprietary (sub-)governments’ jurisdictions add value to all jurisdictions, there is a greater competitive edge to be gained by all these governments through making such investments. In case such a project spans multiple sub-governments, it is not only in their interests, but also in the interests of an overarching government since it can capture the value of the synergies it allows to be created. Such projects can be pursued as joint ventures between proprietary (sub-)governments. If such joint ventures are impossible, a merger can be the solution that captures these synergies.
If a project spans different governments’ jurisdictions and adds net value but does not add value to all jurisdictions involved, it can and should still be pursued. If the value of a project to the subjects of one or more jurisdictions exceeds the external and opportunity costs that it creates in other jurisdictions, the governments of the latter can be compensated and those of the former can still derive value from it. Again, if the value principle holds, such projects are only profitable if they add net value to subjects.
5. Consumer Sovereignty: The Democratic Market
This chapter introduces no new concepts but serves to provide an insight necessary to understand the following chapters. In a capitalist free market economy, the consumer determines what and how the producer produces. The consumer controls what materials are used and where production takes place. He does this without explicitly dictating these conditions, but by choosing between different products based on criteria that matter to him. Ludwig von Mises described it very well in his book Human Action:
‘The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain’s orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.
The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run the plants and the farms. They make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what quantities. They are merciless bosses, full of whims and fancies, changeable and unpredictable. For them nothing counts other than their own satisfaction. They do not care a whit for past merit and vested interests. If something is offered to them that they like better or that is cheaper, they desert their old purveyors. In their capacity as buyers and consumers they are hard-hearted and callous, without consideration for other people.
(Ludwig von Mises in Human Action, chapter 15.4: The Sovereignty of the Consumers)
Proprietary governance turns public goods into private, tradable goods. It turns the government into an entrepreneur and makes the citizen sovereign as a consumer. Democracy literally means ‘rule by the people’. Under consumer sovereignty, a proprietary government can therefore be rightly called democratic. A proper term to refer to consumer sovereignty in a market of proprietary governance would therefore be proprietary democracy. The only difference from representative democracy is that proprietary democracy functions differently. People vote with their feet instead of the ballot, but it is not less democratic. In fact, it is even more democratic, as will be shown in chapter 7: The Superiority of Proprietary Democracy.
The definition of consumer sovereignty, in this context called proprietary democracy, is that producers produce according to the preferences of the consumer. Thus, for proprietary democracy to exist, governments’ incentives should align with their subjects’ preferences. This implies that for proprietary democracy to exist the value principle must hold. Only if the value principle holds will the profit motive incentivise proprietary governments to maximise value for their subjects.
6. Ensuring Proprietary Democracy
6.1 The Exit Principle
There are conditions for consumer sovereignty to hold. One condition is that trade must be voluntary. In the context of government this means that subjects only subject themselves voluntarily to the government’s rule, i.e. subordination must be voluntary. This limits the government’s authority because it implies the government cannot impose any sanction on a subject’s choice to end its subordination by leaving the government’s jurisdiction. This includes a citizen’s choice to terminate his citizenship or residence (emigration) but also a visitor’s choice to leave the government’s jurisdiction. Of course, exit costs can apply, but these must be voluntarily and explicitly agreed to by the subject.
It also implies governments must be able to terminate the subordination of their subjects, i.e. they must be able to expel their citizens, visitors, companies or other organisations present in their jurisdictions. Grounds for termination by either side can be specified in a contract between the subject and the government. This can give more security to the subject that will not just be ‘kicked out’, thereby raising the attractiveness of subordination. Such provisions could also be valuable for the government. If for instance the subordination of a large company creates positive spill-over effects and has required significant government investments, such provisions could protect the government against the risk of its invested capital going to waste.
There exist natural barriers to exit such as moving costs. One might think that making the proprietary government liable for these switching costs increases consumer sovereignty. It does not. Instead, it leads to economic inefficiencies. In case of government liability, the subject may still choose to exit his current government’s jurisdiction even if the gap between the value attached to subordination to this proprietary government and to another is smaller than the costs of exit. In other words: If the subject’s preference of subordination to another government is smaller than the costs of switching governments, such liability can lead to economic inefficiencies. It would lead to situations that violate consumer preferences.
The solution most economically efficient and thereby proprietary democratic is the following: The costs of ending subordination must be borne by the party that chooses to end it. In such case, if for instance the government expels a subject from its jurisdiction, it will only be profitable to do so if the absence of this subject creates more value than the costs that result from his expulsion. Again, if the value principle applies, the government’s profit motive will motivate the government to choose the most proprietary democratic solution. A deviation from this solution would violate proprietary democracy.
The above gives rise to what in this treatise will be called the exit principle:
Subjects have the right to unsanctioned exit and governments have the right to expel their subjects. The party that chooses to terminate the subordination of the subject, whether by voluntary exit or expulsion, should bear the costs that result from this termination.
There can only be proprietary democracy if the exit principle is not violated.
6.2 State Secrecy, Freedom of Expression and Censorship
Another condition for proprietary democracy is that the consumer must be able to freely inform himself about the government and its services. This implies freedom of expression which includes freedom of press. The consumer, i.e. the subject, should be allowed to freely inform itself because there can be no effective consumer sovereignty without freedom of expression and freedom of press. The free exchange of information is vital for the consumer to make choices based on information that matters to him. The ability of consumers to inform themselves well and unimpaired by the government is what makes consumer sovereignty result in the adaption of production to the preferences of the consumers. Thus, without freedom of expression there can be no proprietary democracy. One might object that this can conflict with the government’s right to state (in this case, company) secrecy. If the government protects its state secrets, the necessary transparency to assess whether this secrecy exists for good reason cannot necessarily be provided. An assessment of whether the rule of law exists may also not be possible to make with certainty. In theory, such secrecy enables the government to eliminate, torture or otherwise sanction those who choose to end their subordination. For such actions to affect the choices of other subjects, however, those will have to be informed of the government’s sanctioning practices. Otherwise, it will not deter subjects from ending their subordination. However, this would be incompatible with state secrecy.
What if the government sanctions subjects or threatens them with sanctioning before they use their right to exit, whilst keeping this a secret? It might not deter others, but it could keep these subjects in subordination. One might think the government could do this without suffering a loss to its reputation. Yet if the subject has freedom of expression, word will spread fast. Subjects and potential subjects would inform themselves and their choices would adjust accordingly. They would simply take into account the risk of falling victim to the government’s random actions. Thus, government secrecy cannot by itself violate the exit principle. What if, however, a government violates freedom of expression? If a government would engage in secret operations and prevent subjects from informing themselves, such government would simply be an Orwellian regime. Such a regime exists in North Korea. It punishes defectors and silences critics. Thereby, it violates both the exit principle and freedom of expression. To the possibility of this problem arising, neither representative democracy nor proprietary democracy provide a solution that is guaranteed to always work. Efforts to protect the liberal world order and international rule of law can be very successful but are not guaranteed to succeed.
Because of their potentially dictatorial organisational structure and absence of checks and balances, proprietary governments could be more prone to descend into dictatorships than representative democracies. All that would be necessary is the absence of proprietary democracy. Hence, provisions must be made to prevent this from happening. Potential solutions will be described in chapters 6.6 and 6.7. One might think issues can arise in allowing state secrecy whilst protecting freedom of expression. Not necessarily. State secrecy only applies to the state, its employees and its contractors. For others, freedom of expression should not be limited by state secrecy. This implies that the government should not be allowed to have a monopoly on the press and platforms for the exchange of ideas. In fact, it would be best if the government and its owners are not allowed to have any interests at all in such firms.
Put more simply: Ideally a proprietary government and its owners should not be allowed to hold any assets in media or other markets (such as social networks and platforms) that affect the exchange of ideas within the government’s jurisdiction. Otherwise, freedom of expression could be more easily violated. The necessity of state media does not exist in a proprietary government as such a government is not a representative democracy. Subjects will not have to inform themselves about political affairs as much as in a representative democracy. Of course, the government should be allowed to censor sedition, slander, libel and information of which the spread poses a threat to safety. However, if the government can censor such expressions, how does one know whether censorship is due when it is imposed? How does one know the government does not censor any criticism against it? For the safeguarding of freedom of expression certain provisions must be made which will be described in chapter 6.6.
6.3 Market Structure
Provisions should also be made against the cartelization and excessive agglomeration of proprietary governments. This depends of course on whether such cartels would hold and what barriers to entry they would create. A writer using the alias ‘Calvin Duke’ sees no threat of cartelization in his book[ix]. He posits that the existence of a cartel would encourage newcomers to the market. The problem with this argument is that a jurisdiction may not be available for a newcomer. The world is currently dominated by nation states and if all options left available for proprietary governance are used for a cartel, there is no way for a potential newcomer to compete. Another problem lies in his analysis of the market structure. He compares cartels in a market for governance with those in the illegal drug trade and argues that cartels in governance would likewise not be stable. Yet these markets are not comparable. His argument is falsified by OPEC’s success as a mostly stable cartel of governments. Moreover, if the rule of law exists in proprietary governments this can strengthen their cartels by binding them to treaties. Besides, cartelization is not the only way for governments to obtain monopoly power. The agglomeration or merging of governments can turn a competitive market into a monopolized one rather easily. Such a move would be in the interests of all participants.
To ensure proprietary democracy, provisions must be made against cartelization and against agglomerations and mergers that enable companies to charge monopoly prices.[x] This requires international law combined with a strong rule of law, as will be explained in chapter 6.6: Rule of Law and International Law. Alternatively, a hybrid system as described in chapter 6.7: The Hybrid System could provide the solution.
6.4 The Protection of Governments’ Property Rights
In his book, Calvin Duke posits that a proprietary government would have no interest in waging war. His position rests on several assumptions. The first is that most of the government’s subjects would immediately move elsewhere were the government to start a war. That is not necessarily true. Weaponry is becoming increasingly sophisticated in minimizing civilian casualties. The Israel Defense Forces’ precision airstrikes on Hamas targets shows how successful modern armies can be at minimising civilian casualties. At some point, warfare might become a little inconvenience for subjects if at all.
Moreover, legally acquiring the right to rule over another government’s jurisdiction may be more expensive than acquiring the monopoly on violence by force. Even if the attacking government sees part of or even all its subjects move away permanently or temporarily, the savings in costs of acquiring the right to rule over another’s jurisdiction may exceed the total damage to profits directly resulting from such takeover. This problem exists because in a world consisting of independent proprietary governments there is no central authority holding the monopoly on violence to protect their rights to rule. Their property rights can only be protected by themselves. For consumer sovereignty, trade must be voluntary. This implies that there can be no proprietary democracy when governments use force (or the threat of it) to encroach on each other’s property rights.
A possible solution could be the combination of provisions in international law and a strong rule of law. In that case, proprietary governments would respect each other’s property rights. However, it is not necessarily in the interest of all proprietary governments to support such provisions. In a situation in which it would be most profitable for a government to acquire a jurisdiction by force, it would be in its interest to undermine the rule of law and any provisions made against the use of force that violates other governments’ property rights, if possible. Alternatively, as will be explained later in this treatise, a hybrid model combining both the strengths of proprietary democracy and those of representative democracy may provide the solution.
6.5 Human Rights
For proprietary democracy, in addition to the necessities described in this treatise so far, some other provisions must be made. As mentioned before, voluntariness is essential for consumer sovereignty. In the context of proprietary governance this means it is vital to proprietary democracy.
Children are not able to choose for themselves. They have not voluntarily chosen to be the government’s subjects. Provisions for the protection of children’s rights will therefore have to be made, because the principle of voluntariness cannot hold. Special provisions should also be made for people who reach adulthood with a mental illness that renders them unable to make voluntary choices. From a voluntaryist perspective, for people who enter such a condition after they have reached adulthood this is not necessary, because they had the opportunity to make voluntary choices foreseeing such a situation.
To illustrate the issue, let us consider the following examples. Human trafficking is big business. The exploitation of children is illegal but unfortunately profitable which is why this problem persists. Suppose a child is orphaned. The child has no further family by which it can be raised and its parents have not made any provisions for the possibility their child would end up orphaned. The proprietary government can do with the child whatever it wants. The amount of taxes it can expect the child to pay over its lifetime are less than its market value. In this case, it is most profitable for the government to sell the child to the highest bidder, which would lead to the (likely sexual) exploitation of the child. This would be a grave abuse of the child’s human rights and must not be permitted.
What if a child’s parents are alive and the expected value of taxes they will pay is less than the market value of them and their children? One would expect enslavement to be the action of a proprietary government that ruthlessly maximizes its profit. In case freedom of expression is guaranteed, this will lead to a loss of reputation for the government. Parents would move out with their children and many people otherwise wishing to immigrate now refrain from doing so. Is this loss, however, smaller than the market value of slaves minus their expected tax value?
Alternatively, what would be the consequence if the government enslaves and exploits convicted criminals and their children? Forced labour could be an appropriate punishment for criminal parents but enslaving their children would still be a human rights abuse. It would surely deter crime, but at the costs of innocents suffering.
However, would such a human rights abuse cause subjects to terminate their subordination? If most parents do not engage in crime, what do they have to fear? The impact on immigration and emigration could be very small since most people consider themselves to be law abiding citizens. In this case too, it could be most profitable for the proprietary government to carry out human rights abuses. Besides, if the government has the right to state secrecy, how will parents inform themselves of the risk they are taking by raising their child in that government’s jurisdiction? Occasional human rights abuses to subjects not voluntarily subjecting themselves to the government could take place unseen.
In this treatise, the random enslavement and abuse of adults able to voluntarily agree to their subordination is not considered to be a human rights abuse. If the exit principle and freedom of expression hold, these adults have voluntarily chosen to subject themselves to a government that is free to engage in such activities. If this would be a human rights abuse, sadomasochism would be as well, yet it is not considered to be.
The enslavement and abuse of the involuntarily subordinated, such as children, would be a human rights abuse regardless.
In a world wherein the government has and uses the right to state secrecy, one could also wonder how adults can be informed of the risk of being randomly enslaved or abused by their government. If freedom of expression is not violated, subjects will be able to inform themselves about the law and rule of law. Subjects would not be able to inform themselves of specific acts of the government, but would be able to inform themselves of the risk taken by choosing to be its subjects. Subjects can make the voluntary and informed choice to subject themselves to a government that has the power to act randomly.
More simply: If freedom of expression and the exit principle hold, subjects voluntarily choose to be a government’s subject. In these circumstances, enslavement and abuse do not violate proprietary democracy. In reality, the exit principle can never completely hold. Special provisions must therefore be made for those who are unable to make such voluntary choices.
6.6 Rule of Law and International Law
As shown in this paper, when the following points hold, other provisions for human rights will not be necessary to ensure proprietary democracy:
- The value principle
- Freedom of expression
- The exit principle
- Provisions that keep governments from violating each others’ property rights
- Provisions that prevent cartelization in the proprietary governance sector[xi]
- Provisions that safeguard human rights of children and people entering adulthood without the ability to voluntarily choose their subordination
- The rule of law[xii]
There are two (and possibly more) ways to safeguard these principles and thereby create and maintain proprietary democracy. The first would make sure that proprietary governments all have a strong rule of law and include the principles above in their constitutions. To ensure this, nation states allowing proprietary governance should demand this as a prerequisite for recognition of the proprietary government and trade with its jurisdiction. It could also be valuable to set up NGO’s (watchdogs) that supervise proprietary governments with regards to the principles above. A potential bottleneck of this solution is the possibility for proprietary governments to undermine the rule of law once they perceive it to be in their interest to do so. For instance, once a government has gained enough size and strength to violate other governments’ property rights (e.g. through military takeover), it might be able to undermine the rule of law preventing it from doing so. If the rule of law is not strong enough, a proprietary government could potentially even morph into a hostile absolute dictatorship.
6.7 The Hybrid System
The other possibility is what in this treatise is called the hybrid system. Such a system would consist of a representative democracy with checks and balances that has the monopoly on violence, whilst the right to legislate, adjudicate and enforce is largely or mostly in the hands of private, for-profit companies. The value of this combination lies partly in the political economy of representative democracy, which for example disincentivizes unnecessary warfare[xiii]. Representative democracies would then not be tempted to use force against each other, whilst they would enforce the property rights of their proprietary sub-governments, to enforce laws against cartelization and to enforce the exit principle and freedom of expression. Proprietary sub-governments can then provide the benefits of competitive for-profit governance to their subjects. However, some issues endemic in representative democracy such as rent-seeking could also arise.
Naturally, in a hybrid system many of the same anti-corruption measures should be taken as those taken in representative democracies with low corruption today. Apart from that, part of a potential solution to the rent-seeking problem is to forbid representative democracies from having majority shares in proprietary governments. The government should then hold the same share classes as other shareholders, since representatives could bargain for special privileges in return for holding different share classes. Of course, rule of law in the representative democratic government will be vital to ensure such provisions hold.
As the quote from Ludwig von Mises in chapter 7.2 shows, the free market is democratic and the consumers are its ‘electorate’. A possible objection could be that not everyone has an equal vote. Every penny grants a vote but subjects pay different amounts of tax. This also applies to proprietary democracy. The rich have more to spend and will therefore be a more valuable sort of customer to proprietary governments.
Moreover, since proprietary governance introduces competition in the domain of governance, this could lead to governments lowering their tax rates to attract subjects. Subjects pursuing their own financial self-interest would then move to where taxes are lowest. Currently, such states already exist such as Monaco. Introducing proprietary governance to the world could expand the possibilities of high-income citizens and companies to move to tax havens. Such a development could undermine welfare states. Competitive pressures between governments bring many advantages, but to those who believe that welfare states must persist so that the weak are taken care of, the net results might not be positive.
To this problem as well, a hybrid system could provide a solution. The representative democratic state can levy taxes and redistribute these tax revenues. Meanwhile, proprietary democratic sub-governments could provide efficient government services to subjects.
Two objections should be made to this solution. First, checks and balances and the limiting power of a constitution tend to erode over time.[xiv] This is the inevitable result of the political economy of a representative democratic system with universal suffrage. Thus, rent-seeking and overregulation could become a problem in a hybrid system. A lean, efficient, non-corrupt government is not in the interests of bureaucrats.
Second, whilst a hybrid system would enable redistribution within its borders, it would not be immune to tax arbitrage from other states. Competition from other governments, especially proprietary governments outside hybrid systems, could impair welfare states by limiting the tax rates a hybrid system can charge to its subjects.
7. The Superiority of Proprietary Democracy
7.1 The Inevitable Shortcomings of Representative Democracy
Describing all issues endemic in representative democracy is beyond the scope of this paper. Some will, however, be briefly described in this chapter, to show that several problems non-existent in proprietary democracy are inevitable in representative democracy.
Regarding checks and balances, many representatives currently do not fare very well. For instance, in his book titled ‘Your Next Government?’ Tom W. Bell described some issues that exist with the U.S. Constitution. Constitutions are created to protect the government’s subjects from the abuse of power and to safeguard democracy, human rights and the proper functioning of the government system. As is clear from the history of the United States, however, the U.S. Constitution has been extensively hollowed out. U.S. Supreme Court judges are nominated by the President and confirmed by the Senate, which violates the separation of powers. Consequently, many amendments have been passed and novel interpretations have been given to the constitution. One of the consequences is that government officials such as the judiciary have thereby been able to obtain immunity against civil litigations.
This problem is inevitable. Laws must be able to be adjusted to a changing society. So must the constitution. This implies that the electorate’s representatives must wield the power to amend the constitution when it is necessary. Many provisions are built into constitutions to slow such processes down and to make it impossible for governments to amend the constitution to unduly extend their own powers. Such provisions are doomed to fail. Sooner or later, elected representatives can band together to amend the constitution as they see fit. Besides, a formerly important amendment can provide an opportunity for power-grabbing later. The authority of the representative democratic state can thereby grow beyond the boundaries first intended by those who wrote the constitution. Whereas the U.S. constitution was meant to curb the government’s authority, the political economy of representative democracy has led to the expansion of the state into economic redistribution, excessive regulations and the creation of a host of other responsibilities for the state. Such ‘responsibilities’ of course provide rent-seeking opportunities. It is in the interest of government agents to expand these responsibilities as more taxpayer money can thereby end up in their own pockets.
The erosion of the government’s limits, checks and balances also expands the possibilities for majority rule. The dictatorship of the majority is coming closer with every further stretching and erosion that constitutions undergo. A problem lies with the inevitable loss for minorities in representative democracy. Whereas agents in the free market have an incentive to serve all those willing to pay for it, representative government aims to represent first and foremost the will of the majority. Ideological minorities are left out even if they are right and economic redistribution is favoured by most of the public because for them it simply pays off. Whether it is fair or whether it violates property rights does not matter here. All that matters is the will of the majority.
The best metaphor for the problems with representative democracy that I have encountered was by Titus Gebel (Gebel, 2018). In this book, he explains what would happen to the market for cars if it were governed according to representative democracy. He wonders: ‘What would be the outcome if companies were managed like states?’ He gives the example of a fictional car company that is governed according to representative democracy. Such a company would function much worse than the car companies that exist today.
Another problem with representative democracy is that it can never be greater than the ignorance and ideology of its electorate allows it to be. For example: Pakistan is a democracy. Yet in Pakistan one can receive the death penalty for converting to Christianity. Homosexuals are not safe there and insulting the Islamic prophet is punished harshly. Freedom of expression does not exist in Pakistan. This shows that in a representative democracy, the rule of the majority can lead to the oppression of minorities. A representative democratic state can never be humane if its electorate is not. Many other issues endemic in representative democracy can surely be thought of.
7.2 The Superiority of Proprietary Democracy
As referred to in the previous chapter, representative democracy tends to disregard the needs and wants of minorities. Checks and balances safeguarding the rights of minorities are often insufficient as they can be dismantled. In a proprietary democracy however, minorities also count as they pay taxes just as the majority does. The difference between a market with consumer sovereignty, which is democratic and serves all subjects, and representative democracy, has been described very well by Ludwig von Mises in his book Human Action:
‘In the political democracy, only the votes cast for the majority candidate or the majority plan are effective in shaping the course of affairs. The votes polled by the minority do not directly influence policies. But on the market no vote is cast in vain. Every penny spent has the power to work upon the production processes. The publishers cater not only to the majority by publishing detective stories, but also to the minority reading lyrical poetry and philosophical tracts. The bakeries bake bread not only for healthy people, but also for the sick on special diets. The decision of a consumer is carried into effect with the full momentum he gives it through his readiness to spend a definite amount of money.’
(Ludwig von Mises, Human Action, Catallactics or Economics of the Market Society: The Market, The Sovereignty of the Consumers)
Referring to Titus Gebel’s argument, if representative democracy is the best political system possible, why does it not exist in the free market? Why are Apple and Google not run by representatives elected by their respective customer bases? If a representative democratic system truly functions better than any alternative, it would have been most profitable for companies to govern themselves that way.
Yet such companies are rare if not non-existent. Most successful companies produce according to the preferences of consumers and are run by experienced and often visionary entrepreneurs. Their customers do not explicitly decide what is built and how. No representatives elected by them exist to play any role. They do not vote by ballot for one phone to be produced over another. In a free market, ideology does not play any role in profit-maximising companies’ decision making. Instead, people vote with their feet. The absence of alternative types of companies proves that the capitalist free market is most successful in maximising value for consumers than any other democratic system. The concepts of proprietary governance and proprietary democracy merely extend this highly successful system and the conditions for its proper functioning to the domain of governance.
7.3. The Case Against Excessive Rights
Present-day political systems have been equipped with many checks and balances to ensure against the abuse of power and to protect democracy. The necessity of these directly result from the political economy of a representative democratic system. However, they have very often been unsuccessful. Without properly functioning checks and balances, representative democracy naturally leads to rent-seeking, abuse of power and a relative reduction of the well-being of citizens. Countless examples can be found in the world today, ranging from Malta to Venezuela.
Under the conditions described in this treatise, proprietary democracy provides a solution because it maximizes value for subjects by introducing property rights, the profit motive, competition and consumer sovereignty to governance. When proprietary democracy is ensured, the democratic system, its checks and balances and human rights are unnecessary[xv]. The profit motive and the conditions described in this treatise provide sufficient pressure to proprietary governments to maximise value for subjects.
As explained by Tom W. Bell in his book ‘Your Next Government?’, making subjects shareholders of the government can also result in them effectively voting with a ballot. However, by the definition of private property, proprietary governance can only exist if shares are tradeable. Such a democracy would therefore not have equal representation anymore as soon as shares are traded. Another difference is the way the ballot voting system is organised. For proprietary democracy, the government must have an incentive to maximise profit because this maximises value for its subjects. Otherwise, there can be no consumer sovereignty. Giving shareholders voting rights in a system found in or similar to representative democracies would result in the abandonment of the profit motive, such as when citizens vote for welfare programmes that redistribute prosperity whilst reducing total value for consumers.
Rights, procedures and the equality of rights are built into in criminal law to ensure that the unguilty are not convicted. However, this can give rise to the risk that those who are guilty are not convicted either. Where the ideal balance lies, is for the government to determine. A profit-maximising proprietary government would strike that balance such that it maximises value for its subjects. Such government could have more discretion in criminal and other government procedures. This is because the defunct political economy of representative democracy that requires all sorts of rights, checks and balances is absent.
The same applies to penalties. High penalties such as the death penalty are problematic when the risk of being falsely convicted is high. Such circumstances would lessen the value of citizenship. Here too it is in the interest of the profit-maximising proprietary government to strike the right balance. In this case, the balance is to be found between crime rates and the risk of receiving an undue and severe punishment. The balance most profitable by the government is that which is preferred by its subjects. The proprietary government should therefore be able to determine its own policies.
The only restrictions to the freedom of proprietary governments are the points described in chapter 6.6: Rule of Law and International Law. These could be enforced by the combination of a strong rule of law and provisions in international law. An alternative is a hybrid system as described in chapter 6.7: The Hybrid System, in which a representative democratic government ensures that the conditions bringing about proprietary democracy hold.
Proprietary democracy, i.e. private property in the right to rule in a market with consumer sovereignty, could become the best form of political government yet. However, the right conditions must be met to ensure proprietary democracy. Otherwise, the outcome could be an outright dystopian regime. To reiterate, for proprietary democracy the following conditions must hold:
- The value principle
- Freedom of expression
- The exit principle
- Provisions that keep governments from violating each others’ property rights
- Provisions that prevent cartelization in the proprietary governance sector
- Provisions that safeguard human rights of children and people entering adulthood without the ability to voluntarily choose their subordination
- The rule of law, depending on whether the hybrid system or international law is used to ensure the previous conditions hold
There are two ways to ensure the principles above hold. One is in this paper called the hybrid system and the other is a combination of provisions in international law and a strong rule of law. The former can provide many of the benefits of proprietary democracy to existing representative democracies, amongst which more efficiency, professionalism and the absence of corruption. Transforming a representative democracy into a hybrid system also allows the representative democratic state to maintain a welfare state. Some issues inevitable with representative democracy would, however, likely still be present.
The other option could be more interesting for proprietary governments that want more freedom in ruling their jurisdictions. This solution consists of enshrining the necessary principles into law and international law, whilst ensuring a rule of law that is as strong as possible. This can provide such governments with tax arbitrage opportunities.
In any case, the time is ripe for the concept of proprietary governance to be put into practice. The ZEDEs in Honduras such as Honduras Próspera and Ciudad Morazán attest to the growing interest in this field. If they become successful, they can set an example for other countries to follow. Regions such as Latin America, historically plagued by weak and corrupt institutions, can become as prosperous as the developed world. Proprietary governance, a.k.a. Free Private Cities or Entrepreneurial Communities, could lift millions out of poverty. It is up to those practically involved in this field to ensure that it maximises value for citizens. For inspiring more countries to facilitate proprietary governance, it is paramount to ensure proprietary democracy.
About the Author
George Kerpestein is a liberal-conservative thinker who enjoys theorising about many topics, ranging from political philosophy and economic topics to architecture theory and art.
As an adherent to the Austrian School of Economics and a staunch proponent of proprietary governance, he enjoys entertaining ideas and finding ways to solve problems surfacing with current forms of governments. He seeks to further advances of freedom and understanding of better ways to live together in consciously chosen groups with shared values. On his blog, Casual Realism (medium.com/@casualrealism), he covers many fields related to his academic interests. You can follow him on Twitter (@gkerpestein) and contact him via e-mail on [email protected]
[i] As the concept is called in Titus Gebel’s excellent book titled Free Private Cities: Making Governments Compete For You
[ii] As it is called in Citadel, Market and Altar by Spencer Heath, in The Art of Community by Spencer Heath MacCallum and in Entrepreneurial Communities by Calvin Duke.
[iii] Depending on circumstances regarding proprietary democracy, which will be explained later in this treatise.
[vii] Ludwig von Mises, Human Action, The Limits of Property Rights and the Problems of External Costs and External Economies
[ix] Calvin Duke, Entrepreneurial Communities: An Alternative to the State, Part 1.1: Two Key Aspects of Real Estate
[x] This requirement for consumer sovereignty is problematic. It raises a dilemma on how to define consumer sovereignty, which would take too long to explain here. For an explanation, I would recommend the reader to read the following article: https://mises.org/library/rothbardian-critique-consumer-sovereignty. Regardless, whether consumer sovereignty (in this context proprietary democracy) requires the absence of monopoly power is not relevant. For the consumer (the subject) it will always be best if it is impossible to obtain monopoly power. It is therefore important regardless of whether it is necessary for proprietary democracy.
[xi] As explained in footnote 8, chapter 6.3: Market Structure, whether this should be a requirement for proprietary democracy could be contested. Regardless, this point is essential for the maximization of value for consumers (in this case subjects).
[xii] In the case the ‘international rule of law solution’ described here is implemented. In case the hybrid system solution is implemented and if these principles hold, the rule of law will not be necessary at the proprietary government level to ensure proprietary democracy.
[xiii] According to democratic peace theory: https://en.wikipedia.org/wiki/Democratic_peace_theory.
[xiv] As explained in Tom W. Bell’s excellent book ‘Your Next Government?’
[xv] Unless, of course, this is part of the provisions that ensures proprietary democracy, such as in a hybrid system.