Defense a la carte

Of all the ways to resolve differences of opinion and preference, it seems to me that a free market is the best one. That may seem odd. Markets are for buying and selling stuff, not for sorting out disagreements. Let me explain myself.

Let's say you go to buy a sandwich today for lunch. You go to the first place that looks decent, but the prices just seem incredibly high. Five dollars for a sandwich? Too much. So you leave and go to another place, but you find no respite _ prices are just as high there. So you start thinking how much it could possibly cost to produce a sandwich _ buying meat, bread, paying wages to workers, paying rent for the building, etc., and you still can't figure out how a sandwich could cost any more than three dollars to produce, yet you can't find one for less than five.

You disagree with sandwich shop owners about the price of a sandwich. You could try to petition the government, saying that sandwich shop owners are in culinary collusion and have conspired to keep the price of sandwiches artificially high. This is unfair and inhumane, and the government should put a price ceiling on sandwiches. And some people in government might even listen to you.

Assume somebody important in government listened to you, and you were able to force delis to offer sandwiches at four dollars. Owners would probably respond by reducing the quality of size of sandwiches, or dodging the law in some way (maybe they would stop offering sandwiches individually, and instead only offer "combos" of chips and a sandwich for $5.50). In short, the law would do little to achieve your desired result, which was the same sandwich at a lower price.

What would be the market solution to this problem? With free entry into the market, if you think the price is too high, you can always offer the good at a lower price. If you know how to create sandwiches at $3 each, and the market price is $5, you could undercut the market by selling at $4 and still make a $1 profit on each sandwich. Eventually other sandwich shops will be forced to either come up with a way to lower their prices, or lose their business to you. Due to your innovation in sandwich-making, the market price is lower and the quality is still high, without any laws and their loopholes. Plus, you have a nice profit. Disagreement over. Wouldn't it be great if we could solve all of our problems this way?

But there's something about the disagreement over sandwich prices that doesn't apply to all disagreements. Sandwiches are a "private good." This means that they are both excludable (meaning that I can keep people from the benefits of sandwiches if they don't buy them), and rival (meaning that two people can't eat the same sandwich).

Many goods over which we disagree don't have this quality. Every year politicians and citizens argue over how much we should spend on defense. What kind of good is defense? Can I keep people from enjoying its benefits if they don't pay for it? No, I can't. There is no way to defend only certain citizens, while leaving out others. National defense is non-excludable. Can two people use the same defense programs? Yes, they can. The cost to defend one additional person is virtually zero. I don't feel any less defended if there is another person using my national defense, whereas I do feel less satisfied if another person eats part of my sandwich. National defense is a non-rival good.

This means that there cannot be a market for national defense. I can't enter into the national defense market if I disagree on expenditures. Maybe I could buy some land and set up my own country and set its defense expenditures to my preferences. Then everyone with like preferences would come to my country and pay taxes in my country instead of the United States, eventually putting the US "out of business" as they lose their "customers," (tax-payers).

In extreme cases, this could happen. Think of all the people who fled the USSR, or any of the millions of refugees in the world today. This is their story. They disagreed with policies in their own country so much that they were willing to leave it for another. But this is a huge cost to bear, and it would take a whole lot of emigration for a government to actually lose its tax base.

In the real world, we have to make decisions on things like defense expenditures collectively. The bad part is that only a few people will be perfectly content with the amount that we spend on defense ($399.1 billion for FY 2004). But the good part is that everyone will be happier with that amount than a zero amount.

What's the best way to decide collectively? Have the smartest person in the country decide since he will make a better decision? Have the richest person in the country decide since she is contributing the most in taxes? Have a military expert decide since he has the best information? Vote on it? Winston Churchill once said, "Democracy is the worst form of government, except for all the others we have tried." If you disagree, you can always move.