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I've been reading a little about the Austrian school and a lot of their conclusions and insights looked intuitive and sensible until I came to their view of government spending for "public goods" like national defense.

I might be wrong in this, but it seems to me that they don't even recognize public goods as a valid category. Moreover, when I asked chatGPT how they would solve the free-rider problem in spending for national defense, this is what it gave me:

Austrian economists acknowledge the free-rider problem but believe that it can be addressed through a system of private defense. In a free market, private defense firms would compete to provide national defense services and would have an incentive to offer a high-quality product in order to attract customers. Customers, in turn, would have an incentive to purchase the best defense services available in order to protect themselves and their property.

Austrian economists argue that a private defense system would be more efficient and effective than a government-run system, as private defense firms would have a direct financial incentive to provide the best possible defense. Furthermore, a private defense system would be more responsive to the needs and desires of individual consumers, rather than being shaped by political considerations.

This seems very unlikely to work well precisely because of the free-rider problem.

How does the Austrian school resolve the free-rider problem? Is there a better explanation that I'm missing?

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  • $\begingroup$ Does it? $~~~~$ $\endgroup$ Commented Feb 11, 2023 at 16:55
  • $\begingroup$ this is literally describing organized crime... $\endgroup$ Commented Feb 13, 2023 at 12:38

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Austrian School, as every other school including let's say Marxist School, as such is a set of methodologies not necessarily policy conclusions about what policies ought to be pursued (see Brue & Grant The History of Economic Thought 8th ed). As such it does not really make sense to talk about 'Austrian School', or any other school, offering solutions to this problem.

Austrians argue that the proper way how to do economics is to derive theories from first principles and reject statistical empiricism. Depending on what first principles you choose and moral philosophy you can arrive at any policy conclusion you can imagine using Austrian economics (or any other school of economics for that matter) even at some communist dictatorship. In same way someone could be member of Marxist school (e.g., buy into Marxist reinterpretation of Smith's labor theory of value etc.) and be pro capitalist society.

It would be more correct to talk rather about what solutions classical liberals and anarcho-capitalists advocate, which are two political groups that pretty much cover almost any Austrian economists believed the correct solution here would be from political economy perspective.

When it comes to classical liberal Austrians such as Hayek or Mises they did not reject the role of government as being the provider of public goods such as army. Their solution to the free rider problem would be let government do it. They would perhaps prefer it would be organized less centrally (through lower level of administration) and they might have preferred smaller militaries due to their pacifistic stance, but they would advocate for government provision of these nonetheless (see Haar (2009) Classical Liberalism and International Relations Theory: Hume, Smith, Mises, and Hayek or Schearer 2020 or you can have look at some of their own writings such as Hayek's Constitution of Liberty).

When it comes to anarcho-capitalists such as Rothbard, they advocated that the free rider problem is not as severe, and that people could overcome the free rider problem with private contracts and private action.

There is some credence to the idea that at least some public goods can be provided privately efficiently without need for government. In fact Elinor Ostrom, who was first woman to ever be awarded the Nobel Prize in Economics in 2009, got the prize precisely for her research into political economy that showed that efficient private provision of public goods is possible and there are various ways how to overcome free-rider problem, at least at relatively small local scales (although most of her work focused on environmental protection issues). However, she was mainstream neoclassical/new institutional economist, so she does not count as member of Austrian school (see Ostrom 2009).

This being said, you are right to be skeptical about the idea of private military. Despite of Ostrom Nobel prize winning work there isn't much evidence the free rider problem in provision of national defense, especially for large states (as opposed to let's say small community) can be solved privately. Anarcho-capitalist Austrians such as Rothbard never provided (at least in my opinion) a satisfactory solution to this problem and mostly handwave the problem away.

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I've come across several solutions or answers put forth by those who subscribe to Austrian economics:

  1. Free-riding won't prevent adequate services. This answer asserts that while there will be free-riders, enough people will pay a fair price for fair services that the cost of free-riding will be bearable. There are certainly historical examples where such a thing was the case. Eg fire protection in London in the decades after the london fire.

  2. Charity funding. Similar to point 1, its possible that adequate services could be funded via charity.

  3. Joint contracts. These are where you get everyone or most people to sign a committment to paying a certain cost on the condition that others commit to paying their portion of the costs. This is not likely to eliminate the free rider problem, but can reduce it substantially.

  4. Area contracts. These are contracts required to enter or reside within a paritcular border. A contract could require payment services determined to be suceptible for the free rider problem. This is essentially a government by any other name, the difference being that the contract is explicit and entered into voluntarily.

  5. Traditional government-run service. Some Austrians simply concede that we may not have a solution at the moment for existentially important things like national defense, where a mistake can be fatal. Eg David Friedman calls national defense the "hard problem" and puts it in the category of "those [things] we hope to be able to do away with tomorrow."

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