(The commenting on this article has been disabled, as I am moving to a new commenting system - 8/2007)
This article briefly discusses the fundamental reasons why governments function so poorly, and why many libertarian solutions are insufficient to solve the problem. Government is modeled as an industry which is shown to be lacking in competitive feedback. Based on this, we examine ways of making government more efficient, including an odd but elegant way of fixing this problem which has not previously been analyzed in this context. So if you're ready to get your feet wet, read on!
Those who do not learn from the mistakes of history are doomed to repeat them.
Given how far all current governments stray from the libertarian vision, it is natural that some of us have considered designing or even founding a new nation. In doing so, we sometimes assume that the major failing of present nations is the mental attitudes of their residents. Thus to ensure that a political system works, we merely need to start with libertarians. This is incorrect, because much of what we don't like about current states stems from the behavior of systems - behavior which is to some degree independent of which humans are involved. As an example, the USA started with liberty-minded founders and degenerated anyway.
Alternatively, it is tempting to think that some structural problems or lack of specificity in the constitution are the issue. If laws required a supermajority to enact but a 1/4 vote to repeal, or if the constitution made it clear that RKBA really means the right for anyone to possess the most deadly weaponry available, maybe that would solve the problem. While these issues matter, the approach is still too superficial. Again, the USA started with a pretty darn good constitution, and still degenerated. No matter what your starting laws (and the Bill of Rights is pretty clear), judges must interpret them.
When we look at the empirical evidence of the twentieth century, the libertarian case is bleak. However much we may admire it, small government does not appear to be a stable equilibrium. Instead, the clear pattern is growth of government spending, in absolute and relative terms, in a variety of different first-world countries. The budget-maximizing bureau and the ratchet of government appear to be robust phenomena. We must not dismiss this evidence simply because it is distasteful. Laissez-faire may be efficient, but if it is inherently unstable there can be no Libertopia.
This stability problem is a crucial one for libertarians, perhaps the most fundamental issue we face. We know a great deal about how things would/should/could/did work in our vision of society. But why are such societies so rare? Why aren't they forming? Why do they disappear? How can we create one that lasts? Some excellent analysis has been done on this topic (thanks, public choice economics!). But these pressing questions seem to receive little attention compared to minor technical issues, despite the fact that we must answer them if we are ever to create a stable libertarian society.
Traditional government consists of a monopoly on the use of force in some geographic area. Generally it is extended to include monopolies on a large number of services as well, such as courts, police, military protection, roads, and licensing. We'll consider all of these as government services, and call the provision of these services the governing industry. There are two aspects which make this industry uncompetitive: a high cost of switching and a high barrier to entry.
Government service providers have monopolies over wide areas. Most people live in buildings and own lots of physical property. They are likely to have family and friends in the surrounding geographical area, and to work at a nearby job. While there may be people who live in RV's, only have friends on the internet, and telecommute every day, they are surely rare. Thus if an individual wishes to switch providers, they must physically relocate to a new country. This involves an onerous series of steps: sell their house, pack up all their possessions, quit their job, move to a new country, deal with immigration requirements, buy a new house, get a new job, make new friends, learn a new culture. This is an extremely costly process.
Because it is so expensive to switch service providers, the industry has little market feedback. Jurisdictional arbitrage is ineffective because the difference to an individual between two governments must be higher than the cost of switching - and that cost is huge. Thus its a great temptation for residents to stay and hope things get better, or perhaps try to change them despite slim odds.
If it is not clear why this leads to poor service, consider a business example. Suppose there were many competing phone companies with no interconnection, so that you could only call people subscribed to your provider. It is likely that your friends, family, and coworkers all use the same provider, because convenience of communication is so important. In fact, they've probably all used the same provider for their whole lives. Once a provider had many customers signed up, it would not have to treat them very well to keep them as customers, because it would be so difficult for them to switch. When all phone networks are interconnected and it takes only a few minutes to change providers, service is vastly more efficient. The effect with government is even stronger because physical proximity is more important and all-encompassing than the phone network, thus people are willing to bear higher costs to maintain it.
Consider two industries. One has few economies of scale, thus small firms can enter easily. In the other, high economies of scale mean that only a huge, highly-funded new venture can be competitive with current firms. The first might be the computer applications market and the second the computer operating system market. When the barrier to entry is low, many innovative firms will compete to provide the best product. When it is high, a small number of entrenched firms fight to maintain their position.
The barrier to entry in the government market is gargantuan. While it is possible to control small parts of a democracy without great expenditure, creating a new system or taking over the existing one are very difficult. Bloody revolution is the usual route, and those attempting it must risk death with little chance of success. All land is claimed, and its current possessors have a great deal of interest in maintaining the status quo. The recent US invasion of Iraq demonstrates the tremendous expense and difficulty of regime change.
This high barrier means that the governing market contains a small number of large firms. The industry lacks the continual growth, innovation, and energy produced by a constant stream of small experiments and ventures. Currently, small groups of people cannot readily experiment with new systems. This deprives the world of useful information about improved ways of governing - as well as letting people keep their illusions about methods which would prove disastrous in practice.
Further evidence that these two conditions are key to the poor provision of services is found by examining the few governmental services with a much lower cost of switching and barrier to entry. For example, incorporation and ship chartering do not require physical presence, and both are among the minority of profitable government-run businesses. It is no surprise that for this small subset of "virtual" services, jurisdictional arbitrage is alive and well.
Aside: applying these two criteria to the Windows OS explains why it is of low quality, while Microsoft makes much better products for more competitive industries.
Now that we have considered government as an industry and realized that it is a very uncompetitive one, we should be unsurprised that existing governments do such a poor job. Without competition and market feedback, we should not expect significant improvement - regardless of superficial reforms. Changing one part of one system is not enough, we must change the meta-system under which systems evolve.
There are a thousand hacking at the branches of evil to one
who is striking at the root.
-- Henry David Thoreau
Industries are not made competitive by rhetoric, and the governing industry is no exception. Instead, we must change the incentive structure which leads to stagnant, exploitative governments. The above analysis suggests that lowering the barrier to entry and the cost of switching is likely to be effective. How can this be done?
One answer is a heirarchical system of alliances like medieval feudalism. Each unit can choose which higher-level unit it is affiliated with, and thus shop around for the best deal. This actually created a competitive system, as Robert Wright describes in Non-Zero Sum:
Why were these ruling elites more open to change than Rome's ruling elites? One reason, some historians say, was the decentralized nature of feudalism. Feudal lords often had the leeway to rewrite the rules in their territory, and they also had the incentive - competition with neighboring lords. As savvy lords tried to foster more prosperity than their neighbors, the many fractal units of feudalism became, in effect, laboratories for non-zero-sumness, competing with each other to raise productivity. 
He also reports that this competition in the governing industry may have contributed substantially to Europe's technological advantage. Unfortunately, there are problems with this method. For example, stable units in feudalism tend to be geographically compact, and geographic features constrain the possible configurations. So a unit will often have only 2 options for affiliation - or if its not on a border, no options at all.
One system fairly well-known in libertarian circles is called anarcho-capitalism. The idea is that all of the services of government are provided by private businesses. No one provider has a monopoly on any service or area. For example, police functions would be the domain of "protection agencies", and disputes would be settled in private courts. We will not examine the system in detail here (see ). Instead, we will examine how AC fits into our model.
AC lowers the barrier to entry, because a new firm would only have to enter a specific industry (like fire protection) in a certain area. Some governing service industries may have high economies of scale and be natural monopolies, but it is unlikely that all are. Unlike monolithic governments, anarcho-capitalism allows for competition in the non-monopolistic fields. AC also dramatically lowers the cost of switching because people would not have to physically move in order to change service providers - it would be like changing insurance agents is today. Additionally they are free to choose a different provider for each service. Thus to stay in business a provider must be competitive, or its stream of customers will dry up. It is not merely protecting a rent-generating resource like a traditional state.
The main objection raised to AC is stability - whether the power vacuum of having no central government will inevitably lead to one forming . Critics say the protection agencies will just join together to tyrannize the population. While the scant historical evidence does not support this prediction of failure via swift descent into totalitarianism, it does not point towards long-term stability either. Rather, situations such as an external threat to the anarchy cause centralized control to develop. Once in place, regardless of what happens with the original threat, government gradually strengthens its hold. This is a typical example of the so-called ratchet effect which is a major contributor to the continual growth of government .
In The Machinery of Freedom, David Friedman used the following metaphor to show the benefits of anarcho-capitalism:
Consider our world as it would be if the cost of moving from one country to another were zero. Everyone lives in a housetrailer and speaks the same language. One day, the president of France announces that because of troubles with neighboring countries, new military taxes are being levied and conscription will begin shortly. The next morning the president of France finds himself ruling a peaceful but empty landscape, the population having been reduced to himself, three generals, and twenty-seven war correspondents. 
Taking this metaphor literally suggests an alternative strategy. Suppose that the cost of physically switching countries really could be dramatically reduced. Even though each country retained a monopoly on its geographic territory, governments would be forced to compete for citizens by providing services more efficiently. Governing would be more like long-distance phone carriers less like operating systems. But how?
While the answer is not to put wheels on our houses, some may find it equally counterintuitive - to build floating cities from detachable, modular units. The general concept is by no means an original idea, as floating cities have long been a part of the nation-founding fringe. Because all land is under the control of nations with no interest in selling sovereignty, nation-founders have been forced to consider the oceans. Yet far from being a booby prize, it appears that the sea may be ideally suited to sustaining free societies.
The geography of land is fixed, and the cost of transporting things over it is high. Moving buildings is rarely feasible. Buildings and heavy possessions are valuable and important, which makes control over physical territory important. Water, however, is a fluid medium. Even large buildings, if floating, could be towed to new locations quite cheaply (think cruise ships). So the geography of the oceans is dynamic - pieces of territory need not maintain a fixed spatial relationship.
The consequences of this geography should be clear from Friedman's story. If an individual structure can cheaply relocate to another jurisdiction, the cost of switching governments is low. The streets which make up a town, the towns which make up a county, the counties which make up a state - each level can switch its affiliation to get a better deal. This switch is not merely virtual as in feudalism, since it can involve physically moving the entire area. If the state tries to impose a sales tax on Monday, the capitol building may be all that's left of the city by Tuesday. When leaving is easy, exploitation is difficult.
The barrier to entry is much lower on the ocean as well, because the geography of floating cities can be dynamically grown as well as re-arranged. A new government no longer has to fight a war over some already-claimed piece of land. It can simply take some small bit of the vast empty oceans as its own. While location does matter, the oceans are far more homogenous than land, and so there will be less contention for prime real estate.
As mentioned earlier, one of the major factors bloating governments is the ratchet effect. Because dynamic geography can also be shrunk, it provides a potential "reset button" to help counter ratcheting. Imagine a platform city where the government has become too repressive or inefficient. A single platform decides to disengage and anchor a mile away, forming a new government. More follow. Eventually, the entire city may have relocated to the new position, with exactly the same set of platforms, but an entirely new government. In practice, it is likely that the threat of this possibility will keep it from being necessary. While a reset policy could be made part of a terrestrial constitution, the powers-that-be will have great incentive to fight the reset. When citizens can just walk out and take friends, family, and office with them, resetting is harder to stop. This sort of reset is incremental, so it has no single point of failure. Stopping a terrestrial reset might just require winning a vote. Stopping a dynamic reset requires limiting the freedom of movement of every module in the city.
This solution can be foiled. If a government physically prevents modules from leaving, they have terrestrialized the city - and can proceed to terrorize it. But while this is a genuine danger, the aquatic city is still relatively better off. On land, buildings and land are inescapably trapped in place. On the ocean there is always some chance that a platform might, through valour or stealth, make a daring escape. Further, this restriction will have to be sprung quite suddenly, as I believe that the freedom of physical association will be considered the most fundamental right of a platform. It will be revered as free speech and property rights are by libertarians today, for it ensures explicit, voluntary participation in the social contract.
Dynamic geography moves power downwards towards the smallest separable unit. Depending on various factors, the smallest economically feasible unit might be as small as a single residence, or it might have to house some 10-100 people. Either way, this size will allow far more individual influence and accountability than in current huge, monolithic, winner-take-all political systems. Not only will government be more efficient, but it is likely to be more diverse. There seems to be a fair variety in people's tastes for political systems, so with a lower barrier to entry firms will arise to serve many niche markets.
Part of why this idea is so powerful is that you don't need to believe in it for it to work. The governing market will have different characteristics under a different incentive structure, regardless of the particular political beliefs of its citizens. This avoids the weak link of many utopian ideas, which require everyone to See The Light. The only convincing required is to start the process, and since its incremental only a few people need be persuaded at each step. As floating cities grow, the additional evidence that they are nice places to live convinces those on the margin, which produces more evidence, and so forth.
A disadvantage to DG is that the oceans are a difficult and resource-poor environment. One might ask whether the advantages of efficient government are worth it. Empirically, the answer appears to be yes. For example, consider cities like Hong Kong and Las Vegas. With few natural resources, they have enjoyed tremendous economic growth by providing an environment of freedom. In our complex global economy, there is plenty of work to be done besides extracting natural resources.
You can see why governing floating cities will be a dynamic, competitive industry. As with any such industry, I have great confidence that it will produce useful innovations I would never have dreamed of. DG, like AC, produces good government through competition. I don't claim this will result in utopia, but it will increase both private freedom and the efficiency of public efforts. Note that the advantages of dynamic geography are not specific to libertarian or AC politics - all kinds of government will be made more efficient by DG. In fact, it may turn out that both communism and anarcho-capitalism are infeasible on land but workable at sea.
Are such settlements technologically feasible? I have done a fair amount of research on the subject and concluded that they are not only practical but reasonably cost-effective. I am currently writing a book on the subject, called Seasteading. For more detailed information, see the draft, which is available on the web . Note that even if the technical problems are an issue, we have transformed a political problem into an engineering one - and humans are good at solving engineering problems.
Under anarcho-capitalism, individuals are free to switch providers of any individual service without physically moving. In dynamic geography, modules can always choose an entirely different government by switching location. There is no conflict between these ideas, and in fact a great deal of synergy. An AC system seems much more likely to form and remain stable under DG, for several reasons.
For example, governments currently have huge profits from their monopolies on coercion. This gives them a great deal of incentive to fight the emergence of an AC system, and a large pool of resources to fight it with. In the competitive market of governing a dynamic geography, the profit for providing services is dramatically decreased. This will make it much it easier for AC (or other alternative systems) to emerge.
As we mentioned earlier, a frequent criticism of AC is the stability problem - what happens if all the protection agencies gang up to form a government. This is much less of a worry when potential victims can physically move away at low cost. Like the president of France, the protection agency cartel may form a monopoly - only to discover that its territory consists of its corporate headquarters and a few waves. Its rank and file should be able to get new jobs easily, as the protection agencies in the newly formed city on the horizon are hiring like mad - but its executives will have a more difficult time.
Thus dynamic geography may finally strengthen anarchy's weakest link. It is difficult to seize hold of water - it tends to fragment into tiny pieces and swirl away. Counterintuitive though it may be, this apparently shifty foundation will provide a stable base for anarchy.
Dynamic geography leverages the peculiar nature of the oceans to create a free society. It is interesting to consider how broadly applicable this technique is. Well, the next frontier will be space. Space contains planets, some of which have static geographies, and others (gas giants, worlds with liquid surfaces) have dynamic ones. But most of space consists simply of...space - which is clearly an environment of dynamic geography. Gravity wells do place severe limits on movement, but the utter lack of friction means that gigantic objects can be moved cheaply. In other words, dynamic geography is not merely a local quirk, it holds for most of the universe.
So the bad news is that our current residences are unlikely to ever enjoy high levels of freedom or support stable anarchy. The good news is that 70% of the earth's surface and 99.9999...% of the universe have the necessary characteristic. The landlubbers and groundhogs can keep their monopoly-inducing dirt - we'll take everything else.
Mark Twain once said "Buy land. They've stopped making it." When he is finally disproved, I predict that a great deal of political change will result.
Thanks to Wayne Gramlich and David Friedman for their inspirational ideas, and to the Libertarian Nation Foundation for giving me a reason to write this up.
 Nonzero: The Logic of Human Destiny by Robert Wright.
Pantheon Books, 2000. ISBN: 0-679-44252-9.
 Friedman, David D: 1973. Machinery of Freedom: Guide To A Radical Capitalism (New York, NY, Harper & Row).
A few chapters are webbed at: http://www.daviddfriedman.com/Libertarian/Machinery_of_Freedom/MofF_Contents.html
 For an example of an article arguing that AC is unstable, see Paul Birch's Anarcho-Capitalism Dissolves Into City-States
 Crisis and Leviathan: Critical Epsiodes in the Growth of American Government, Robert Higgs, Oxford University Press.
 The seasteading website and book can be found at: http://www.seastead.org/