The fundamental trouble with government is that it is unconstrained. There is no process to achieve the optimal amount of regulation or private sector intervention, and even if it is perchance achieved at one point, there is nothing to keep it there. The line between desirable and abuse of power is not in fact a line; it’s a gradient. If the government has the power to tax a little, at what point do we stop them from taxing a lot? If the government has the power to bust trust companies, what’s to prevent them from using (and refraining to use) that power to shape the marketplace to their liking?
The Public Choice school has written much on this problem. Though there may indeed be market failures, nothing justifies government intervention in the private economy, simply because regulatory capture and interest groups are such a systemic problem. Without a strict separation of economy and state, the state will accrue (and has accrued, in every case worldwide) vast powers over the economy that were never intended and are almost always detrimental. Government failure, simply put, is worse than market failure.
But instead of giving up on government, what if we could implement market processes to government policy?
Prices on the market are a lot like government regulation. If Motts charges $2 for a jar of applesauce, what’s to stop them from charging $3? Why not $5? There is again no clear line between desirable and abusive. But the market economy has a feature that government does not: competition. Competition, both among producers for consumers and among consumers for products, drives prices down and up, respectively, until they reach an equilibrium. Motts cannot charge $10 for a jar of applesauce because people will simply buy Dole applesauce, and Motts will not get any money. Dole cannot charge below cost for applesauce because people will flock to their product and accelerate their loss of money until they fail. The equilibrium price is where these two forces upwards and downwards stabilize. This is the beauty of the spontaneous order of the marketplace, not only that such a price equilibrium is attained, but that this price allows for the optimum allocation of goods.
What would such a spontaneous order look like for governments? The first prerequisite of a competitive market is competition. States right now barely compete with one another. To be certain globalization has brought much good in the way of liberalizing economies worldwide in order to attract business, but this is only scratching the surface of the possibilities afforded. The only prerequisite of a microfederalist supersystem is completely open borders.
Open borders allows for people to “vote with their feet”, so to speak. If a government taxes too highly (the price is too high), or is inefficient in providing public services (bad quality), people can simply move out to more friendly states. Likewise if a government gives too much in the way of welfare benefits (charging below cost), people will flock to it and bankrupt the state. Governments will immediately eliminate both welfare benefits and taxes, making for a series of very lean states.
States must also be allowed to fail economically. The failure of a state, much like the failure of a corporation for its employees, will not necessarily mean the end of the world for its populace. More efficient neighboring states can buy out failed states by assuming their debts and incentivizing their residents (stockholders).
Conversely, states must be allowed to divest themselves of regions, creating separate states. The marketplace works through acquisitions, mergers, failures, and divestitures to arrive at the optimal firm size in a particular market – from large single-firm markets with high barriers to entry (like utility companies) and those with high economies of scale and a few major players (like electronics companies), to markets with low barriers to entry and multitudes of smaller competitors (like parts of the food industry). There is no possible way to determine optimal firm size without this process. Likewise there is no way to determine optimal size of governments, in population, geographical size, or scope of authority, without it either. Though exorbitantly overstretched governments can currently fail on account of unwieldyness (see the disintegration of Europe’s imperial colonies in the last century for geographic overstretching, and the collapse of the Soviet Union for overstretching in authority), the current governments of the world are almost certainly still larger than optimal, sustained only by lack of competition.
A competitive microfederalist system would make procedural problems practically irrelevant. Public Choice problems are eliminated, as regulatory capture would be fatal. Governments would face different sorts of pressures. It would force every form of government, from democracies to dictatorships, into acting in roughly the same manner – operating at regulatory equilibrium (as a sidenote, it also obviates the need for a voting test), much like firms within a market will behave competitively despite being organized differently internally (though, like the case for Market-Based Management for companies, one could make the case that democracies will be inherently more efficient than dictatorships). This has the benefit of leaving to the market everything that can be left to it, while taking care of genuine public goods problems (roads, pollution, etc.) without giving unconstrained power to any institution.
Furthermore, this system provides for choice in regulatory preference. Just like Coke and Pepsi have natural markets of people who prefer one over the other, governments could tailor their policies to their localities. Gay marriage (or marriage benefits at all) would be adopted by some governments, and not by others. Predominantly Islamic states could without problem live under Shia law. None of this is problematic with open borders, because like a homeowners’ association that requires neatly mown lawns and bans red drapes, there is always the option to leave: all associations are voluntary.
What then distinguishes a government from a private institution like a homeowners’ association? Solely the use of force. Governments have a geographic monopoly on coercion, and can (probably must) provide police protection to their residents. Homeowners’ associations and private institutions do not have this power.
Hayek’s concept of spontaneous order through competition is a powerful and practical philosophy of beauty. An open-border microfederalist system eliminates both market failure and government failure, complementing each institution with the other, and holding both in competitive equilibrium.