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Call for Entrepreneurs

by Gil Guillory
by Gil Guillory

Perhaps you’ve read one or more of the groundbreaking works on the market provision of security:

The Market for Liberty by Linda and Morris Tannehill

Power and Market by Murray Rothbard

The Enterprise of Law: Justice without the State by Bruce Benson

The Private Production of Defense by Hans-Hermann Hoppe

(there are many more)

And you’re thinking, "Hey, when is some security company going to call me so I can sign up with their service, and let me put my money where my mouth is?"

I know I’ve been waiting for that call – but it hasn’t come. Why not?

There are three types of companies that we might expect to expand into this line of work: insurance companies, home monitoring companies, and patrol/guard companies.

Insurance companies are often mentioned by anarchist authors. The current state of homeowner lines was summarized in the ad copy of a panel held at the 2002 Casualty Actuary Society meeting:

Homeowners insurance has become the second largest line of business in the property/casualty product portfolio. Nevertheless, profitability in this line has long been elusive, with the industry operating ratio being less than 100 percent only four times in the past 20 years. Adding to the dismal picture, recent results have been battered once again by the growth of claims related to mold and catastrophes. The possibility of catastrophic losses due to terrorist activities has generated an additional level of concern.

Where in this discussion is burglary and vandalism? It turns out that there are much bigger fish to fry. Burglary and vandalism only account for a small portion of the exposure of homeowner’s policies – the big pieces are fire and storm – ever since the innovation of the homeowner’s policy in the 1950’s. This is not to say that rising crime rates in the 1960’s and 1970’s did not affect insurance companies’ bottom lines – they did. But, the response was better modeling and increased premiums. Further, with the move away from direct verification of burglary to high deductibles to combat fraud, homeowners were no longer covered by most of the chrematistic losses that crime engenders. If your house was burglarized today, and losses amounted to $1500, you may not have even met your deductible!

Insurance companies are not likely to return to direct verification of burglaries to control fraud. The current arrangement is more profitable, and has much to do with economy of scale. As such, they will likely never innovate in the direction of offering the anarchist vision of zero-deductible policies.

Home monitoring companies such as ADT might be good candidates. But, the more one looks, the more one finds out why such an expansion is not in the cards. The residential market segment of home monitoring companies comprises only 15% of their business, and the major drivers in the rest of the business are technology as a replacement for labor in the security of governmental and corporate clients. Indeed, the résumés of the board of directors of Tyco (parent company of ADT) as presented in its 2005 Annual Report show that they have careers from companies such as Motorola, Verizon, Rohm and Haas, du Pont, and MicroWarehouse. The organization is dedicated to technological solutions, so I suggest that employing patrol labor is the farthest thing from their minds, and not part of either their core competency or their business strategy.

With regard to Guard/Patrol companies, this is a more problematic question. In personal communications with guard companies large and small, I have never found one that does not operate on a cost-plus basis. When these companies’ representatives were asked about the patrol-and-restitution model, they explained that such a direction did not appeal to them, since it was not congruent with their business model. Also, with their typically low profit margins – due to intense competition – undertaking a subscription-based model and its inherent uncertainty is too risky. Furthermore, guard/patrol companies are started up and staffed primarily by former government patrol officers. As such, it is postulated that their experience establishes a mindset that government patrol is fundamental and private patrol is merely supplemental. When these companies’ representatives were told about the anarchist business model, they were curious and had never even considered such a thing.

The experience of Fred Smith teaches a lesson about business and entrepreneurship. His combination of three distinct ideas – hub-and-spoke distribution, overnight delivery, and delivery by air – into one business plan was a sensational success. Companies such as UPS and Airborne Express could have innovated the way that he did, but they didn’t. Only after FedEx was successful did UPS and Airborne Express copy it. Even Delta Airlines, a leader in the hub-and-spoke method of transporting passengers, did not innovate the way that Fred Smith did.

The lesson is this: a step-out business model will only be tried by a new firm. Established firms will modify their operations a bit, but not radically change their business model.

We can bypass for the moment what events like this teach us about the efficient markets hypothesis, market failure, and entrepreneurship. OK, just one question: Was there market failure with regard to overnight package delivery the day before FedEx began operations?

The Fred Smith’s of Anarchism?

I have defended the notion that subscription-based patrol and restitution services are not going to magically appear, especially from the likes of AIG, ADT, or Guardsmark. What we need are the Fred Smith’s of subscription-based patrol and restitution services.

Napoleon Hill might say that what is needed is a Master Mind: a coming together of energetic minds for a common purpose. Rob Adams would say that what is needed most is an execution team. Pretty much the same thing: a complementary, competent team is needed.

Such a company needs knowledgeable and experienced innovators in the fields of:

  • Patrol
  • Investigation
  • Adjusting
  • Insurance
  • Law
  • Management
  • Marketing

Where are these people?

May 26, 2006

Gil Guillory [send him mail] recently presented a paper On the viability of subscription-based patrol and restitution services at APEE. He lives near Houston in The Woodlands, Texas.

Copyright © 2006 LewRockwell.com

 
 
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