Such private arrangements, which are in fact quite common, can deal with externalities as well. A colleague of mine used to point out that in his (private) community he could not repaint his front door without the permission of his neighbors--that being one of the terms of the contract for that particular community. In a condominium, which is essentially the same arrangement packed into a single building, the contract is likely to include procedures for resolving disputes among neighbors as to what behavior in one apartment inflicts unreasonable costs on adjacent apartments. In any proprietary community, the contract is likely to contain arrangements by which the signatories can jointly modify it in order to deal with new circumstances.
The existence of such institutions raises an interesting question: In what sense are they not governments? As a British acquaintance put it to me, his relationship with his condominium association and his local authority are essentially the same. Each of them has authority over his behavior as a result of his decision to live in a particular place--an apartment in the condominium in the local authority. Each imposes rules on him. Each "taxes" him--although the condominium does not call the money it collects for maintanance and repairs taxes. Each can change the rules and the taxes imposed on him by similar, democratic methods--a vote of his fellow citizens in the one case, his fellow residents in the other. While the condominium association may be a useful solution to a set of problems, in what sense is it a private solution? Or, to turn the argument around, if libertarians approve of such institutions when they are called condominium associations or proprietary communities, why do we disapprove of them when they are called governments?
One possible answer to this question is to invoke libertarian ideas of natural rights by arguing that the proprietary community, unlike the government, came into existence without violating anyone's rights. The developer bought the land from its owners and resold it to purchasers who had agreed to the government-like restrictions included in the purchase contract. The local government, on the other hand, came into existence because, at some point in time, a majority of the inhabitants (or possibly a majority of the citizens of some larger political body within which it is located) decided to create it--thus imposing their rules on everyone already living there, whether or not he agreed.
That is a possible answer, but I do not think it is one likely to convince many non-libertarians, nor is it one that I find terribly interesting. The purpose of this essay is to offer another answer, and one that does not depend on our particular view of rights. There are good practical reasons why the way in which the "government-like" institutions came into existence matters, quite aside from the question of whether anyone's rights were violated in the process.
To see the reasons, consider the following question: You wish to buy a truck, and have a choice of two. One was built in Detroit, one was built in the Soviet Union. Which do you choose?
Most people would choose the capitalist truck. Why? Both are trucks. If they are identically built, they should function in exactly the same way--why does their history matter? Why should we care about the ideology of a truck?
The answer, of course, is that the two trucks are not identically built. The capitalist truck was built under a system of institutions in which people who build bad trucks are likely to lose money. The communist truck was built under institutions in which people who build good trucks are likely to lose money, and often other things as well--since the result of building good trucks is likely to be not meeting your assigned quota for the month. Even before checking out the trucks, we have a good reason to expect that the communist truck will be worse built. In particular, we can expect that it will be heavier--since quotas were frequently set, not in number of trucks, but in tons of trucks.
Precisely the same answer can be made for the difference between the "government" of a condominium or proprietary community and the larger government within which it is located. The private developer who created the former had a private incentive to design the best possible political institutions. What he was selling, after all, was both a house and a share in a "government." The more attractive the form of the community association appeared to the purchaser, the higher the price he would be willing to pay for the house.
It could be argued that a similar constraint applies to the political institutions that create and modify local governments. The voters, after all, also want to live under desirable institutions, so the political entrepreneur who is creating a new local government or modifying an old one also has an incentive to try to create attractive institutions. That is true to some degree, but much less than in the case of the proprietary community. There are reasons why democracy does not work nearly as well as capitalism.
For one thing, the individual voter has very little incentive to try to find out whether the proposed political changes are actually in his interest, since his vote has only a small chance of determining what actually happens. The individual purchaser, on the other hand, "votes" by buying or not buying a house in the community. If he votes no, he will not be under that particular set of institutions, if he votes yes he will, so he has a substantial incentive to investigate the institutions before he buys--or at least to check out current property values and the current condition of common facilities in previous communities sold by the same developer. That argument is one of the reasons why not only communist trucks but even democratic socialist trucks are likely to run worse than capitalist trucks.
One of the most important characteristic of a government is its size. The average American lives under a local government ruling at least tens of thousands, perhaps hundreds of thousands, of citizens. The average inhabitant of a condominium or proprietary community, I would guess, lives under a "private government" of about a hundred citizens. I doubt this is an accident. My suspicion is that local governments are bigger than proprietary communities for much the same reason that communist trucks are heavier than capitalist trucks.
The preference for capitalist trucks is not merely a matter of libertarian ideology. A sensible communist would also prefer capitalist trucks. Indeed, communists who had the opportunity to shop in the West--an opportunity frequently given as a reward for party loyalty and other communist virtues--routinely demonstrated their preference for capitalist goods by buying them in as large a quantity as possible. More recently, what used to be the Communist world has demonstrated its preference for capitalist trucks on a somewhat larger scale.
Published in Liberty Magazine, reprinted by permission