One argument against institutions of complete laissez-faire is that government is needed to provide facilities such as roads and sidewalks and to deal with problems such as the conflict between my desire to play loud music at night and my neighbor's desire to sleep. A possible reply is that most such problems can be dealt with by proprietary communities. The developer who builds a group of houses also builds the local streets and sidewalks; each purchaser receives, along with his house, the right to use the common facilities and to have them maintained, agreeing to pay his share of the cost of such maintainance according to some preset formula.
Such private arrangements, which are in fact quite common, can deal with externalities as well. My friend and colleague Gordon Tullock 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. When the same arrangement is 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 the residents of 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.
In what sense is that not a government? 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 solution to a set of problems, in what sense is it a private solution? 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?
A possible answer is 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 the past, a majority of the inhabitants, or possibly a majority of the citizens of some larger political body within which it is located, or possibly someone with a bigger army than anyone else, decided to create it, 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. There is a different and, I think, better answer that does not depend on a libertarian view of rights. There are practical reasons why the way in which 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 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 insisting on only building good trucks is likely to be failing to meet 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. Among other things, it is likely to be heavier, since quotas were frequently set, not in number of trucks, but in tons of trucks.
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. The more attractive the community association appeared to the purchaser, the higher the price he would be willing to pay for the house. Voters 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 some incentive to try to create attractive institutions, but a much weaker one. There are reasons why democracy does not work nearly as well as capitalism.
For one thing, the individual voter has little incentive to try to find out whether 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 doesnŐt buy he will not be under that community association, if he does he will, so he has a substantial incentive to investigate the institutions before he buys or to check out current property values and the current condition of common facilities in previous communities sold by the same developer. That is one reason why trucks produced under democratic socialism, like trucks produced under communist dictatorship, can be expected to run less well than capitalist trucks.
One 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.