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Anarchy in the Skies

Mises Daily: Monday, May 12, 2008 by

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The thought of abolishing all government regulation of the aviation sector and handing this task over to the free market is, to most people, as unthinkable and alien an idea as that of privatizing all police and courts. The general perception is that air travel requires central and international control and regulation by governments in order to prevent total anarchy in the skies (in the derogatory sense). But are governments really needed to accomplish this task, or can it and should it be handled entirely by the free market?

There is some debate within the Austrian School on whether or not airspace as an intangible resource can be owned as is, without physically transforming and framing it first. If one assumes that it can indeed be owned in this way, the answer to the whole question of aviation desocialization becomes fairly straightforward: "virtual" air highways would be built in the same way as roads on the ground; those owning them would dictate the rules for flying an aircraft along these routes as well as who should be allowed to do so; airports could own or rent the airspace above and in the vicinity of their ground perimeters, and so on. For the sake of argument, however, let's assume that airspace cannot be owned, and that the sky is thus "free for all." In this case, the answer may require a bit more elaboration.

Just as with the privatization and denationalization of the police and judicial system in an anarchocapitalist society, insurance companies would play a vital part in the area of aviation. Virtually every owner of an airplane would want to insure their aircraft, since the unit cost of these typically range anywhere from a few hundred thousand dollars up to hundreds of millions of dollars. No one in his right mind would purchase such a costly good only to leave out all insurance in the process.

A second reason for owners to insure their aircraft is that all commercial airports along with most private landing strips would require any plane intending to land there to be covered by insurance in order to be granted landing rights. This of course stems from the desire of the airport owners to be certain that any damages caused by an incident or accident on their soil involving an airplane could and would be paid for, in part or to the full extent, by the insurance company representing the unfortunate aircraft involved. Since these airports are private property, their owners also have the right to defend them against any unwanted (uninsured) intruders.

What, then, would these insurance companies demand from the airlines and other aircraft owners in terms of the obligations and conditions stipulated in their insurance contracts? As always, insurance companies seek to minimize the payment of claims to their clients in order to minimize costs and maximize profit. This in turn causes these companies to take a keen interest in making sure that their clients — the aircraft owners — avoid any accidents to the greatest extent possible. In order to accomplish this task the insurance companies would have to cooperate with airlines, industry organizations, airports, aircraft manufacturers and even competitors to develop a common system for the safe and orderly conduct of flight operations. This would include everything from setting up industry-wide standards for airplane navigation and the equivalence of today's pilot licenses, to setting up systems for the filing of flight plans and conducting air traffic control. The insurance companies would then demand that their clients follow these rules as a prerequisite for signing an insurance contract with them.

One should also keep in mind that these insurance companies would only be interested in "regulation" that would actually enhance safety, meaning that any costly redundant regulation deemed unnecessary from a pure safety point of view would be quickly rejected. The insurance companies would also happily embrace any new regulation proposals and ideas that would reduce the risk of accidents, and there would be no need for them to ask for permission from higher authorities such as politicians or bureaucrats in order to implement these changes. Any proposed improvements, therefore, would quickly be put in place if deemed to be of a positive nature, thus contributing to the speedier prevention of further accidents.

First, these private solutions stand in stark contrast to their governmental counterparts of today, such as the Federal Aviation Administration (FAA), which are tied up by bureaucratic red tape that often takes years to comply with or circumvent whenever they wish to impose new and better safety measures, as this often requires the involvement of politicians to change legislation and grant the implementation of these new procedures. This process becomes particularly tedious if the proposed regulation runs the risk of upsetting voters or special-interest groups whom the politicians are keen to keep on their side.

Second, these departments and their owners — the governments — have no direct financial interest in doing everything they can to enhance aviation safety, unlike the insurance companies who would constantly be on the lookout for ways of increasing safety as a method of keeping claims from airlines and other aircraft owners at a minimum.

Third, politicians are well known to dip their paternalistic fingers in areas where their expertise is limited. This inevitably means that new regulation proposed and imposed by politicians often comes in the form of an inadequately thought through, knee-jerk response to public demands for safer air travel. This brings about regulation that is lacking in substance while creating the false impression that government is actually hard at work improving safety. What it only tends to achieve, however, is reduced airline efficiency and reduced passenger comfort.

Governments are always inferior to private companies in this matter, not necessarily because they are less competent, but because they lack the incentives that insurance companies are driven by to improve safety. Where a bureaucracy has the incentive to increase its budget, a private company has the incentive to reduce its costs, and accidents impose costs. Every dollar spent trying to improve safety is therefore an investment, as it may lead to a decrease in claims, thus yielding a higher profit margin.

The National Transport Safety Board (NTSB) which today handles all air crash investigations is also an unnecessary institution (as are its foreign counterparts), as insurance companies would take care of this task too. Accidents would naturally be of particular interest to the insurers, and these events would be meticulously examined whenever one of their client's airplanes was involved, to try to establish the exact causes behind the crash. These investigations would then form the basis of any claims made by their clients relating to the accident, thus making them vital to both parties.

Maintenance of an airline's fleet would also be closely monitored by the airline's insurer, and if this was deemed to be lacking in quality by the insurer it would formally complain to its client and threaten to raise its premium if proper action was not taken immediately to improve safety. For a government agency to handle this responsibility and monitor every airline in operation is not only a massive undertaking but is also doomed to fail, as the FAA and its foreign equivalents lack any financial incentives in this process. For the same reason, governments cannot know what maintenance standards they should ideally impose on airlines, other than those arbitrarily set out by politicians and bureaucrats. They cannot reproduce the same creative process regarding new ways of improving safety that competing insurance companies, driven by profit, would engage in. Also, where efficient solutions might involve customized contracts with each airline regarding the maintenance of their aircraft, no government agency will pursue such a solution. Instead it imposes a one-size-fits-all scheme that both cripples airline productivity and reduces safety.

The government is neither necessary nor able to provide sufficient air travel security to prevent hijackings and other attacks on airplanes or airports, as the events of 9/11 should have established. In fact, the US government may have been the institution that enabled those particular attacks to occur in the first place. Since 1961, American pilots were allowed to bring firearms in to the cockpit of their airplanes, but just two months before the 9/11 attacks, the FAA banned this practice. As a result, the hijackers knew for sure that arming themselves with knives and box cutters was sufficient to overpower four entire passenger jetliners, as none of the pilots onboard would be armed. This gun ban was then lifted in November of 2001, hopefully never to return again.

George W. Bush likes to credit his draconian "security improvements" for preventing any further terrorist attacks from occurring in the United States in the past seven years. But the record could have been more than forty-seven years, instead of just seven, had the government and the FAA not intervened in airline security. Or, as Hans-Hermann Hoppe puts it, one gun would have prevented what the world's second largest army could not.

This example, along with the ever-increasing congestion of the skies and airports, and the fact that airplane accidents continue to occur across the globe are all typical symptoms of central planning and the socialization of the aviation sector. No government can solve all these problems, regardless of the amount of tax money it pours into airport security, air-traffic control, or the FAA, as it simply lacks the proper incentives and mechanisms required, such as the desire for profit and the fear of competition. Private companies on the other hand do possess the incentives and the means, and until the task of regulating air travel is entirely handed over to the free market, economic resources and human lives will continue to be wasted.