Government efforts to get out hostages leads to very poor and counterproductive results. (This is one of those rare subjects where there is no good forum here at AWRM, but it does need to be talked about.)

Amidst hostage scenarios, like the Hamas situation, it is important to remember why governments should not pay to have their nationals released. Paying for hostages to be released creates a perverse incentive in which more people are taken hostage to receive more payments. This is undoubtedly a subpar outcome.

Furthermore, any effort by governments to reclaim hostages makes their country’s nationals more prone to being taken hostage.
Payments and alternative methods of extraction rely on the use of resources stolen from the taxpayer by the government. Let’s break it down.

The research paper “Bounties, Grants, and Market-Making Entrepreneurship” by David Lucas and Caleb Fuller finds that—in a variety of bounty programs (programs that pay out a reward to private actors for completing a certain task)—the government ends up increasing the production of whatever they were trying to eliminate, thus making the original problem worse.

Putting this in other terms, the production of undesirable things is subsidized by government payment programs, which are, paradoxically, aimed at eradicating that undesirable thing. Applying this to hostage taking yields the same result: more hostages.

When paid for the release of a hostage, the hostage taker begins to expect that future hostages will be paid for as well. The hostage takers, far from being inhuman combatants, are rational. They will continue to take hostages and release the hostages for monetary payments, and if the government continues the hostage payment program, hostages will continue to be taken.

While the number of hostages increases, there is a more fundamental problem with government hostage programs in general. When governments use resources to secure the release of their nationals, they are using resources they have no legitimate claim to. Why should the taxpayer of any given country be forced to bear the burden of people who traveled in risky areas? When the taxpayer is forced to bear the burden, more people travel to risky areas. Hence, more people will be taken hostage due to their recklessness.

This burden should not be forced on the taxpayer; in fact, the functions of hostage negotiation, payment, and extraction should be completely privatized. Only then will the decision of whether to pay for the release of a hostage or to extract them by some other means will be predicated on profit and loss and the free choice of the consumer.

What might this look like? Fortunately, there already is a private market for ransom payments in the form of kidnap and ransom insurance, or more simply K&R insurance. In a free market in hostage payment, this market would grow, and perhaps every person would pay some form of K&R insurance when traveling to foreign countries. As of now, government efforts to extract hostages or secure their release crowd out private methods, methods that would exclusively be purchased by people who are too poor to afford K&R insurance.

If the cost of K&R insurance is sufficiently high, then the traveler may choose some other method of prevention, such as bringing a weapon with them. Wealthier travelers may opt to have an entourage of security officers; these wealthy travelers may also be able to pay the ransom more easily. Of course, if K&R insurance is sufficiently high, travelers will opt to not travel at all or to travel uninsured—a risk they are free to take, but others are also free to not come to the rescue.

K&R insurance still exhibits the same problems as government hostage payments, but the payments are restricted by profit and loss and come from voluntary channels. K&R insurance premiums also provide valuable information about the state of numerous high-risk countries. K&R insurance companies will likely be monitoring the situation in various notable high-risk countries, enabling premiums to better reflect the current risk of travel to any particular country. When states are in charge, they are less likely to incorporate these risks into their decisions since profit is not being sacrificed.

The situation with Israel and Hamas is a glaring example of this. Israel was warned prior to the attack, but they downplayed the threats. If Israel were a private K&R insurance company, then they would have incorporated these threats into premiums. If not, they would risk bankruptcy since payouts would be higher than the premiums. As premiums skyrocket, alarms should be going off in the heads of travelers, deterring them from traveling to at-risk areas.

Ultimately, government hostage extraction either subsidizes hostage taking or risky travel using other people’s money. Privatizing the hostage extraction market internalizes the costs of extraction to the individual travelers through K&R insurance premiums. Privatization also has the advantage of being voluntary whereas the government provision of payment and extraction uses the resources of the taxpayer, forcing the taxpayer to bear the cost of reckless foreign travel. Forcing the taxpayer to bear the risk of the travel of others is a blatant violation of private property and creates perverse incentives.

It is best to keep these lessons in mind regarding the Hamas/Israel situation. What should the Biden administration do to extract the hostages that Hamas took? Any effort to extract the hostages is a violation of the private property of the United States taxpayer, the legitimate owners of the resources being used. It is true that the hostages may have paid into the pool of taxes, but it is likely that the hostages’ tax payments are outweighed by the costs of extraction.

Instead of using the taxpayers’ resources to extract hostages, the US should drop all military and government financial support of Israel and refuse to aid in the conflict whatsoever, signaling to Hamas that holding the hostages will not benefit them any further. Killing the hostages may also be seen as a provocation, so the hostages will likely be released if the US commits to neutrality—a stance the US, unfortunately, will never hold.

If the hostages are not released, this is not a testament to the failure of the libertarian, free-market position but a testament to the failure of individual judgment. Should the US continue to subsidize travel in risky countries? Definitely not. However, what responsibility do the individual travelers have? If they travel to a country that has a history of terrorist attacks and violence, they have to understand the potential consequences.

Beginning a policy of not extracting hostages will send a message to all travelers that they should probably rethink their annual trip to Somalia. Is there any chance the US will implement this policy? Unfortunately for the taxpayer, but fortunately for “danger tourists,” probably not.

Onward and upward,