Driver’s licenses in a free market


If you’ve ever had “the roads” discussion with someone (or if you do not accept that the roads could function without the government), you might have reached the point where your debate partner (or you) pulls out the apparent trump card of “Well, that’s all fine and dandy, but how are you supposed to handle driver’s licenses without the government.”

This is supposed to be checkmate, but it’s not. The driver’s license “issue” is actually even easier to solve than the roads because it’s been already solved in other industries.

As I have mentioned here before, I work as an engineer in refining. Many of the regulations that are used in the industry are private or at least were developed privately until the government adopted them as regulations (because they were actually good*). One of the larger groups, the American Society of Mechanical Engineers (ASME) develops pressure vessel standards, piping standards, etc. They were founded in 1880 in response to a significant number of boiler explosions on steam locomotives. These explosions cost lives, money, and time.

From a strictly financial standpoint, these explosions caused the railroads to lose money to replace the destroyed engines and trains, they lost the ability to use some lines, and it caused them to lose consumer confidence. The ASME wrote standards on how the steam boilers were to be constructed and tested to ensure that they would not explode. Boiler manufacturers would purchase copies of the code and when they could adequately prove to the ASME that they were manufacturing vessels in accordance with the code would receive a “code stamp” that they would apply to the nameplates of the boilers they built. This stamp was the proof that the vessel would function as it was designed.

Insurance companies, in turn, would be more willing to sell policies to the railroads at a cheaper price because they had confidence that they could minimize the number of times they would need to pay out.

And what prevents the ASME from just giving the codes and stamps to anyone? If their stamped vessels keep exploding, there would be no confidence in their codes, making them worthless. For that reason, they carefully audit businesses before agreeing to let them hold a stamp.

In the case of the railroads, everybody won. The ASME made money, the insurance companies made money, the railroads made more money, and the customers got safer (and presumably) cheaper rides.

So how does all of this relate to driver’s licenses? If you don’t already understand that the free market can effectively handle the roads, just accept for the sake of argument that it can.

Remember, road owners are in the business because they want to make money. They make money by getting as much volume on their roads as they can. They attract and retain drivers by offering a travel experience that is quick, fairly priced, and safe. In order to do this, both the roads themselves and the drivers that use them need to function properly. The road owners have it in their best interest to only allow drivers on their roads who can drive safely and within the rules of the road, so there is definitely an incentive to ensure that they have some degree of competence.

As a result, businesses would compete to provide certifications, or licenses, to people to prove that they are capable of driving well. Just like the ASME, the license businesses would want to make certain that anyone who receives a license from them deserves it. If not, the license would not carry much weight and would not be enough to get you onto a road, so there is no incentive for drivers to pursue that specific license.

Furthermore, insurance companies would be interested in the ability of one of their customer’s to earn a license from a reputable business (and could very likely be the source of the driver’s licenses). No insurance company wants to insure bad or unproven drivers, so the licensing process is a way for them to help determine what coverage they will sell if at all.

This all creates a system of checks and balances. Road owners want to attract drivers to their roads but to keep their roads attractive only want drivers who are have a certain skill set. Drivers want to drive on the best roads and keep their insurance costs as low as possible. License businesses want to retain a good reputation by ensuring the licenses they give are to drivers who possess a certain skill set. Insurance companies want to provide coverage to drivers they feel won’t cause them to have to surrender money on claims.


*Of course no matter how a privately-developed regulation is, I do not support forcing it on others. They should be adopted voluntarily.