In the modern legal system, the victim of the crime gets punished twice.
In the case of a robbery, for example, the victim gets robbed by the thief and then, if the criminal is actually arrested and imprisoned, the victim gets robbed again by the government to fund the incarceration. This makes the case for a prison industry suspect in a free market legal system. But many libertarians make the case that in a libertarian society, free market prisons would emerge. As with so many things, history is able to offer some insights into the issue.
For most of Anglo-Saxon history, prisons were largely absent from the criminal justice system. The establishment and expansion of prison as a way of punishing criminals came about only as the government encroached further and further into the court system.
After the Norman Conquest of 1066, Anglo-Saxon common law became absorbed into royal law over the course of many centuries. Even as the legal system became more government-controlled, though, punishments for most of English history continued to be restitution-based, rather than punitive. Just as in libertarian legal theory, if a person violated the common law — which typically only ever meant a violation of a person or property — the victim would bring suit against the aggressor, a trial would be quickly conducted, and the culprit would pay restitution to the victim to compensate for the damage caused. Similarly, contracts would govern disputes over wills or between merchants. The use of prisons was limited to holding people awaiting their trial, and since punishments were based on restitution, the incentive for a speedy trial was built into the system.
Within a century of the Norman Conquest, as the crown had already started absorbing some of the courts and employing judges, people were being held longer to await Royal judges. Henry II, who came to power in 1154, created legal innovations which included permanent courts of professional judges and itinerant judges, which centralized parts of the legal system. Because the new system determined that some infractions had to be adjudicated by itinerant judges, prisoners had to be detained until one of these judges passed through their municipality. This meant longer wait times for trials that were monopolized by the crown, and thus the expansion of the use of prison cells. However, incarceration was still not seen as a punishment.
Because certain infractions were now between the crown and the culprit — much like our modern legal system of fiat law, where a criminal dispute is between, say, a marijuana user and the government — the punishment was restitution to the crown, rather than an actual victim of aggression. This form of restitution was called an “amercement,” or a fine.
Henry III, who took the English throne in 1216, oversaw the movement to use prisons as a form of punishment. At this time, though, it was still only for prisoners who refused to pay the fine to the crown. In order to coerce prisoners into paying the fine to the crown — usually because they refused to plead guilty to the crime for which they were convicted — they were piled with chains and stones until they gave in or died. But the prisons were still not a punishment per se, but merely a tool for the coercive extraction of revenues for the crown.
But jails cost money, and now that they were being used to hold prisoners for longer than the wait for a speedy trial, the costs were increasing. The purpose was to raise revenues through this system, so spending tax dollars to maintain prisons was counterproductive. To finance the cost of running a prison, sheriffs — which were originally the government enforcers of royal courts — were granted the license to run a prison, which they obtained by paying a fee to the crown. The sheriffs then made money by levying detainment fees from the prisoners and selling them amenities.
It was not until the 1500s that prisons started looking like the modern penitentiary systems, with the Houses of Corrections that were state-funded and used largely as a way to “reform” the vagrant poor (in reality, the Houses of Corrections were a way to get cheap labor for the government or government cronies). However, this would not remain the exclusive manner of dealing with criminals, after a 1597 law allowed for pardons to be granted to prisoners willing to sign a contract as an indentured servant, supplying many of the early Virginia laborers, among other colonies.
Originally, the transport of indentured servants was paid for by the landowner purchasing the servant (this was subsidized by the headright system that granted the landowner 50 acres of land per indentured servant). The result of this system was that landowners were not paying for the transport of servants — particularly servants who were felons — as quickly as England would like to have shipped them out. So in 1718, the crown passed the Transportation Act, which finally allocated government revenue to the management of prisoners by paying for their transportation to the various British colonies.
By the eighteenth century, the crown was finally funding the prison system through the Houses of Corrections and the Transport Act, and prisons were starting to look much closer to their modern form. Prisoners wore uniforms and performed hard labor, with restitution being largely a thing of the past. With good behavior, inmates might earn an early release, and with bad behavior, they might earn a lashing. By the end of the century, especially with the secession of the American colonies from Britain, imprisonment had become the primary form of punishment for criminals.
In libertarian theory, the question of how prisons would work in a fully private, free market system never quite seems settled. Some people argue that while today’s “private” prisons are not truly private in the free market sense, there would be a profitable and superior system of imprisonment to handle violent criminals without the existence of a tax-funded government. While it is impossible to prove or disprove this argument with theory alone, the history of the Anglo-Saxon legal system offers us some a valuable perspective. And, as the history demonstrates, prisons were never the product of the free market.