Why free market enthusiasts should love trial lawyers

[I am not an expert in these fields.]

Most people who self-identify as enthusiasts of the free market loathe trial lawyers. I believe they do so out of tribal loyalties, not from reason. In this essay, I’ll only address the “not from reason” part.

Some people are faith-based free-marketeers. They believe that in our current economic organization the market would make the correct decisions in the absence of regulation. I distinguish these people from those who believe that, given a different economic organization, the market would make the correct decision in the absence of regulation. The difference between the two is that the faith-based free-marketeers pretend that externalities do not exist.

Externalities are cases where part of the cost of a good or service is not paid by participants in a market transaction.

Example: If your factory is upstream of me, and you dump sewage in the river I get my drinking water from, you damage me but (in our society minus government) I have no recourse. Your customers get cheaper goods than they should.

(A somewhat famous) Example: You run a railroad on your property. Sparks from your trains ignite my wheat field. Who should suffer? How much?

Example: As a fisherman, I gain direct benefit from overfishing, the cost is spread amongst all other fishermen, and there is no way for them to get compensation from me.

The free-marketeers I’m concerned with solve this problem by extending property rights to everything. I have property rights to the water I drink from, so I can charge you for the right to pollute. In a pure market situation, it makes as much sense for me to bill you for my burned wheat as it does to force you to install spark arrestors. If fish are proportionately owned by fishermen, my overfishing is in effect stealing someone else’s property.

So, in what’s sometimes called pure market anarchism, the BP Gulf oil spill is handled by the owners of the gulf and adjacent lands demanding compensation from BP. BP, as a rational economic entity, will have already adjusted its operations so that its gain from drilling in the gulf is more than the total of what it will pay owners in a spill. (Or, equivalently, BP buys the appropriate amount of insurance.)

However, there’s a problem even in the case of perfect information and friction-free litigation: How does BP know how much to adjust its operations? That must be done by understanding the cost (and benefit) of previous spills. But how is the cost arrived at? By what was previously paid out. (Yesterday’s weather, for you Extreme Programmers out there.) But BP (or its insurance company) and any patch-of-Gulf-owner are likely to disagree about the degree of damage and thus the amount of compensation due. For any given spill, its cost is disputed. But a single number is required. How can this be handled?

One way is by our existing system of litigation: BP lawyers and the owner’s lawyers (or lawyers for a collective of owners) fight it out in front of some impartial authority (a judge or jury). If you agree with that, you love trial lawyers because they’re required to make that system work.

However, many free marketeers find trial lawyers unsavory, so they envision some more dispassionate entity. People of my generation often read Heinlein in their formative years and long for the role of “Fair Witness” - someone who, due to deep training, does not let her own preferences sway her judgments.

Suppose there exists a Fair Witness-like adjudicator. There are two possibilities: (1) she gains all knowledge needed to decide the case herself, or (2) she relies on proxies who feed her information. In a market world, I suppose that different Fair Witnesses would offer both approaches. I claim, though, that the proxy approach (2) would win out.

Why? If we assume the market works, we must assume that salesmanship, marketing, and advertising work. They are not significantly regulated, so are not affected by market distortions, yet they persist. (Man do they persist.) If you believe the market works, you must believe they lead to better decisions by consumers. (Else the company that eschewed them would be able to deploy the cash saved to positive ROI activities.)

However, what are marketing, salesmanship, and advertising but an argument that your competitor’s counter-argument is weak? It is an inherently adversarial relationship, using the consumer as the highly-interested judge of competing arguments.

This is precisely parallel to the situation of two advocates arguing in front of a Fair Witness. Therefore, the skills of an advocate—a trial lawyer—are essential for the market process of determining how much BP should spend on safety (or, equivalently, how much its insurance provider should insist it spend on safety).

I should note that I am not a believer in the wisdom of the market—due in part to my readings in behavioral economics and asymetrical information—but as a software person I run into a ton of people who claim to believe in the free market but are in effect supporters of America’s peculiar system of crony capitalism that favors unnaturally-large (according to their expressed beliefs) business. Or they are glibertarians. This essay is for them.

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