The Failure of the Market Failure Argument

Continuing our 2020 IHS Summer Seminar series on the classical liberal tradition, Prof. John Hasnas of Georgetown University shared his case against the market failure argument. While teaching at the Georgetown business school, Dr. Hasnas continually encountered arguments about market failure and regulation.

Dr. Hasnas explains that the market failure argument goes something like this: markets produce prosperity and wealth, but sometimes there are social costs to third parties. The social costs can reduce the value of the exchange, and sometimes those costs are greater than the benefits. In these cases, people often say that people are worse off and the market has failed to achieve prosperity.

This market failure argument is a fairly good example of what is called inattentional blindness, Dr. Hasnas says. Many people, even academics and economists, can’t see the force of tort law on the markets. They only see how legislation can serve as a remedy.

Dr. John Hasnas

The idea of inattentional blindness is that when your attention is intensely focused on one aspect of reality, you often can’t see other aspects of reality which are otherwise perfectly obvious, because you’re just so focused on something.

-Dr. John Hasnas

When we think of law, Dr. Hasnas says, we typically think of law in the political sphere. But there is more regulating the market than legislation. Property law, tort law, contract law, commercial law, and even criminal law came from customary law rather than from legislation, Dr. Hasnas states.

As a matter of fact, almost all the law that undergirds our commercial society arose from the customary law, common law process.

-Dr. John Hasnas

Common law is not judge-made or legislated law. Dr. Hasnas cites William Blackstone’s definition of common law, observing that it is law that arises from the settlement of actual disputes. Common law is often referred to as customary law, since it evolves over time from past experience.

For most of history, the common law consisted of rules that were abstracted from a series of cases thought to represent just resolutions of past disputes. The idea of following precedent—of stare decisis, that you hear a lot about—that’s a very contemporary doctrine.

-Dr. John Hasnas

Moving on to talk specifically about tort law, Dr. Hasnas explains that tort law is the common law that covers personal injury. Tort law is not legislated; it evolves from the needs of people striving to live together in peace. These laws include the tort of battery and tort of assault, which evolved from a long history of actual cases and a need to discourage violence.

Tort law is the law in which if one party acts in a way that imposes an unconsented-to harm on a third party, on another party, the injured party may bring a tort suit to recover damages or injunction to prevent the harmful activity or both.

-Dr. John Hasnas

We tend to be more familiar with legislation, which are general rules created by representatives to apply to all in a jurisdiction. Unlike other common forms of regulation, legislation always has a political angle that favors regional interests over the common good.

I’m going to suggest to you, that to correctly understand legislation, we should see it not as rules that are designed to regulate transactions in the interest of the public good and to suggest they are rules that reflect whatever the politically dominant interest is.

-Dr. John Hasnas

How can a free market operate without government involvement, then? Dr. Hasnas argues that there is no such thing as unregulated voluntary transaction, since we are regulated by our own ethical beliefs, customary practices, common law, and tort law.

If we consider civil liability to be the market’s internal regulatory mechanism, Dr. Hasnas says, then the market failure argument is unsound. Legislation is unnecessary because tort law—and plaintiff attorneys—can regulate the market.

You can watch the full lecture and other IHS Summer Seminar recordings on our YouTube channel. For more information on Summer Seminars, graduate and faculty programs, and funding opportunities, visit TheIHS.org.

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