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Recently, Paul Krugman went off on one of his usual rants, suggesting that the Libertarian Party's opposition to environmental regulation was a recipe for disaster.

Not so fast, says Tyler Cowen. The problem with the anti-regulation position is that it is not pro-pollution enough. Cowen explains:

[Krugman's position] is the opposite of the correct criticism. The main problem with classical libertarianism is that it doesn’t allow enough pollution. Under libertarian theory, pollution is a form of violent aggression that should be banned, as Murray Rothbard insisted numerous times. OK, but what about actual practice, once all those special interest groups start having their say? Historically, under the more limited government of the 19th century, it was big business that wanted to move away from unpredictable local and litigation-driven methods of control, and toward a more systematic regulatory approach at the national level.

The Libertarian Party position here, whether they admit it or not, is almost certainly drawing primarily from Rothbard's lengthy essay on pollution and preferred legal remedies. Rothbard writes:

[E]veryone should be able to do what he likes, except if he commits an overt act of aggression against the person and property of another. Only this act should be illegal, and it should be prosecutable only in the courts under tort law, with the victim or his heirs and assigns pressing the case against the alleged aggressor. Therefore, no statute or administrative ruling creating illegal actions should be permitted. And since any prosecution on behalf of "society" or the "state" is impermissible, the criminal law would be collapsed into a reconstituted tort law, incorporating punishment and part of the law of attempts. The tortfeasor or criminal is to be strictly liable for his aggression, with no evasion of liability permissible on the basis of "negligence" or "reasonability" theories. However, the liability must be proven on the basis of strict causality of the defendant's action against the plaintiff, and it must be proven by the plaintiff beyond a reasonable doubt.

This may sound bland and technical enough out of context, but if one reads Rothbard's full essay, it quickly becomes clear that Rothbard considers pollution to be "aggression" in many cases and will hold property owners to a high standard when it comes to not polluting the air and water of neighboring properties. That is, a coal-burning power plant that spews noxious chemicals into the air over its neighbors would be considered an aggressor under Rothbard's interpretation and rightly sued for damages by the victims in a variety of circumstances.

In a legal regime supported by Rothbard, polluters would likely face far greater legal sanctions than under the current regulatory regime.

Cowen, on the other hand, appears to have concluded that the "optimal" level of pollution is likely higher than what a Rothbardian tort system would allow for. In other words, Rothbardians are too intolerant of pollution.

The Problem With "Efficiency" and "Social Cost"

Cowen — and many others — come to this conclusion by adopting an erroneous idea of efficiency and social optimality in which the state makes a determination as to the "correct" amount of pollution, and then engages in legislation (or rulemaking) to set a ceiling on the amount of pollution.

As Cowen correctly notes, large powerful firms like this approach because it provides predictability and high up-front costs, while lowering the likelihood of being hit with immense judgments in the court system later.

Thus, regulation delivers exactly what an incumbent firm wants: High barriers to entry for new competition, while limiting future unpredictable costs.

And how do regulations limit future costs? Rothbard provides an example:

Suppose, for example, that A builds a building, sells it to B, and it promptly collapses. A should be liable for injuring B's person and property and the liability should be proven in court, which can then enforce the proper measures of restitution and punishment. But if the legislature has imposed building codes and inspections in the name of "safety," innocent builders (that is, those whose buildings have not collapsed) are subjected to unnecessary and often costly rules, with no necessity by government to prove crime or damage. They have committed no tort or crime, but are subject to rules, often only distantly related to safety, in advance by tyrannical governmental bodies. Yet, a builder who meets administrative inspection and safety codes and then has a building of his collapse, is often let off the hook by the courts. After all, has he not obeyed all the safety rules of the government, and hasn't he thereby received the advance imprimatur of the authorities?

Similarly, in the case of an air polluter, a polluter can legally spew poison into the air right up to the limits allowable by law. Indeed, in some cases, liability will be explicitly limited by statute as a condition of new regulations being put into place.

Here Rothbard makes a second point, also. He points out that regulation spreads around costs, even to those people who never build a building that collapses on anyone or harms anyone. In other words, it imposes costs on everyone, including entrepreneurs who may be able to develop innovative and safe building techniques that conflict with established building codes.

In a Rothbardian court-based system, the cost of poisoned air or a collapsed building are borne by those who actually engage in the harmful behavior. These costs can be immense.

Understandably, a firm may prefer a system in which costs are predictably higher, than a system where costs are potentially lower (if lawsuits are avoided), but far less predictable.

But, the fact that some firms would prefer this system is not a justification for imposing this system on everyone.

Nevertheless, many hold that a regulatory state is preferable to the Rothbardian legal option because a regulatory state would presumably allow for pollution even in cases when individual victims can prove they are being harmed. That is, under Rothbard's system, a small number of aggrieved parties could shut down a polluting factory when society in general allegedly benefits from the activities of that factory. That's not "optimal" from a societal standpoint, we are told. Thus, we need a regulatory state that would encourage more firms to engage in economic activity — such as power generation — which nevertheless often produces pollutants.

The assumption is that in order to get the socially optimal or "efficient" amount of power and transit, we need to build a system that can fine tune the amount of pollution that is to be allowed, and to balance the needs of a small number of aggrieved parties — those with pollution-caused cancer — against the needs of people who receive the benefits of industry.

The problem is it is impossible to make the sort of calculations necessary to "balance" the needs of one group against another at the societal level. And if we can't do that, we can't determine what the "correct" amount of pollution is for the society overall. We can only determine the harm done by pollution in terms of specific victims and specific times and places.

The reason we cannot calculate the right balance, as Rothbard notes in "The Myth of Efficiency," is that social cost does not actually exist:

[T]here is the grave fallacy in the very concept of “social cost,” or of cost as applied to more than one person. For one thing, if ends clash, and one man’s product is another man’s detriment, costs cannot be added up across these individuals. But second, and more deeply, costs, as Austrians have pointed out for a century, are subjective to the individual, and therefore can neither be measured quantitatively nor, a fortiori, can they be added or compared among individuals. But if costs, like utilities, are subjective, nonadditive, and noncomparable, then of course any concept of social costs, including transaction costs, becomes meaningless. And third, even within each individual, costs are not objective or observable by any external observer. For an individual’s cost is subjective and ephemeral; it appears only ex ante, at the moment before the individual makes a decision. The cost of any individual’s choice is his subjective estimate of the value ranking of the highest value foregone from making his choice. For each individual tries, in every choice, to pursue his highest-ranking end; he foregoes or sacrifices the other, lower-ranking, ends that he could have satisfied with the resources available.

The pro-regulation position, on the other hand, is that it is possible to determine a system-wide level of acceptable pollution and then apply that on everyone, everywhere. Those who suffer pollution from a nearby factory will just have to "live with it" because government regulators have determined that the cost to those specific victims is not sufficient to warrant the imposition of heavy fines on the polluters. Yes, there is a point at which we can say that pollution levels are too high, but that level is set with overall social optimality in mind. That is, even if some people suffer significant damages, we may conclude that the social cost is low and and it would be inefficient to allow a small number of plaintiffs to drive the polluter out of business.

Rothbard, meanwhile, wants to provide a legal remedy that addresses the high costs imposed on a small number of specific victims, even when the supposed societal cost is "worth it." This may strike many economists as "inefficient," but Cowen is right that the free-market position in this regard is less tolerant of pollution than is supposed by interventionists like Krugman.

Ryan McMaken is the editor of Mises Wire and The Austrian. Contact: email, twitter.