So, Peter Thiel plans to start his own version of Galt’s Gulch by creating his own floating country off the coast of San Francisco, which country will embody libertarian ideals.

On a small scale, something like this could actually work.  On a large scale, probably not so much, in part because of the two prominent issues that libertarianism doesn’t address well on its own terms — the problem of public goods, and the ex-ante regulation problem.

For the moment, I only want to raise the latter.  It is, in sum, this — libertarians would rather that market forces regulate various aspects of commerce/industry rather than the government.   Let’s set aside the fact that for a market to function well in this world, the participants in the market need complete (or near complete) information (this is never the case in a modern economy, btw; consider — Do you know the name of the company that actually produces the food you eat?  The medicine you take?  Not the brand on the packages, but the actually giant agribusiness/generic pill manufacturer that produces it?)

The main problem I see here is that the lack of ex ante regulation is likely to result in enormous economic loss (even death) on the back end.

To pick one example: In the U.S. today, the FDA regulates drug production ex ante.  That is, the process of producing drugs is regulated by the gov’t (via the FDA) before the drugs reach the market.  The idea is that ex ante regulation results in only safe and efficacious drugs being sold in the market.   Obviously, being run by imperfect human beings, the regulatory process, too, is imperfect.  But it seems to work pretty well.

Now imagine a world where government doesn’t regulate drug manufacturing (or some other product).  Instead, market forces will cull bad manufacturers and reward good ones.  The problem here (as I see it) is that market forces can only regulate effectively after the product has hit the market and shown itself to be harmful and/or good.  The problem with that, of course, is that the harm it causes before the market “discovers” that it’s bad can be enormous.

Imagine ten companies produce an antibiotic.  Imagine further that some of those, in an effort to reduce costs and bring the product to market more cheaply than its competitors, cuts corners in the production process.  The consequence is that the drug is adulterated.  Either it works poorly or is actively harmful.

In the world as it exists today, the FDA and the regulations promulgated and enforced by it exist to ferret out those flawed production processes and prevent that drug, as manufactured by that bad drug producer, from ever reaching the market.

Absent that regulation, we have only the market (and subsequent tort claim in the courts) to correct for that problem.  But the market will only correct that problem ex post, i.e., after the problem has become manifest.  The cost of that problem may be small — perhaps the drug doesn’t work,  and there’s some marginal, unnecessary but temporary increase in human suffering before consumers note the identity of the manufacturer (again, assuming consumers have full information), stop buying from the company, and drive that company out of business.    But if the drug is actively harmful — let’s say it kills those who take it, or ruins their liver, or whatever — then the damage done is severe.  True, the market may correct for it (by putting the bad manufacturer out of business in time) but the price society pays for “waiting” for the market to correct for the issue is some number of dead and/or very sick people.   From my perspective, that’s just too high a price to pay.  I don’t want some number of sick children, or elderly people, or anyone, dying or suffering unnecessarily because I’ve replaced ex ante government regulation with ex-post market (and court) regulation.  You can probably imagine many similar examples — in say, food production, construction, and we could on and on.

I heard from a libertarian friend years ago that libertarian-leaning economists were doing some work in this area, but I’ve never heard anything more about it, and have never heard this issue satisfactorily addressed by libertarian thinkers.

Thoughts or comments?