We’re all familiar with the arguments that trial lawyers are the bane of this country’s existence. We hear that the cost of lawsuits and regulation challenges businesses’ ability to compete and create jobs. What we need, we are told, are caps on damages – limitations on the amount that patients can recover for pain-and-suffering in medical malpractice cases, the elimination of treble damages provisions in consumer protection laws.
It sounds like these complaints from the tort reform movement put them on the side of individual liberty and free markets. But when you take a closer look, it’s obvious how much distance there is between tort reformers and free market economics.
In a recent column, Paul Krugman linked to this old videotaped interview with the late Milton Friedman, the Nobel Prize winning economic adviser to President Reagan, famed for his free market thought and favor of deregulation:
What should be interesting about this interview to many who sympathize with the tort reform movement, is how unabashedly pro-tort law Friedman is. In case you don’t have time to watch the whole interview, Friedman says that we should have less government regulation of business and allow tort law to force business to absorb the cost of its accidents. Friedman, like most of his Chicago school colleagues, including Judge Richard Posner (whom I’ve blogged about before here) favored a regime without much government red tape, where businesses would be forced to behave responsibly by trial lawyers who forced them to internalize the costs of their misdeeds.
Many businesses are able to externalize the costs of what they do on an innocent and unsuspecting public. So, for example, a company may be able to emit smoke from its smokestack without having to pay for the negative effects of its pollution. A legal system that prohibits that noxious pollution and allows the factory’s neighbors to sue the factory helps promote efficiency by forcing the factory to internalize the costs of its pollution. This is how we insure that, on balance, net-net, businesses’ activities are doing less harm than good. The price of the goods that the factory produces may be driven up as a result, but this legal change causes the goods to be priced according to their true cost to society, and thus is efficient in an economic sense.
But it is clear that this sort of legal regime, favored by extremely market-oriented thinkers, is not what the tort reformers endorse. They want to interfere with lawsuits and keep caps on damages. Thus, this week in Congress we saw Republican Senator Lisa Murkowski block a bill that would have amended the Oil Protection Act of 1990 to raise its cap on damages from $75 million to $10 billion. We wouldn’t want a federal law that would force BP to pay for all of the coasts of the oil spill cleanup would we? Think of the poor BP shareholders who might not receive a dividend! Best to let government foot the bill, the same way it did with AIG and the rest of Wall Street.
