March 18, 2021 Reading Time: 6 minutes

Although I enjoyed the study of economics much more than I enjoyed the study of law, I’ve always been happy with my decision to earn a law degree on top of my degree in economics. By exposing me to real-world details that I’d otherwise have missed, studying law greatly improved my ability to evaluate economic processes and policies.

Some economists, somehow, grasp these crucial details without having studied law formally. These impressive scholars include Armen Alchian, Terry Anderson, Ronald Coase, Harold Demsetz, Thomas Sowell, and Bruce Yandle. But far too many economists miss these details. The result is often policy analysis that’s mistaken, and policy advice that’s unrealistic and counterproductive.

This poor analysis and advice are especially prevalent when economists write about so-called “externalities.” Externalities are third-party effects, such as when Steve and Sarah’s actions have an impact on Silas’s welfare, with Silas not being consulted by either Steve or Sarah.

If this impact improves Silas’s welfare we call it a “positive externality” – such as if Sarah pays Steve to renovate her house, thereby raising the market value of next-door neighbor Silas’s house. If this impact worsens Silas’s welfare we call it a “negative externality” – such as if Steve, while working to renovate Sarah’s house, creates loud noises that distract Silas as he does yoga or as he is Zooming into an important meeting.

When economists encounter examples such as these, their first instinct is to bemoan the fact that both Sarah and Steve ignore the impacts of their actions on Silas. Their second instinct is to describe government interventions that would cause Steve and Sarah to take account of these impacts. A typical recommendation might be to tax people for any annoying noise caused by their home-renovation projects.

Economists recognize that the administrative costs of carrying out such policies are sometimes so high as to make such policies unwise. But at least in principle, too many economists are prone to conclude, the lack of taxation of loud noises from construction workers causes too much noise to be emitted.

The Subtle Genius of the Law

The law, however, often takes effects such as these into account in ways that economists miss. The most important of these ways lies in the specific manner in which the law creates – and refuses to create – property rights. The resulting, detailed pattern of property rights is important.

In Anglo-American law, a person is entitled to compensation only if he or she transferred title to valuable property with no intention of giving a gift, or suffered the loss of some property interest as a result of the actions of someone who violated his or her property rights. Therefore, the mere fact that Sarah’s action improves Silas’s well-being is insufficient to create an obligation that someone pay Sarah for her ‘positive’ action. Likewise, the mere fact that Silas suffers some harm from Steve’s construction activities is insufficient to justify imposing a tax on Steve for his noisy construction activities.

The law refuses to impose obligations in circumstances such as these because the law recognizes a feature of reality to which economists are often blind. While both economics and law understand that people, being gregarious creatures, are forever having impacts on strangers, the law – unlike the all-too-common careless economist – recognizes that people often repeatedly interact with each other through time in ways that cause the costs and benefits of “external” effects to tend to balance out for each person.

The law, in effect, recognizes that costs that Silas suffers today from Steve’s noisy construction on Sarah’s home are offset by other benefits that Silas will enjoy tomorrow, such as his own ability to emit noise that will annoy Sarah if and when he, Silas, chooses to renovate his home.

In other words, where careless economists see “externalities” – and, hence, “market failure” – the law often sees parties compensating each other in the form of in-kind activities. Silas is compensated to endure the construction noise from Sarah’s house with his own right to inflict such noise on Sarah if and when he has construction done on his house.

The law recognizes another feature of this in-kind compensation that takes place over time: such compensation is embedded in community members’ reasonable expectations. If Sarah confines construction on her home to the daylight hours, the law recognizes no right of Silas to be free of such noise. Silas is correctly treated as if he should expect to suffer such noise during the daylight hours. Likewise, Sarah and home-remodeler Steve are treated as if they should expect to be able to inflict such noise on nearby homeowners during the daylight hours.

Matters differ for the nighttime. If noise from Steve’s midnight hammering keeps Silas awake, the law will back Silas’s quest to prevent Steve from doing such hammering. People reasonably expect that their neighbors will not emit loud noises at night.

Identify the Property Rights

People’s reasonable expectations give rise to property rights. No property right of Silas is violated by Steve’s loud hammering at noontime; a very real property right of Silas is violated by Steve’s loud hammering at midnight.

This distinction should be, but frequently isn’t, recognized by economists. What this distinction means is that a genuine externality exists only when there is a violation of someone’s property rights. If you walk within eye-shot of me wearing a polka-dotted shirt, any discomfort that I might experience because I dislike polka dots is not an externality, even if I can objectively prove that my anguish at the sight of your shirt is intense. Because you have a right to wear polka-dotted shirts in public, and because I should reasonably expect to encounter people from time to time wearing polka-dotted clothing, you have not harmed me in any legal, economic, or ethical way.

Put differently, despite my aversion to polka dots, your wearing a polka-dotted shirt in public does not violate what libertarians call “the non-aggression principle.” (The non-aggression principle says that individuals should be free to do whatever they choose as long as they don’t aggress against non-aggressive others.) The fact that the law protects only property interests from third-party effects means that one cannot immediately go from “Sarah’s actions negatively affect third-party Silas!” to the conclusion that “Therefore, Silas has the ethical right, and should also have the legal right, to use coercion, if necessary, to prevent Sarah from negatively affecting him!”

Is Breathing Unmasked in Public Aggression Against Innocent Third-Parties?

The relevance of the distinction between third-party effects that violate someone else’s property rights and third-party effects that don’t is especially crucial today. Many economists defend lockdowns, mask mandates, and other Covid-19 restrictions as scientifically ‘objective’ means of dealing with externalities. Similarly, some libertarians justify lockdowns and other restrictions as being not only consistent with, but demanded by, the non-aggression principle.

Yet the relevant question is not: “Does Sarah’s breathing unmasked in public physically or psychologically affect third-party Silas?” Instead, the relevant question is: “Does Sarah’s breathing unmasked in public violate any of Silas’s property rights?” The answer to the first question is irrelevant; the answer to the second question is what matters. Only if the answer to this second question is ‘yes’ should an economist conclude that an externality is afoot; only if the answer to this second question is ‘yes’ should a libertarian conclude that Sarah is aggressing against Silas.

So what about Covid? Until March 2020 no American had a property right in being free of the risk of exposure to pathogens carried by asymptomatic individuals going about their normal ways of life. Because each of us has always, unavoidably, emitted into the air we breathe bacteria and viruses that potentially harm – and sometimes kill – others, life as we know it could never exist if each of us had a property right in being free of such bacteria and viruses spread by others.

No one expected to be free of such exposure. No one had the right to be free of such exposure.

And so there ought at least have been a presumption that this same rule holds for SARS-CoV-2. There ought at least have been a presumption that each of us continues to enjoy the legal and ethical right to go about our affairs publicly and without a mask despite the physical fact that, in doing so, we risk transmitting the virus to other people.

Perhaps this presumption is, as lawyers say, “rebuttable.” If I try very hard I can imagine there arising a pathogen so contagious and so lethal across all age groups, and one that also can be relatively successfully evaded by a couple of weeks of massive lockdowns, that a plausible case can be made against the ancient and strong presumption that no one’s property interests are violated by strangers breathing-out air in public.

But not only did knowledgeable people learn early on that the severity of SARS-CoV-2 hardly rises to a level justifying such a major change in law and ethics, there was never as much as recognition of the longstanding rule that no one’s property interests are violated by the breathing of other people going about their normal lives. All of a sudden, starting one year ago, the hysterical fear of Covid – and the irresponsible stoking of this fear by politicians and the media – caused people simply to forget that no one has an enforceable right to be free of air breathed-out by others.

Pro-lockdown economists faux scientifically chant “Reduce externalities!” Libertarians with a weak commitment to liberty self-righteously claim to be the true upholders of liberty by repeating nonstop “We must honor the non-aggression principle!” But neither these economists nor these libertarians take the time to consider the complex real-world details from which individuals’ rights emerge and in which these rights are rooted and defined.

In free societies, Sarah’s potential negative impact on the welfare of third-party Silas has never been held to be a sufficient reason to coercively prevent Sarah from acting in ways that are thought to give rise to that negative impact. Any such rule would have ground society to a halt the moment it was adopted.

Unfortunately, such a rule was adopted – or, actually, imposed with jackboots – in 2020. I fear that this destructive rule will remain with us for a long time.

Donald J. Boudreaux

Donald J. Boudreaux

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.

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