Libertarianism is still fairly on the fringe of normal thought, and I would argue that most people are fairly unknowledgeable about many of its nuances, but it’s known well enough to have plenty of people provide their commentary on it. Unfortunately, that means a lot of people completely swing and miss. This was the case when John Hopkins professor, Matthew Green, decided to give some examples of his problems with libertarianism:
The problem I have with libertarianism is the assumption that humans won’t, given the opportunity, build condos on top of a live volcano. The second problem I have with libertarianism is the assumption that your neighborhood bank won’t invest your savings into those condos.
There is a lot wrong with this. First of all, libertarians don’t just make that assumption. If Green does know any libertarians who do, I’d love to see some examples. But of course, if he is unable to do so, the argument will change to “Well, you don’t realize that’s what you actually believe.”
Okay, so why wouldn’t people build houses on top of live volcanos in a libertarian society? Why is it not true that libertarians are guilty of an oversight?
I can’t believe that this needs an explanation, but oh well.
Green’s biggest mistake is that his argument is a non sequitur. Yes, it is true that zoning laws and other state laws and regulations are often designed to prevent people from harming themselves. However, that does not mean that the state action is the reason for people not doing stupid things. Let’s apply Green’s logic elsewhere. Does the existence of food safety laws prevent someone from serving toilet water instead of beer at a bar? Or does he avoid that since it would be terrible for his business?
Maybe Green didn’t want to be taken so literally. Maybe he was using a hyperbole to prove his point. Let’s frame his assertions this way:
The problem I have with libertarianism is the assumption that humans won’t, given the opportunity, build condos where there is a strong possibility that a natural disaster would destroy them. The second problem I have with libertarianism is the assumption that your neighborhood bank won’t invest your savings into those condos.
These wouldn’t be new issues in a libertarian society left unfettered by state restrictions. These issues are dealt with and solved today. The main mechanism for this is insurance. Let’s say a builder did build condos where natural disasters were likely to occur. Most people cannot afford to purchase a home or condo with cash, so they often acquire a mortgage. The banks that offer the mortgages want to make sure that if the property is destroyed that the homeowner doesn’t simply stop making payments since there’s not much of anything left of the property. The bank will therefore require that an insurance policy on the home is purchased to help mitigate their risk of not getting their money back on the mortgage.
The homeowner himself also has an incentive to purchase the insurance anyway. No one wants to make a huge purchase only to have nothing to show for it.
Insurance is all about managing risk. If the likelihood of a disaster is quite considerable, like the case of a live volcano, then the likelihood that the insurance company will have to pay out on the policy is also quite considerable. Insurance companies want to make a profit on their policies, so they will charge what they believe is enough to cover what they must pay out. For example, if you live in a place where your home is expected to be destroyed by a tornado every year, then the cost per year of your tornado insurance policy will be at least the value of your house.
But it would never get to that point and the insurance company would not even bother to offer policies. In the case of the annual tornado, the house would be uninsurable. This sends a signal to everyone in the market to not build homes there (or if someone does want to build, that they need to do so very cheaply).
As such, banks wouldn’t be very keen on investing in properties likely to be damaged even before they’re sold. They also wouldn’t want to invest on projects that are uninsurable since that would also make them unsellable at a price that would return a profit.
Libertarians make far fewer assumptions than people claim we do. The accusations are normally the result of ignorance of economics both in theory and in current practice. Matthew Green should think his issues with libertarianism through a little more thoroughly.
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