I recently watched the documentary Hot Coffee. This is an excellent film, and I highly recommend it.

The movie covers a few different cases, brilliantly debunking the myth of tort reform as a check on widespread frivolous lawsuits. The film exposes the reality that tort reform is an intrusion on the proper mechanism for holding wrongdoers accountable in a free society.

Stella Liebeck

The film, at its core, is a defense of the civil justice system against tort reform. Most people don’t understand what tort cases are, or the extremely valuable role they play in effecting positive social change.

I first learned about the truth behind the McDonald’s coffee case from a discussion with John Hasnas back in the summer of 2010. He explained that the popular understanding of the McDonald’s coffee case was completely wrong. Hot Coffee was released in June, 2011, but I only heard about it recently, so I rushed to see it.

You probably dismiss or even scowl at the McDonald’s coffee case as an example of a frivolous lawsuit, in which one greedy and opportunistic woman successfully gamed the system. The popular thinking is that a coffee spill is such a common occurrence that it shouldn’t be grounds for anyone to get millions of dollars. You might think that juries are so stupid and biased against big corporations that they enable widespread abuse of the system, extracting money from big corporations, and passing on the costs to consumers in the form of higher prices. All this is wrong.

There are lots of popular misconceptions about the case. The plaintiff, Stella Liebeck, wasn’t absentmindedly driving. She wasn’t even in the driver’s seat of the car. When the spill happened, the car wasn’t even moving.

In reality, the plaintiff and her son got coffee at their local McDonald’s drive-through. Her son was driving. After getting the coffee, he pulled over into a parking space so that his mother could remove the lid and put cream and sugar into her coffee. When the car was stopped, she took the lid off, and spilled the coffee right onto her lap.

The coffee was so hot that Liebeck suffered extensive third degree burns across her legs and groin, and actually required multiple skin grafts. Liebeck herself wasn’t being opportunistic, and wasn’t even after punitive damages. She only wanted McDonald’s to pay for the difference of the cost of her medical bills, for what Medicare wouldn’t cover.

In the trial it was revealed that McDonald’s had documented about 700 complaints about their coffee being too hot, prior to Liebeck’s spill. McDonald’s even conceded that their coffee would certainly seriously burn someone if they tried to drink it immediately. The official determination was that at such a high temperature, the coffee would only need to make contact with a person’s skin for a few seconds to cause a third-degree burn.

Some portray this case as typical leftist activism by attacking big corporations and absolving individuals of their responsibility. Such framing is entirely wrong.

There’s often a knee-jerk reaction among libertarians and conservatives to defend businesses against the left, and admittedly, the left is usually wrong when they advocate the use of the legislative and the executive branches to regulate businesses preemptively, but the judicial branch is different.

Central planning, and all the destructiveness associated with it, is a product of the legislative and executive branches. In contrast, judicial systems predate centralized governments [PDF], so framing tort reform as a move toward free markets doesn’t make any sense. Historically, in the absence of governments, courts were the premier mechanism to redress disputes and wrongdoings.

The issue of tort reform manifests Haidt’s moral foundations in an unusual way. The progressives who advocate for strong protection of tort law are concerned with power imbalances that favor big companies, and are operating on the oppression foundation, while the conservatives who wish to avoid rewarding societal moochers are operating on the fairness foundation. The equilibrium is sort of backwards. Usually progressives discount how governments subvert spontaneous orders when advocating for central planning that undermines the rule of law, and usually conservatives hesitate to challenge established traditions for fear of unintended consequences. In the case of tort reform, conservatives are advocating for central planning that would subvert the spontaneous order of the civil justice system, and progressives are defending the mechanism that protects the vulnerable.

Tort law is crucial because it is simultaneously surgical and effective, unlike anything you would ever see from the executive or legislative branches. The day after the ruling of Liebeck v. McDonald’s Restaurants, every restaurant in America cooled its beverages to safer temperatures, because they knew precisely what they would be liable for, and what kind of punishment might befall them if they failed to serve beverages at a safe temperature. It would be unthinkable to see compliance like that from a rule out of some bloated bureaucracy in DC. A hypothetical attempt at regulation by the legislative or executive branches might have been to create some ineffective new agency, bureaucratically guzzling millions of dollars, perhaps employing inspectors to roam the country and issue fines.

The jury had originally awarded $2.7 million dollars as punitive damages, but the judge reduced that to $480,000. Those large figures embody what H. L. A. Hart called the Benthamite “economy of threats.” Punitive damages need to be high enough to change the behavior of the wrongdoers, and if the company is quite large, like McDonald’s, it might take a few million dollars to send the message.

Colin Gourley

Tort reform is destructive because it limits liability. In the case of Colin Gourley, an OB/GYN was found to have breached the standard of care, thereby causing Colin Gourley to suffer numerous mental and physical defects in utero. The parents sued for medical malpractice, and won, but a tort reform law limited the offending doctor’s liability.

Colin Gourley will never be an independent adult, and his parents were seeking enough money to insure that their son would be taken care of for the rest of his life, after the point at which they’d be able to take care of him. The tort reform law effectively absolved the offending doctor from their negligence.

Sure, doctors make mistakes, but it doesn’t follow that protecting strong tort law allows just any patient dissatisfied with their results to sue. The standard of care is an established legal concept, and courts can decide with expert testimonies whether it has been breached.

It is incompatible with a free society for a government to limit liability. Just as centrally planned bankruptcy laws are economic interventions [PDF], centrally planned laws limiting liability for doctors, or corporations, or anyone for that matter, are economic interventions. A free market of private business insurance would better weigh the costs and benefits to society of various risky activities. Governments shouldn’t arbitrarily decide in advance how much damage a party can cause. After all, in the course of history, we humans have demonstrated profound creativity in being destructive.

Laws that limit liability systematically favor businesses at the expense of the general public. Tort reform is obviously special interest lobbying for government-created rents.

Oliver Diaz

When discussing the case of Oliver Diaz, Hot Coffee loses focus by pivoting to tangential leftist issues, incorrectly accusing Citizens United v. Federal Election Commission as a primary driver that corrupts the elections of judges. Citizens United correctly protected free speech.

The real culprit is democracy itself. Choosing judges through democratic processes at all opens up the judicial system to politicking. Less democratic alternative institutional structures for the judicial system are perhaps more robust and less corruptible, if support for tort reform is a widespread weak preference. That the preference for tort reform is widespread and weak is probably due to rational ignorance. The preference is probably just expressive, because conservative framing of the issue has been quite effective and popular. We should expect voters to vote against their own self-interest in democratic referenda about tort reform.

Jamie Leigh Jones

When is a contract not enforceable? When shouldn’t a contract be enforced?

Jamie Leigh Jones fought against a mandatory arbitration clause in her employment contract, in the fine print. She wasn’t even aware of the clause.

Jones was an employee of Halliburton, and at the time of Hot Coffee’s release, she was supposedly brutally raped while working for them in Iraq. After the film’s release, Jones did finally win the ability to sue Halliburton in open court, but the jury found that the sex in question was consensual. Regardless, the important broader question is the validity of mandatory arbitration clauses.

These stock arbitration firms conduct much repeat business with the large firms that are their clients, but conduct no repeat business with disgruntled employees, so these arbitration firms are strongly biased against employee claims. Would obviously unfair clauses in the fine print of agreements actually hold up in court, or any sensible common law regime? Can you actually sign your rights away in an iTunes EULA? Fortunately, I don’t believe a lot of these clauses actually hold up.

Such victim blaming is appalling, but not surprising.  The Israeli government was the arbitrator in a dispute about itself.  Institutions cannot be held accountable for their abusive actions when they hold a monopoly on arbitration and legal accountability.  We have seen this repeatedly in cases of police brutality, prosecutorial misconduct, and war crimes.  The state holds a monopoly on law.  When it commits crimes, it won’t hold itself accountable.  Instead, it will blame the victim.

While libertarians all agree on the need for a drastic reduction in the size and power of the state, the libertarian movement has long been divided between the anarchists, who believe that the state should be done away with entirely, and the minarchists, who wish to reduce it to a few functions regarded as essential. This dispute also goes on within the Free Nation Foundation, whose membership (including the Board of Directors itself) is split on the issue of anarchism (also known as anarcho-capitalism, or market anarchism) vs. minarchism (also known as limited government). I welcome Adrian Hinton’s contribution as an opportunity to advance this discussion.[1]

What is Objective Law?

For Hinton, the chief defect of anarchism is its incompatibility (as he sees it) with objective law. Unfortunately, Hinton does not define the notion of objective law, but he gives us a few clues. He contrasts objective law with a system in which “anything goes;” in which individuals or groups can act in accordance with rules they simply happen to take a fancy to, unconstrained by the need to give rational justification.

I gather, then, that objective law is reliable and principled. Under a system of objective law, legal requirements will not simply arise or vanish with the whims of particular legislators or the shifting fortunes of pressure groups. There is some predictability to the law, with regard both to content and to enforcement; one can count on it. And the reason for this is that the requirements of objective law are grounded on reasons that are accessible and justifiable to rational human minds generally, regardless of personal emotional biases and idiosyncrasies.

If this is what objective law is, then I agree that objective law is a good thing. But is it true that objective law can be provided only by a governmental monopoly?

Objective Law Requires Competition

Consider the parallel case of objective science. Objectivity is a good thing in the sciences too; but how do we achieve it? We do not suppose that the way to get objective science is to put all scientific research into the hands of a single governmental monopoly; on the contrary, we recognize that it is only through allowing competition among scientific theories and scientific research programs that scientific objectivity is possible. As John Stuart Mill argued in On Liberty, we learn the worth of our ideas by seeing how well they can withstand challenge, whether in the form of intellectual arguments or in the form of alternative experiments in action. A view that is insulated from critique is less well grounded, since we cannot tell whether it would have survived had critique been permitted. Nothing would be more deadly to scientific objectivity than monopoly control.

And as Austrian economists Ludwig von Mises and Friedrich A. Hayek have shown, this argument applies to the market for goods and services just as much as to the market for ideas; competition is a discovery procedure, a crucial source of information, but one whose data grow steadily less reliable as it falls under the direction and control of a centralized state. If this is true for ideas, goods, and services, why not for law as well?

Law Without the State

Hinton says that “anarchy would certainly mean in practice … to have no government.” If by “government” Hinton means the state, i.e., an agency holding a monopoly (or near-monopoly; no institution has ever held a genuine monopoly) on the use of force within a given territory, then it is trivially true that anarchism means having no government. Anarchy just is the absence of a government.

But Hinton’s phrasing—saying that the absence of government is what anarchism would mean “in practice”—leads me to suspect that he regards the absence of government as a result of anarchy rather than the same thing under another name. This suspicion is confirmed by his use of Ayn Rand’s phrase “competing governments” (a phrase rarely used by anarchists themselves) to describe the anarchist system; obviously by “competing governments” Hinton cannot mean competing states. My guess, then, is that by “government” Hinton means something like: an institution or set of institutions governing human activity through the application of rules. In short, by government he means something rather like law.

But does Hinton really mean to maintain that there would be no law, no legal system, in the absence of a centralized state (i.e., a territorial monopoly)? That would be a remarkable claim, for the overwhelming preponderance of historical and anthropological evidence verifies that law is far older than the state. Until recently, states were the exception, not the norm, in human society; and stateless societies have enjoyed quite sophisticated and long-lasting legal codes.

Of course, the fact that stateless legal systems exist does not show that they are particularly good. Admittedly, none of these stateless legal systems represents the libertarian ideal. Neither, however, does any state known to history. Which is better?

It might be thought that a monopoly system is better if only in virtue of being more reliable and predictable. If a single agency is charged with legislating and enforcing the rules of conduct in a given area, one can expect those rules to be reasonably uniform; whereas if many different agencies are producing law, one has little to count on.

But the historical record suggests otherwise. For example, the Law Merchant—the stateless system of commercial law that evolved during the late Middle Ages and early Renaissance—was able to compete successfully with government courts precisely because it offered a more reliable and uniform system than could its state competitors. The reason is not difficult to find: a competitive, voluntarily funded system needs to please its customers, while a government monopoly, which forbids competition and extracts its revenues by force, faces no such incentive. (To offer a contemporary analogy: the reason no company offers triangular credit cards is not because card shape is regulated by the government but because customers would not purchase a card that would not fit in standard ATM machines. Standardization emerges because of market pressure, not at the barrel of a governmental gun.)

Hinton maintains that under anarchism, every individual “would have to either carry a gun at all times, or else join a private militia composed of such people. In other words, America would look rather like the Wild West.” To begin with, this might not be so bad; contrary to the Hollywood stereotype of lawlessness and violent shootouts, the reality of life on the frontier, today’s historians are discovering, was relatively peaceful and civilized—certainly a good deal more so than America today. An anarchist society could do worse than to imitate the so-called “Wild” West.

Leaving that aside, however, why should we assume that the options Hinton describes are the only ones? If shoes are not provided by a centralized governmental agency, we do not infer that everyone will either have to become his own cobbler or else join a shoe-manufacturing commune. Instead, we foresee a division of labor: some people will specialize in the making of shoes, which other people will purchase from them. Why not expect a similar development in the market for law?

Perhaps Hinton is assuming that an anarchist society could not afford a division of labor in the production of law, because the application of law typically requires the use of physical force, and if only some members of society are specializing in the use of physical force, then everyone else in society will be at their mercy. But if this is an objection to anarchy, why is it not a still stronger objection to the state, since the state, unlike a security agency under anarchy, is unchecked by any rivals and so is in an even better position to abuse its power?

Is Limited Government a Genuine Alternative?

Hinton envisions a minarchist utopia in which governmental actions are “rigidly defined, delimited, and circumscribed,” while the government itself is “like an impersonal robot,” operating free from any “touch of whim and caprice.” This sounds nice, but after all, the state is an institution with a definite nature, and the actions to be expected from it are determined by that nature and not by our wishes and fantasies. So the real question is whether it is realistic to expect this kind of automatic and impartial operation from a centralized monopoly.

But surely the verdict of public-choice economics is in the negative. The state is a human institution, peopled by individuals who respond to incentives. And, as Madison and Hamilton pointed out in The Federalist, in our choice of political institutions we cannot afford to assume that those we place in charge can be counted on to be wise and just. Power corrupts, because it attracts the corruptible. And the incentive system of a governmental monopoly is truly perverse. Imagine a state official who controls a million dollars in tax money. How is he motivated to spend it? In a competitive market he would be motivated to spend it in such a way as to please his customers (in this case, the taxpayers), but as things stand they have nowhere else to go. (If he is an elected official, perhaps they will have a chance to vote against him in a few years, but the franchise, with its all-or-nothing character, is a rather less effective mechanism for the expression of preferences than the market.) But if he is offered favors or bribes by special-interest groups, then he has an incentive to divert that money to their favored cause; after all, it isn’t his money, so he has nothing to lose.

Hinton may well reply that such problems are to be solved by a constitutional structure incorporating checks and balances. I agree. But I see anarchism as the logical conclusion of the checks-and-balances approach. The point of checks and balances is to put a brake on the tendency of political institutions to aggrandize power by arranging it so that a power grab by one part of the system will trigger opposition by other parts of the system. This was the idea behind the U. S. Constitution, with its federalism and division of powers. Unfortunately, it failed, as the supposedly antagonistic parts learned the benefits of working together to oppress the people. From an anarchist perspective, the problem with the minarchist version of checks and balances is that it does not go far enough; the opposing parts are too few in number, and too closely linked together in a single overarching institution.

I once opposed anarchism precisely because I was so convinced (largely as a result of reading Isabel Paterson’s The God of the Machine) of the importance of constitutional structure. I assumed (as Paterson had) that there is no constitutional structure under anarchy. But it now seems to me that precisely the opposite is true: the competitive market provides a much more sophisticated and complex constitutional structure than any state monopoly.

Hinton worries that, in an anarchist system, private courts “could freely dispense with such niceties as procedure or rules of evidence.” So they could. So could government courts (as indeed they often do). So long as humans possess free will, nothing can guarantee that they will act as they should. The fundamental question is this: under which system—market competition or government monopoly—is abuse of power more likely?

But the problem is not one of evil motivations alone. Even a state run by saints would face an informational problem. Just as the most well-intentioned central planner would be unable to make objective decisions about economic production, consumption, and distribution, because the information generated by the spontaneous market order would be inaccessible to him, so without the competitive, evolutionary process through which law originated and developed before the state, a centralized legislature would be unable to make objective decisions about which legal rules and procedures work best.

Resistance is Feudal

The history of Europe offers an instructive example. At the beginning of the Dark Ages, the Roman Empire had collapsed in the West, while still surviving in the East in the form of the Byzantine Empire. For the next thousand years, Europe was divided between these two regions. An observer at the start of this period might well have predicted that the East, not the West, would be the most successful. After all, the East had retained much of the classical learning that had been lost in the West; moreover, the institution of Roman law had been maintained in the East, while the West had become politically fragmented and decentralized. But this is precisely why the next step forward in civilization was taken by the West and not by the East. In the East, the state grew steadily more powerful, more centralized, more bureaucratic, and more oppressive. No rivals to its authority were permitted; even the Church was absorbed into it. Inefficient, stagnant, ossified, the Byzantine Empire became a brittle structure unable to withstand the steady advance of Turkish migrations. Even the classical heritage of Greco-Roman thought did the East no good, when the Emperor successfully issued an edict closing the schools of philosophy.

In the West, by contrast, there was no political monopoly. Power was divided among kings, nobles, free communes, and the Church. An adverse decision in the manorial court could be appealed to the royal court, or the merchant court, or the ecclesiastical court, and so on. (For details, see Harold Berman’s Law and Revolution.) Competition created the trial-and-error process through which common-law systems evolve and progress and adapt to the needs of the time. And it is because of the spaces of freedom that were opened up through this decentralized, competitive system that trade and culture began to flourish again in the West. (By contrast, in the East, Roman law—which originally had contained competitive, evolutionary elements, as Bruno Leoni shows inFreedom and the Law—became codified and static.)

Anarchy and Gang Warfare

Hinton offers two scenarios as a challenge to the defender of market anarchism. In the first scenario, Smith asks his security agency A to impose legal sanctions on Jones for an alleged robbery, and Jones asks his security agency B to protect him. Mustn’t such a situation inevitably lead to violent conflict between security agencies?

Perhaps, but it seems unlikely. Security agencies are not governments with a guaranteed supply of tax revenues. They depend on their customers, and so are much more responsive to customer demands. War is an expensive means of settling disputes, and even the most belligerent customer may think twice on receiving his monthly bill. Security agencies that settle their disputes by force rather than through arbitration will have to charge higher premiums, and so will lose customers to their competitors.

Does this guarantee that a system of competitive security agencies will never break down into warfare? No, nothing can guarantee that. All I am making is a comparative claim: competitive security agencies are far less likely than monopoly governments to resort to force.

Hinton’s second scenario concerns a demonstration by a Communist punk-rock militia, armed with submachine guns and singing the Internationale (that old punk-rock standard). Hinton asks what response, if any, the anarchist would regard as legitimate.

The first thing the anarchist would want to know is who owns the street where the demonstration is taking place. If the demonstrators have not obtained permission to be there, the owners would be within their rights to call in a security agency to eject the trespassers.

But perhaps the demonstration is taking place on public property. (I regard public property as a legitimate concept, though many market anarchists do not.) At that point, the question is whether the demonstrators are violating anyone’s rights. Certainly there can be no libertarian objection to their exercise of the right to bear arms, a right endorsed by minarchists and anarchists alike. The question is whether the demonstrators are threatening aggression. If so, it is legitimate to call in security forces to restrain them—and again, this is so both on anarchist and on minarchist premises. The anarchist position is not that “the Commie punks should have the freedom to do whatever they feel like.” Rather, anarchists hold that the Commie punks should have the freedom to do whatever they feel like so as long as they do not initiate force—whereas the minarchists wish to restrict not merely the use of initiatory force, but the use of defensive and rectificatory force as well. I do not see how this additional restriction can be morally justified. And in practical terms, granting one agency the right to use forms of defensive and rectificatory force denied to everyone else is extremely dangerous.

We welcome debate. D 

The American government has some of the most disingenuous accounting practices imaginable.  Every cost they estimate is really a logarithmic function, and they cannot keep the United States Post Office from losing about $5 billion a year.  They systematically sap the value of Federal Reserve notes through inflation and cannot be trusted to leave funds appropriated for Social Security in the designated account.

They literally take money from those worst off in society for retirement, supposedly for their own benefit, remove the money from that account, leave an unfunded liability, and then use the money on something more politically expedient while the weakest lose their coerced investment and are reimbursed unwillingly by those who remain productive.  What a racket!

As an institution, one should be extremely skeptical of both the practical ability of the government to be able to deliver quality results and the motivations behind the actions of state actors.

Many of the people who argue for the necessity of the state believe that humankind is essentially petty and cruel and thus make the case for a centralized political system to maintain order, peace, and prosperity.  But if humankind is all of those naughty things, then how are the people in government any different?  If people are profit-seeking and brutal, then they don’t become magnificently well-intentioned and public-spirited after joining the state.

Conversely, centralized power might even attract the cruelest in society, and any government would thus become infinitely more dangerous if the humankind were inherently evil.  I am far from the first to point this out.  Hayek famously wrote about this in The Road to Serfdom in the chapter “Why the Worst Get on Top.”  This idea is also central to the economic study of public choice theory.

Worse still for libertarians, the right has thoroughly embarrassed itself with its mercantilist defense of BP after the Deep Horizon Disaster and further sullied the reputation of markets in the process.  The juxtaposition of free market rhetoric and the fascistic reality of their position is responsible for an ever-increasing amount of damage to the perceived credibility of market liberalism.

In the haste to defend their mythological and hollow admiration of markets, the GOP’s ranks have closed around BP, in an effort to prevent a guilty-by-association wave of anti-market eruption from the political left.  Their smoke screen dooms liberty’s message and begs the question:

“How is defending an aggressive company a virtue for a free marketeer?”

I know the feeling. As a market-oriented thinker there can be pressure to defend every single market interaction.  “Walmart did what?  Oh, well, they have a right to, even though that’s ridiculous.  This is really a problem of state-granted corporate privilege.  In a freed market without a state these incentives and interactions would not actually exist, and this poor behavior would be very unprofitable…”  This isn’t always so convincing to the uninitiated, but libertarians walk a tightrope on issues like this.

This debate in the popular and mainstream media sources truncate the acceptable lines of argument between the fascist right, who are currently blocking legislation to raise liability caps, and the cries for more well-intentioned but economic progress-strangling regulation from the left.  There is a better way though, with a free market and without a state.

I’d argue that one should react with a “don’t hate the player, hate the game” attitude with regard to this incident.  BP, like all market actors, respond to the forces of supply and demand mostly outside of their control in order to internalize economic gains for their staff and investors.  However, with this statist anti-market and dangerous liability cap, firms like BP and their shareholders are are predictably incentivized to be less cautious than they would be without state protection.

With unlimited liability for civil damages through torts (private non-criminal damages suits) and a freed market, BP and all companies would be positively incentivized to keep the likelihood of negative (and expensive!) externalities to the most minimal amount conceivable.  This is precisely the kind of ‘regulation’ libertarians support.

This one change against caps on liability would make business extremely responsible and would do so without all of the inflexible bureaucratic regulations which produce sluggish and impoverishing economic conditions.  Unlimiting torts will make the world freer, safer, and more sustainably productive.  This is but one step on the road to the ideal of a stateless society, but if you are currently arguing for justice as a result of BP’s actions, please don’t forget to include this essential point.  Without this necessary reform, any new laws reacting to the Deep Horizon Disaster will only be polishing brass on the Titanic, and it will only be a matter of time until the perverse incentive structure strikes again.