by Robert Bloomfield

The title of today’s show was Live Free and Prosper, and our guest, Adam Thierer, provided a forceful and compelling defense of freedom in the face of online threats to our children and privacy, the solutions derived from self-empowerment and personal responsibility. Well, I am going to argue the other side. That’s right, folks, I am going to argue against freedom! No, of course not. Instead, I am going to argue against simplicity.

H.L. Mencken said “For every complex problem, there is a solution that is simple, neat, and wrong.” For me, this captures the problem of libertarianism in a nutshell.

Let me start by saying that I can’t think of a better place to study libertarianism than virtual worlds. Communities like second life arise in a setting largely devoid of regulation. At our opening show on virtual goods and Second Life’s economy, founder Philip Rosedale and Chief Product Officer Tom Hale sounded strong libertarian notes. The first words out of Philip’s mouth that day were, and I quote: “My role in Second Life’s economy is to keep my hands off it.” Tom agreed, elaborating that he has been “humbled by both the scope and creativity in the scale of Second Life’s economy.” That sounds another libertarian note, that of Friedrich Hayek, who emphasized that no one person—president, regulator, or even Philip Rosedale—can understand what a million people collectively know as they use free exchange to set prices and self-organize.

On the other hand, freedom and self-organization hasn’t always worked out so well in Second Life. It was a little over a year ago that I gave a connecting the dots segment titled “Everything I needed to know about the financial crisis I learned in Second Life.” Second Life’s free and unregulated financial markets quickly devolved into a series of bank failures that reflected some combination of excessive risk-taking, incompetence, outright fraud and pyramid schemes. Attempts at self-regulation repeatedly failed due to conflicts of interest. Eventually, Linden Lab came up with a very non-libertarian solution: they insisted that banks could operate in Second Life only if they showed evidence of real-world regulatory oversight.

My own philosophy on freedom and regulation is probably best described by the rather unpopular “General Theory of the Second Best,” formalized in the 50’s by Lipsey and Lancaster, and spread into the regulatory sphere by legal theorist Richard Markovits in the 1990’s.

The basic idea is this: The foundation of neoliberal economics is that when markets are perfectly free of regulation, friction, externalities and other imperfections, they achieve the pinnacle of economic success, allocative efficiency. This outcome is what economists call “first best.”

Now, we all admit that markets are not perfectly free of these imperfections, so we strive for the ‘second best’: the highest degree of allocative efficiency we can achieve given the imperfections we cannot avoid.

The general theory of the second best says this: if you have multiple imperfections in the market, then eliminating only one of them doesn’t necessarily improve allocative efficiency. Now, the theory isn’t particularly popular, even though it is widely recognized to be true, because it doesn’t allow simple arguments. A regulation that addresses an obvious problem like pollution doesn’t necessarily help, because it might have unintended consequences that are worse than the problem we are trying to fix. By the same token, eliminating a regulation that stymies freedom doesn’t necessarily help, because it might be essential to counterbalancing another imperfection, and we will be less free and worse off without it.

The bottom line is that we live in an imperfect world, and we will never eliminate all government regulation and other imperfections. The general theory of the second best tells us that we need to look at each regulation in all its messiness, in the context of the other regulations and imperfections we have to suffer.

So I’m not against freedom. I’m just skeptical of simple arguments. So those of you who want to maintain the highest degree of freedom in your virtual lives, your greatest degree of privacy, I applaud your sentiment. But take a lesson from Adam Thierer. Don’t just argue for freedom because freedom is good. Lay out the mechanisms by which your solution will lead to good outcomes, the tools and hard work people will need to undertake to make your view work. If you’re a fan of regulation, lay out in all its gory messiness how the regulation will work, how it will adapt to quickly changing technology.

Bottom line: I am a skeptic. I don’t believe people when they tell me that a new regulation will improve our lives, and I don’t believe people when they tell me that getting rid of an old regulation will improve our lives. At least, I don’t believe them if their arguments are simple. I want their arguments to be messy, complicated and uncertain. Because in the end, those are the arguments that are going to be least wrong.