Do Lawsuits Make Us Less Safe?

John Stossel writes today in Real Clear Politics about abuses of the tort liability system.  He begins as follows:

Imagine if an evil business routinely deprived us of products that would help us live longer with less pain and more comfort. We'd be outraged, and lawyers would line up to sue. Yet something similar happens today, thanks to lawsuit abuse. Makers of all kinds of products are afraid to sell them to us because one lawsuit could ruin them.

Personal-injury lawyers claim they make America safer, but that's a myth. It's easy to see who benefits from those big damage awards we read about. Less obvious -- but just as real -- are the things we'd all like to have but never will get because of this climate of fear. Here are a few examples.

Monsanto once developed a substitute for asbestos -- a new fire-resistant form of insulation that might save thousands of lives. But Monsanto decided not to sell it for fear of liability. Richard F. Mahoney, the CEO at the time, said, "There may well have been a safe, effective asbestos replacement on the market, and now there isn't."

Stossel goes on to provide many other examples where fear of litgation has allegedly prevented companies from researching or producing valuable new products.

I am a big fan of John Stossel, but I am not sure he is on target in this particular case.  Stossel's lament is a common refrain among conservatives and libertarians, and the anecdotes that Stossel and others offer in support of their view are indeed disturbing.  But the criticism may suffer the same short-sightedness as the judge in the beauty contest who, having seen the first contestant, declared the second one the winner.  We have to be careful what we wish for; the tort liability is plausibly better than the alternatives, despite its own imperfections.

To see this, note first that everyone benefits when companies consider the potential risks and liability from any products they produce.  Without question, an overly zealous liability system might result in too little innovation and too few new products; but an insufficiently zealous one could produce the opposite effect.  To know we are on the wrong side of the tradeoff requires more than examples of products that "should have been introduced" but were not; it requires a systematic accounting for all such cases and for the cases where companies thought better of developing and selling products that would have carried excessive risks relative to their value. I am aware of no such accounting, nor it is obvious how one could produce it.

In addition, it is a mistake to compare the current, imperfect tort liability system to a hypothetical but "perfect" tort liability system; that is not the choice we face.   Perhaps there are reforms of the current system that make sense, but there will always be abuses.  Lawyers are simply too clever at circumventing rules that attempt to limit their payoffs.

Worse yet, the alternative to a tort liability system, with all its warts, might be a government regulatory agency that decides what products can be researched and sold.  That is roughly what occurs for medicines under the Food and Drug Administration, and the result is not encouraging.  In particular, the FDA seems to err on the side of caution and introduces enormous delay and cost in the production of new drugs.  The actual choice society faces, therefore, is likely between an imperfect tort liability system and an imperfect regulatory system.  At a minimum, the choice is not obvious.

My own hunch is that the tort liability system is the lesser of the evils.  One reason is that, for the most part, this system is run by individual states.  This allows for variety, innovation, and experimentation.  It also means competition between states to provide a business environment that is not excessively hostile.  These considerations will not guarantee an ideal outcome, but I suspect the results will be better than under a federal regulatory approach like the FDA.

Comments

[Mark C. Foley]

May I use this post for my Econ 101 class? Great economic analysis example.

[Mike Huben]

Stossel takes a very common position for a libertarian: corporate shill. Just like CATO.

If libertarians took their own ideas seriously, they would advocate deregulation of the tort system instead of "state competition". Not to mention deregulation (and loss of state protections) of corporate charters.

Theer are good economic reasons for the FDA's proactive regulation versus the tort system's post hoc fines. A product such as a fire retardent is easy to test objectively to see if it works: very low information costs. A medicine has very high information costs to see if it works, requiring large scale double blind tests. A product such as a fire retardent requires some means of getting into a body to harm it, which may or may not be likely. A medicine is placed directly in a body, and thus has every opportunity to harm it.

And of course, Miron overlooks the fact that there are competing NATIONAL FDA's. We can test how effective they are at approving useful medicines by looking at international movement for approved treatments: and there's very little. I'd bet that the vast majority of international movement is for unapproved treatments that are patently fraudulent.

[Lloyd Willis]

Mr. Huben: Do you mean to say that there are libertarians who do not advocate doing away with corporations and all those other "limited liability" schemes?

How would one go about "deregulating" the tort system? That's a proposal I've not had the pleasure of reading about.

[Mike Huben]

Lloyd: Of course there are libertarians who do not advocate doing away with corporations. Why don't you try to find a CATO article taking that position? I suspect that Boaz also doesn't take that position, but I haven't checked. Why don't you make a list of famous libertarians who advocate doing away with corporations: beyond Rothbard, it might be difficult to name too many.

The tort system is clearly regulated by statute law. Statute laws declare some things liable, and others not. They place limits on some awards. Etc.

[Christopher]

Very nice blog, glad I stumbled onto it!

[James]

"If libertarians took their own ideas seriously, they would advocate deregulation of the tort system instead of "state competition". Not to mention deregulation (and loss of state protections) of corporate charters."

Which libertarian ideas do you think liberatrians are failing to take seriously? I can see a cost/benefit argument for corporations and for the existing tort system. I wouldn't agree with it so much, but I wouldn't accuse libertarians who make such a case as being inconsistent with their professed ideals.

However, *every* anarchist libertarian favors elinimating the state, so that naturally means they favor eliminating state grants of priviledge. These are not rare positions among libertarians.

[Mike Huben]

As I said before, Stossel takes a very common position for a libertarian: corporate shill. Just like CATO.

He doesn't seem to take those ideas seriously. Neither do a great many other libertarians.

Do you have any idea what percentage of supposed libertarians are anarchist?

[James]

Mike,

This may strike you as odd, but I've never in my life seen Stossel. However, I wouldn't call him a corporate shill for the same reason I wouldn't call you a government shill: such attacks on motive are superfluous and uninformative. If Stossel makes any false claims about the world, you could just show that they are false. I'm aware that this is more difficult than calling someone a shill and may be unsuitable if your purpose is something other than to make a convincing argument.

I have no idea what percentage of supposed libertarians are anarchists. Should this matter to me?

"everyone benefits when companies consider the potential risks and liability from any products they produce"

Everyone does not benefit from forced, mandatory safety levels. A product's safely characteristics should be thought of as one of its features.

Some consumers may not want the extra expense, the reduced functionally, or the delays necessary to meet arbitrarily set gov't safety standards.

[Mike Huben]

"forced, mandatory safety levels", and "arbitrarily set gov't safety standards". Wow. So how is it that thalidomide is back on the shelves?

Go ahead: please show me that consumers are more sensible about these things than the FDA. (When it is not being pushed around by Bush, as in the Plan B pill.)

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[WEL]

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I had eye surgery and in the post-op pack was MAXIDEX(dexamethasone) drops by ALCON LABS.

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Use Google and enter EPOCRATES MAXIDEX REACTION to verify

OR CALL 800-757-9195