To your example I would add the "Tragedy of the Commons":

http://dieoff.org/page95.htm

The tragedy of the commons demonstrates that with certain shared resources, when everyone freely pursues their rational self interest not only is utility not maximized, sometimes the result is catastrophic.

Libertarian solutions to the tragedy of the commons usually involve attempted parcelization and privatization of existing commons, and while that's practical in certain cases, in many others -- fishing grounds, air quality, global warming, etc... -- it is not.

Libertarians do not oppose this stuff, they merely want to consider other approaches. I think pollution can be dealt with purely from a property rights framework, not a greater good framework.

Again, this is a low priority issue, and the thing to look out for is when planners try to use the 'greater good of all' to give handouts to special interests, as has been overwhelmingly the case with eminent domain lawsuits around the country.

Privatization of fishing grounds, in the form of fishing rights distributed by auction, is a widely used means of managing fisheries. It works well when property rights are actually enforced (e.g. a body of water controlled by only one nation).

This makes some sense -- I guess I was thinking mostly of the devastation of fishing stock that has occurred over the last few decades in areas that aren't managed. However, I'd question whether the notion of fishing rights is truly libertarian. It obviously requires a fair amount of government intervention and management, to the extent that the more extreme anarcho-capitalist types would find it unpalatable.

Parcelization of fishing areas was used by Turkish fisherman of the Anatolian coast, with dramatic improvements in fishery productivity.

Counterpoint to "Tragedy of the Commons":

http://links.org.au/node/595

When you cross the street at a traffic light, do you look at the color of the light and immediately propel yourself into the intersection? Or do you take a few seconds to glance from left to right to make sure that there isn't a vehicle careening toward you?

My guess is that you double check the government when it comes to your personal safety. So why should anyone believe automatically that just because the SEC exists, any investment bank will be a safe bet and act in precisely the way it ought to?

Any firm is prone to conflicts of interest, fraud, deception, lack of transparency, etc. Investment banks are no different.

It's a reality of life that sometimes people/groups will try to defraud/deceive others. Self-interest (being symmetric) offers a backstop against this, UNLESS regulation gets in the way.

The analogy I'd use is this? SEC regulations on iBanks were as effective as a paper seatbelt. In other words, not effective at all. What did the SEC spend last year doing while the financial meltdown was brewing? It shut down prosper.com!

You may think that it's optimal to declare that everyone should put on a paper seatbelt and that when things get bad just do a bailout, but libertarians would prefer to let people make decisions based on facts the whole time.

Are you arguing that no seatbelt is better than a paper seatbelt?

Just because the seatbelt is broken, doesn't mean we should abandon seatbelts. It means we should work harder to make better seatbelts.

An argument I see when libertarians are faced with such questions is that libertarians aren't 'against' seatbelts, but they want to explore the alternatives. And yet they don't seem to come up with any other alternatives...

I'm arguing that a paper seatbelt is a deception. Metaphorically, if you know a car doesn't have a seatbelt you'll drive more cautiously, or possibly have a seatbelt installed that you know works. In other words, you'll use your cognitive faculties to assess the risk and then manage that risk.

What we should not do is idealize the paper seatbelt or pretend that it works when it does not, or pretend that the design of that paper seatbelt hasn't been heavily influenced by corporate lobbyists, corrupt politicians, etc.

Society is more akin to an iterated prisoner's dilemma: the same game, but played lots of times. In that situation, the ideal strategy is actually to cooperate.

Cooperation only happens when you iterate every time in a one-on-one fashion with the same players over and over again. For example: the relationship with your local grocer, who has a reputation to build. But it is the wrong metaphor for most real issues in social policy. Pollution is a tragedy of the commons problem.

This is a more important point that I think most people realize. The classic "flaw" in Libertarian thinking (both among self-described Libertarians and those who criticize it) is neglecting higher-order effects. The prisoner's dilemma is a perfect example of this. The game played once is very different from the game played repeatedly. You'll find the same sort of differences in numerous other game-theoretic situations.

Unfortunately, most supporters of Libertarian policies only get to the first-order implementation and then stop and are rightly criticized for the limitations and flaws that result. All of the complexities of higher-order effects are neglected, but those are the parts that actually make the theory workable in the real world.

I don't think you offer any evidence to support your point.

I'd argue the opposite, that a big, opaque regulatory state is the perfect environment for corruption.

I think you mistook my comment as an argument against Libertarianism - it was not intended to be such. My point was that people oversimplify both the implementation and the analysis of Libertarian principles. A system with many, many free actors can be amazingly complex, and what I'm suggesting is that for people to see the value of the system they need to recognize and embrace that complexity.

For example, the basic principles of a free market (e.g., supply and demand) are easy to state but result in complex transactions. When things don't "work out" for someone in the real work and they raise an argument against "free markets" (as in the current housing bubble), we need to be ready to point out all the complex ways that the free market worked correctly but where the non-free parts distorted it (government policies encouraging loans to unqualified applicants).

In complex systems with non-linear behavior, we need to be very careful that we understand the full context of an event or we won’t be able to extrapolate the results. That’s why first-order approximations fail so often in mathematics and in real life.

Excellent point. You're right, a basic humility about the human ability to understand and control complicated systems is at the root of libertarian principles.

I think it's somewhat absurd that Obama and Bush even pretend they can do anything about the financial crisis.