In the October 2006 Freeman I reviewed Cass Sunstein’s very good 2005 book, Laws of Fear . Although my review is not available on-line from FEE with its own url, it is pasted below the fold.
Cass Sunstein is much like his University of Chicago Law School colleague Richard Epstein. Both publish articles and books at a breathtaking pace. Both use economics lavishly. Each would be the smartest person in any group of 10,000 randomly chosen people. Both are academic superstars.
But while Epstein sees the world through the lens of a classical liberal, Sunstein wears the lens of modern American liberal—or a “progressive,” as such well- meaning champions of vigorous government regulation and heavy taxation are (misleadingly) called.
Unlike many “progressives,” however, Sunstein brings genuine intellectual firepower to the debate. His arguments, in this book and elsewhere, are serious and challenging. And while I often disagree with him, I must say that 90 percent or more of this book is spot-on correct.
He opens Laws of Fear  with a devastating attack on the so-called “precautionary principle.” This “principle” advises that we steer clear of actions that might generate substantial harm even if we don’t know what this harm might be and its chances of occurring. If it’s possible that action X will cause some great harm, the precautionary principle demands that the action be avoided.
Environmentalists love that principle because it rationalizes almost any piece of restrictive regulation— or so they think. Because, for example, drilling on the Arctic National Wildlife Reserve might unleash a series of events that doom all of the flora and fauna of the northern wilderness, that’s sufficient reason to prevent drilling even if the chances of this outcome are tiny.
Sunstein points out, however, that “the Precautionary Principle is literally incoherent, and for one reason: There are risks on all sides of social situations. It is therefore paralyzing; it forbids the very steps that it requires.”
Indeed so. A proponent of ANWR drilling can turn the precautionary principle’s logic around by pointing out that there’s a chance, however small, that failure to drill on ANWR might lead to catastrophe.
No matter how loudly it’s done, no such illogical posturing for (and against) regulation can substitute for sound cost-benefit analysis. A regulation cannot be justified on the possibility that some extreme scenario might materialize. Instead, sound estimates of the probabilities of various outcomes, along with estimates of the costs and benefits of those outcomes, are the intelligent way to determine what actions are appropriate.
Sunstein is correct about this, and he makes a strong case that “assignment of monetary values to risks is far more plausible and intuitive than it might seem.” I agree completely—if government is going to regulate, it should do so on cost-benefit grounds.
But how wide are those grounds? In my opinion, nowhere near as wide as Sunstein believes them to be. First, as Elinor Ostrom’s research shows, people are surprisingly creative at arranging their affairs voluntarily to solve many problems of a kind that too many of us simply assume can be solved only by government. When the robustness of private arrangements is overlooked (as Sunstein tends to do), the benefits of government regulation are overestimated.
Second, people tend to abuse power. Although Sunstein sometimes seems aware of Public Choice concerns, too often he writes as if they are either nonexistent or exaggerated. When the dangers of government-power abuse are overlooked, the costs of government regulation are underestimated.
So in my view, the soundest cost-benefit analysis counsels against almost all government regulations and in favor of reliance on the law of property, contract, and tort. Put another way, cost-benefit analysis counsels in favor of laissez faire.
Sunstein would disagree, for two reasons. First, he overestimates the benefits and underestimates the costs of regulation. Second, and more interesting, Sunstein is a legal positivist—he believes that all law is created by government. From this belief it’s a short step (which Sunstein seems to take) to the conclusion that all law is consciously chosen.
This isn’t the place to challenge legal positivism. I mention it only because it is the largest flaw in all of Sunstein’s work.
Still, Laws of Fear is a solid work, informed by sound economic understanding – including many useful applications of behavioral economics. I recommend it to readers of The Freeman with more enthusiasm than I expected I would have.