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Sunday, June 8, 2008

Some Free Market Justice Calculations

Some reader comments deserve their own separate post.

Thomas Blair has left a new comment on your post "Falling Cranes and Sovereign Immunity":


If you consider the $990M punitive damage award excessive, consider this analogy. Suppose I steal $1000 from you, but I only have a 1% chance of getting caught. 99 times out of 100, I make a profit of $1000 for a total of $99000. 1 time out of 100, I get caught. If my damages are only $1000 when I get caught, paying restitution to the victim, then stealing 100 times yielded a net profit of $9900. Without punitive damages, stealing is profitable when there's a low risk of getting caught.

The number $9900 ought to be $99,000. Just a small typo.

Yes, a typo. You know what I meant.

Frequently, even egregious misconduct goes unpunished.

For a cornucopia of recent examples involving just the police forces, look no further than the Agitator blog, which I see you read.

Yes, I read the Agitator sometimes. However, a list of police abuses gets boring after awhile. I'm more interested in the "So what are you going to do about it?" aspect.

You have to be careful about the Strawman Fallacy. Whenever a policeman helps someone, the mainstream media says "Yay! Hooray for the State!" By heavily touting the best behavior by policemen, they create the false impression that almost all policemen are saints. Similarly, suppose you only cite the *WORST* things that policemen do. Then, you might falsely conclude that State policemen are pure evil.

In reality, State policemen sometimes behave honestly and sometimes behave dishonestly. If they were dishonest 100% of the time, it'd be too obvious. Most State policemen are unaware that they are the thugs of a massive criminal conspiracy.

State police have an absolutely unaccountable monopoly. The cost of their services is far greater than it would be in a free market. Further, they almost never suffer negative consequences for misconduct. I cannot say "I don't like the quality of the State-provided police protection. I'm firing them and hiring someone else."

The market cost of insurance is thus $100k plus the insurance corporation's expenses; let's assume a 50% profit margin for the insurer. Insurance can be purchased for 2% of the cost of an accident.

Perhaps I misunderstand you, but shouldn't the insurance be available at 1.5% of the cost on 50% profit or 2% of the cost on 100%?

That isn't how profit margins are calculated.

Profit margin = (expenses) / (revenue).

If your revenue is $2M and your expenses are $1M, then your profit margin is 50%. If your revenue is $1.5M and your expenses are $1M, then your profit margin is 33%. Profit margins cannot exceed 100%, if you have income and no expenses. If your revenue is $3M and your expenses are $1M, then your profit margin is 66%, not 200%.

Compensatory damages only include direct compensation for injury or property damage. If you're unable to enter your apartment for a week due to a construction accident, then the cost is 1 week of rent. The inconvenience is not included as a cost.

Do you mean to say this is the way things are now, or this is how they should be? I'd argue that the inconvenience is surely compensable. In this case, the construction accident has imposed not only the cost of one week's lost rent (that I've already paid to my landlord), but also the cost of having to secure replacement lodgings for the week. If the purpose of compensatory damages is to make the person whole after imposing a cost, then my need to secure shelter for that week is a cost imposed upon me through no fault of my own. Additional restitution might be due if my inability to access my dwelling due to the accident cost me in other ways, like not having access to my business records or computer, for example.

In the present, only actual physical damage usually counts as compensatory damages. Time wasted by the victims does not count.

In a free market, time wasted by the victims *DOES* count towards a compensatory damages calculation.

Let's consider another example. I own a cell phone. I am overbilled for $200. I spend 4 hours on the phone getting the problem fixed. My bill is corrected and the overcharge for $200 is removed. However, I am not reimbursed for my 4 hours of time wasted.

In a *FREE* market, I would be entitled to compensation for my 4 hours wasted. If my time is worth $30/hour, then I am entitled to $120 in compensatory damages, in addition to the $200 correction on my bill. Further, suppose only 1% of the customers who are overbilled decide to sue for compensatory damages for time wasted. In that case, I am *ALSO* entitled to $11880 in punitive damages. With cheap and efficient courts, all injured customers would be able to seek restitution. In the present, it doesn't pay to sue for small amounts of money.

Further, in a free market, the cell phone corporation would not have a State granted monopoly/oligopoly. The cell phone corporation is shielded from competition by the State. I can't say "I'll choose a cell phone corporation that isn't abusive". There aren't any! Why offer decent customer service when you have a monopoly/oligopoly, and you're protected from negative consequences when you abuse your customers?

If a drunk driver is stopped by police, and the police catch 10% of drunk drivers, then the penalty should be the cost of an accident (paid to the police); this is better (for the drunk driver) than an actual accident, because nobody was injured.

Again, I presume this is taking place in an agorist society. By what authority do police officers (or private security officers, depending on your nomenclature preferences) have to pull over any motorist suspected of driving drunk, and by what authority can they extract a payment equal to the cost of a (non-existent) accident as a fee for pulling a drunken motorist over?

Yes, I was assuming a free market in that case.

When you buy car insurance, as part of the agreement you agree to not drive while drunk. What insurance association would sell insurance that covered drunk drivers?

If you are driving while drunk, then the other drivers on the road have a valid tort claim against you. Your reckless driving increases their chance of injury.

Suppose I hire police association A to protect me. If I am driving on a road, and police association A arrests a drunk driver on that road, then police association A is meeting its obligation to protect me. If I am the victim in a drunk driving accident, then I have a valid claim against my police protection/insurance agency for failing to protect me. If I am driving on a road outside police association A's jurisdiction, then they will subcontract to the local police to protect me. It would be a reciprocal arrangement. You wouldn't have to negotiate separate police coverage wherever you travel.

Suppose that, for someone driving drunk, the odds are:
10% chance caught by police
1% chance of accident
89% chance of neither accident nor caught by police

Suppose the cost of an accident is $1M.

10% of the time, the drunk driver would get caught by the police. They would owe the police $1M in damages. Their insurance would not cover the bill, because they agreed to not drive drunk as part of their contract. Debt due to criminal negligence could not be discharged by declaring bankruptcy. Notice this makes drunk driving *RISKIER* than in the present!

89% of the time, they would get away with it. Rounding, this is a 8/9 chance of getting away with it.

1% of the time, they would get in an accident. They would owe $1M in compensatory damages. Their chances of getting caught were 1 in 9. Therefore, they would also owe $8M in punitive damages. If the victim is unable to pay the punitive damages, then the police protection agency is obligated to pay the punitive damages.

Notice that the police make a net profit. For every 100 drunk drivers, they catch 10 (collecting $1M), 89 escape (no net gain or loss), and there is 1 accident (paying $9M; the police association must now find a way to get the criminal to pay $9M). Even if the criminal is unable to pay, the police make an overall profit.

Punitive damage awards could be adjusted to make sure that the police earn a reasonable profit rate. I only use approximate values here.

Suppose the police decide to set up a roadblock to catch drunk drivers. When the police stop someone who is not drunk, then the police are obligated to compensate them for the time wasted. Suppose it is $5 per car. In that case, the police can profitably set up a roadblock to catch drunk drivers whenever they estimate that more than 1 in 200,000 are driving drunk. The people inconvenienced by the police checkpoint are fairly compensated.

Notice that "wasting people's time" and "damages owed by criminals" are fairly calculated. Also notice that the police are responsible for paying compensation to the victim, if the criminal is unable to pay. Insurance policies won't cover damages due to negligence.

Probably, someone convicted of a crime would be allowed to keep their job so they could pay off their debts, under strict supervision. Their relatives may have to pledge some of their property as collateral/bail. Repeat offenders would be jailed. If your relatives refused to pledge collateral/bail, then the criminal might be jailed (depending on the severity of the crime). The concept of "collateral/bail posted by relatives" would be a strong incentive to keep your relatives honest. If they had a pattern of misbehavior, you would refuse to pledge collateral to help them.

There also would be a grey area. Certain blood alcohol levels are considered "definitely too drunk to drive". Some blood alcohol levels are considered "slightly impaired". Someone slightly impaired would still owe full compensatory damages for an accident, but they would owe less of a fine if stopped by police and less punitive damages in the event of an accident; they may be entitled to partial insurance coverage. Any insurance policy that covered driving would explicitly specify what blood alcohol levels are permitted.

Please excuse my comments if I've mistaken descriptions of what 'is' for what 'ought to be'.

I didn't make the distinction clear.

As usual, let me know if you have any further questions. These free market justice calculations aren't that hard, once you take the proper free market perspective. The specific numbers I give above are just a guideline. The actual fair values would evolve over time.

1 comment:

Thomas Blair said...

Profit margin = (expenses) / (revenue).

This isn't how profit margins are calculated either.

Profit margin is given by:
PM = (profit) / (revenue)
PM = (revenue - expenses) / (revenue)
PM = 1 - (expenses)/(revenue)

I presume you intended to indicate the third formula. This example is a bit silly, as we don't have a value for the insurer's expenses. I think we both get it.

If you are driving while drunk, then the other drivers on the road have a valid tort claim against you. Your reckless driving increases their chance of injury.

Here's where we begin to differ. The mere increase in the probability of injury is not sufficient cause for recovering damages. If I am playing catch with my son and threw a ball and hit a passing pedestrian, he would have a valid tort claim against me for injuring him. If I, however, throw the ball and just missed him, he has no valid claim. He has been caused no loss and sustained no injury. Such is the case with impaired driving. The only time a tort is committed is when a loss occurs. Driving impaired causes no loss. Crashing into a person or property while driving, whether impaired or not, is a tortious action and damages may be sought by the victim.

Suppose I hire police association A to protect me. If I am driving on a road, and police association A arrests a drunk driver on that road, then police association A is meeting its obligation to protect me.

Agreed, but where does the police association gain the authority to detain the impaired driver? The driver has caused no harm to anyone.

If I am the victim in a drunk driving accident, then I have a valid claim against my police protection/insurance agency for failing to protect me.

Sure, but the more important thing is that you have a valid tort claim against the tortfeasor.

10% of the time, the drunk driver would get caught by the police. They would owe the police $1M in damages.

Damages for what? An non-existant accident causing non-existent losses? Damages, by definition, cannot exist without a loss and no loss has occurred.

Suppose the police decide to set up a roadblock to catch drunk drivers.

Again, by what authority? Am I free to do this, provided I give everyone I stop a fiver? Suppose I'm rich as hell and I want to have a little fun. I declare myself to be ThomasBlair Security Force and obtain a client. I set up roadblocks with the intention of finding people unsafely operating a motor vehicle (tail lights out, high/low tire pressure, cracked belts and hoses, shoddy maintenance) and detain a few thousand drivers for the two days it takes me to physically examine every car. I assign fines based on the probability that a certain maintenance issues is likely to cause harm or damage to my client. Provided I pay them $30/hr, or whatever they're worth, who's to stop me? By your reasoning, I've committed no tort, because I declare that I'm looking for unsafe motorists.

I promise I'm not being an ass here. I'm just trying to understand where the police associations acquire the authority to detain anyone they please, even if compensation is awarded. By your calculations below, a police force may make a profit by detaining two hundred thousand motorists looking for that one that's impaired.

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