(Continued from here and here.)

Aside from situations involving historical injustice, another way that applied libertopianism can run into problems in the real world is when costs are  socialized.  Consider financial regulation.  In libertopia, there is no financial regulation other than the general laws against force and fraud that cover all private transactions.  Applied to current policy issues, the libertopia approach would seem to recommend as much deregulation as possible.

In practice, however, we must confront the existence of “too big to fail”.  As we saw in the 2008 financial crisis,  the government is not  going to let large financial institutions go under even if they deserve to based on their reckless business practices.  The short term costs of a complete collapse of the global financial system are just too great.

But it is well known that the guarantee of a taxpayer bailout creates moral hazard problems.  A financial firm that knows it will be saved if it over-leverages itself will make riskier investments than it optimally would.  Libertopian thinking has nothing particularly helpful to say about this dilemma.  It seems that even a libertarian who has a prima facie objection to any  coercive government intervention, whatever its form, would have to acknowledge the need for some sort of financial regulation in this situation.

But on what grounds is state intervention justified in this instance?  Often, policies of this sort are justified using economic cost-benefit analysis.  CBA is certainly an important metric for evaluating policy alternatives.  But is also unlikely to be completely satisfying to a libertarian; a common thread that runs through most libertarian political thought is that individuals are separate in a way that makes it impossible to properly evaluate a policy’s legitimacy simply by aggregating costs and benefits over a individuals in a large group.

Anyone have any ideas for a more distinctively libertarian approach?