Richard Epstein‘s latest column for the Hoover Institution’s “Defining Ideas” takes aim at Paul Krugman’s flawed arguments.

In order to set the stage for this critique, it is necessary to first establish how libertarians understand free markets. Most emphatically, these markets do not operate in a vacuum. They require that we have clear assignments of rights to both human labor and external objects. The standard position here is that all individuals own their own labor and the various resources, both physical and intangible, that they acquire either by initial capture or by transfer from a prior owner. Its basic system of exchange must be protected by vigorous rules that prevent all self-interested individuals from disrupting voluntary transactions. There must be formalities with certain classes of contracts to increase security of exchange. And there must be strong rules to prevent bad actors from bypassing the market by seizing things that do not belong to them. That prohibition against theft in turn requires the state to provide remedies against other actions that destroy the property of other persons, not only by direct blows but also by pollution. Far from rejecting these government limitations on individual activities, a responsible system of laissez-faire capitalism necessarily embraces them. A sensible libertarian is a classical liberal in the tradition of Adam Smith and David Hume. On economic issues he is no anarchist, but a believer in limited government. …

… The overall pattern should now be clear. One reason why the debate between hard-line libertarians and their fevered opponents like Krugman has taken such a know-nothing turn is that neither side bothers to take seriously the nitty-gritty institutional details on the uses and limits of regulation in a variety of complex areas. Milton Friedman tended to miss these points because his main targets were minimum wage, rent control, and agricultural price supports, where the hard line libertarian solutions make a good deal of sense.

Krugman doesn’t have that excuse. He fails to understand how institutions work because it is so much easier to slam libertarians for their cultish devotion to Ayn Rand. The truth is, as I argued in an earlier critique of Rand Paul, libertarianism has a strong and useful theory of rights, but offers only loose guidance on the mix between public and private remedies for both breach of contract and harms to strangers, including pollution. All Krugman’s popular work is marred by his obsessive attention to monetary policy and the Fed. If he ever cared to study mid-level regulations on pollution, drugs, and highway usage, he would discover that not all libertarians are as clueless as his New York Times screeds have become.