Should fast food restaurants be allowed to sell food without posting calorie content? To market unhealthy food to children?
Should garbage cans be labeled "Landfill"?
Should manufacturers be allowed to sell caffeinated alcoholic beverages? To whom should alcoholic beverages be sold?
Should prostitution be legal? Drugs? Weapons? Nukes? Divorce?
What should the age of contractual capacity be? The age of sexual consent?
What should be the consequences of a breach of contract?
Are taxes the same as stealing?
A System of Incentives
The field of law & economics recognizes that a system of law is a system of incentives. We adjust human welfare by adjusting the incentive structures in which humans operate.
Any incentive structure, including but not limited to a legal system, helps people predict how they will be treated, and thus how to plan their actions. Any incentive structure will do, more or less, for this purpose. But some individuals will always be treated sub-optimally by any incentive structure. The only certainty is that some will live in misery - there is always plenty of misery to go around.† But who should be miserable, and how miserable, and why?
By creating or adjusting incentive structures, planners assume that they know what is best for human flourishing. Creating and adjusting incentive structures is an inherently epistemically ungenerous activity. This, I think, is the main problem with Bryan Caplan's take on behavioral economics, which I've previously summarized thus:
Bryan Caplan thinks that the solution [to the problem of men not wanting to work] is to not have soup kitchens. That is, to make everybody so miserable that they HAVE to work, or else.
Caplan (and his coauthor) "know" that it's better for people to live as close to a "productive," middle-class existence as possible; so they argue we should adjust the incentive structure to give the poor fewer choices so that they are forced to make the "right" choice.
The search for a just, ethically defensible incentive structure requires an attempt to get outside of any single individual or group's notion of what is best - to do what's best for everyone, not just the would-be incentivizer and his cronies.
The Russian Doll Problem
In some sense, incentive structures compete with each other (e.g., capitalism v. communism). But even competing incentive structures exist within a wider incentive structure. The governments of countries may be seen as competing incentive structures, existing within the wider incentive structure of the world. Organized crime and government are competing systems of incentive, and operate within the wider incentive structure of the natural world. This is true even if the background incentive structure is merely "might makes right" - which is probably the only possible top-level, ultimate incentive structure.
Creating and adjusting incentive structures is at best hubris, at worst tyranny.
Some (libertarians, the religious, and advocates of democracy, for example) ignore this problem by assuming a privileged status for some kind of incentive structure.
Privileged Incentive Structure: God Said So
Some of the most successful religions worldwide have a built-in legal system and/or incentive structure. For this reason, some religions function very well as technologies that promote trade. Sharia in Islam, Gemora in Judaism, and Canon law in Christianity are the most well-known examples.
Religions are not written texts. As my rather religious Jewish boyfriend puts it, the written text (e.g. Mishnah) is like a constitution - but a government is not its constitution. The United States has a tiny little constitution, but the system of incentives is largely given by the enormous system of courts and police that interpret and enforce the written text.
Adherents of these religions get around the Russian dolls problem of incentive structures by assuming a privileged status for their enshrined incentive structure on the basis that this incentive structure was ordained by God.
Privileged Incentive Structure: The Market Said So
Libertarians attribute a privileged status to the "free market." However, a market exists within a context of a wider incentive structure (the initial distribution, human nature, scarcity). Markets are not ever really "free" - there must be a wider incentive structure to contain the market, even if this incentive structure is merely "might makes right."
Privileged Incentive Structure: The People Said So
A novel solution to the Russian Dolls problem of incentive structures is: let the participants choose their own incentive structure. Various forms of democracy claim to embody this solution.
Ultimately, this is no more than creating a market to determine the rules for the market. "One person-one vote" is, ultimately, as arbitrary as "one dollar, one vote" (or "one bullet, one vote," for that matter). Why is a person the proper unit of democracy? Why adults and not children? Why present people and not future people? What about the rights of those in the minority position on anything? Why is it fair for a majority to impose its will on a minority? Democracy is, at best, a caricature of consent.
Prior to garnering fame as an authoritarian parenting enthusiast, law and economics scholar Amy Chua wrote a book (World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability) explaining some of the problems with "democracy-as-privileged-incentive-structure" - especially when combined with a purportedly free market. In the real world, economic advantage tends to not be spread equally among people - or randomly. Advantages, whether intellectual or material, tend to be clustered within identifiable groups of people, and these groups tend to attempt to manipulate the system of incentives to increase this clustering (that is, to promote inequality). Unfortunately, the red-in-tooth-and-claw nature of the background incentive structure is frequently revealed when "market-dominant minorities" are punished for their inequality-promoting success in often gruesome ways by the (ethnic) majority.
Is the "free market" right, in this case? Should market-dominant minorities, racial or otherwise, own and keep an ever-growing majority share of the world's property? Or is "democracy" right? Should the majority be able to punish the market-dominant few? The conflict, rarely acknowledged, demonstrates that neither is an inherently good incentive structure.
The nature of our universe prevents an ethically sound incentive structure from existing.
It's the initial distribution all the way down.
† Misery, or suffering, might be defined as that of which there is negative scarcity. Not only is there an abundance, but there is an abundance and its consumption is not optional. I think it is more humane to think of economics in terms of a system for the distribution of misery, rather than the distribution of scarce, utility-promoting goods and services.