The Marketplace of Ideas: Government Failure Is Worse Than Market Failure When It Comes to Social-Media Misinformation

Cite this Article
Ben Sperry, The Marketplace of Ideas: Government Failure Is Worse Than Market Failure When It Comes to Social-Media Misinformation, Truth on the Market (September 22, 2023),

Today marks the release of a white paper I have been working on for a long time, titled “Knowledge and Decisions in the Information Age: The Law & Economics of Regulating Misinformation on Social-Media Platforms.” In it, I attempt to outline an Austrian law & economics theory of state action under the First Amendment, and then explain why it is important to the problem of misinformation on social-media platforms. 

A basic summary of my legal analysis is that, while most theories of state action fail as applied to social-media platforms, facts as alleged in the so-called “Twitter Files” and other journalistic efforts, as well as the litigation in Missouri v. Biden,  could allow a court to find state action when social-media companies act due to coercion by or collusion with government actors. If that is the case, then the moderation decisions made pursuant to such coercion or collusion would be struck down as unconstitutional prior restraints and viewpoint-based suppression of speech.

Even if this is so, however, the remedies a court could impose are relatively limited from the point of view of those aggrieved: it can simply tell the government agents to stop doing what they are doing, but can’t stop social-media companies from continuing to enforce their misinformation policies as they see fit, so long as no state action is involved. 

The more interesting part of the paper, from my point of view, is the theory of why this distinction between state action and private action is important when dealing with the problem of misinformation on social-media platforms. The basic thesis is that the First Amendment protects private ordering from government intervention, and thus is as much about protecting a market for private speech governance as it is about protecting the marketplace of ideas.

Thus, the First Amendment rightly allows for social-media companies to set and enforce policies on misinformation where it would forbid the government to do the same. This is because the marketplace of ideas, even as intermediated to some degree by the market for private speech governance, will allow for the best ideas (or, put another way, true speech) to win out, while government intervention—whether overt or covert—would prevent this market process. Or so the (law & economics!) theory of the First Amendment goes. 

In this blog post, I want to consider one potential objection to the First Amendment’s “marketplace of ideas” metaphor that space didn’t permit in my already too-long white paper. Namely, that there seems to be a consistently large amount of “market failure” in the marketplace of ideas as measured by “the truth” winning out. Even in the face of these market failures, however, there is reason to expect government failure to be much worse. In other words, the First Amendment’s rightful reliance on private ordering to deal with false speech is based more on the much greater harms to society that would flow from government imposition of “the truth” than the market process necessarily leading people to know and believe “the truth.”

The History of the ‘Marketplace of Ideas’ Metaphor in the First Amendment

The U.S. Supreme Court has alluded to the market for ideas in First Amendment law for more than a century, dating back at least to Justice Oliver Wendell Holmes dissent in Abrams v. United States:

Persecution for the expression of opinions seems to me perfectly logical. If you have no doubt of your premises or your power and want a certain result with all your heart you naturally express your wishes in law and sweep away all opposition. To allow opposition by speech seems to indicate that you think the speech impotent, as when a man says that he has squared the circle, or that you do not care whole-heartedly for the result, or that you doubt either your power or your premises. But when men have realized that time has upset many fighting faiths, they may come to believe even more than they believe the very foundations of their own conduct that the ultimate good desired is better reached by free trade in ideas — that the best test of truth is the power of the thought to get itself accepted in the competition of the market, and that truth is the only ground upon which their wishes safely can be carried out. That at any rate is the theory of our Constitution.

This justification for generous protection of speech follows from the traditional arguments of John Stuart Mill (and John Milton’s “Areopagitica”), who argued in chapter two of “On Liberty” that the best defense of truth depends not on suppression of speech, but on allowing it to be constantly tested in the marketplace of ideas:

First, if any opinion is compelled to silence, that opinion may, for aught we can certainly know, be true. To deny this is to assume our own infallibility.

Secondly, though the silenced opinion be an error, it may, and very commonly does, contain a portion of truth; and since the general or prevailing opinion on any object is rarely or never the whole truth, it is only by the collision of adverse opinions that the remainder of the truth has any chance of being supplied.

Thirdly, even if the received opinion be not only true, but the whole truth; unless it is suffered to be, and actually is, vigorously and earnestly contested, it will, by most of those who receive it, be held in the manner of a prejudice, with little comprehension or feeling of its rational grounds. And not only this, but, fourthly, the meaning of the doctrine itself will be in danger of being lost, or enfeebled, and deprived of its vital effect on the character and conduct: the dogma becoming a mere formal profession, inefficacious for good, but cumbering the ground, and preventing the growth of any real and heartfelt conviction, from reason or personal experience.

Over time, the Supreme Court has cited this general idea over and over in its First Amendment jurisprudence. 

Even when it comes to clearly false speech, the Supreme Court has found that, unless it falls under a category like fraud or defamation, such speech remains presumptively protected by the First Amendment. This means that such regulations are subject to strict scrutiny, including narrow tailoring. And it would be nearly impossible for a ban on misinformation to be narrowly tailored when counter-speech is possible. As the Supreme Court put it in United States v. Alvarez:

The remedy for speech that is false is speech that is true… suppression of speech by the government can make exposure of falsity more difficult, not less so. Society has the right and civic duty to engage in open, dynamic, rational discourse. These ends are not well served when the government seeks to orchestrate public discussion through content-based mandates.

In sum, the marketplace-of-ideas metaphor is a consistent part of justifying First Amendment doctrine, used to justify striking down intervention by way of censorship. But while it has its uses, there is little reason to think the marketplace of ideas necessarily leads to truth.

The Problem of Market Failure in Ideas

The simple truth is that no one, not even the wisest among us, has but a very small amount of knowledge. As the extended order of the economy has grown, there has not only been a division of labor, but a division of knowledge. Even among the most educated members of the population, specialization in a particular subject matter for relative advantage is the norm. Those things that interest us the most and/or have the most salience to our everyday lives are the things we tend to know the most about, mostly because we have the most incentive to learn those things.

When it comes to “knowing” things, we are desperately reliant upon others for nearly everything outside our relatively narrow areas of expertise. And this goes for everyone. Even assuming we are all rational beings who want to gain knowledge, the process of doing so is costly. Because it takes time, resources, and focused energy to gain knowledge, we remain in a state of what economists call “rational ignorance” in relation to a lot of things. 

Compounding this problem, even when we have an interest in pursuing knowledge in an area, we often have ideological priors that cause us to behave less than objectively in receiving information. In other words, even when we know a lot about something, we may choose to pursue that knowledge in part to support a tribe or movement and thus engage in serious logical errors, or even consume and propagate misinformation when it supports our side. We are particularly likely to do so if the cost is lower to us than obtaining and evaluating information objectively. Economists call this “rational irrationality.”

These twin problems mean that we are desperately stuck in a world where we don’t know what is true, either because we don’t have the time or wherewithal to investigate it, or we only engage in information-seeking that confirms what we want to believe. To make matters worse, humans are, quite frankly, also just ignorant and irrational regardless of whether it is rational to be or not. Even with the costs of information coming down rapidly due to the rise of the internet, weeding out good and bad information (and evaluating it objectively) remains a challenge.

An individual doesn’t, however, step into the marketplace of ideas without any help. There are various institutions that have developed as sources of authority, from trusted family and friends to (wise elders and religious organizations, to teachers and professors and scholars, to news media and its journalists and fact-checkers, to new media like blogs or even social media platforms. Some of these people (or institutions made up of people) could even be said to be studied intellectuals (defined by Thomas Sowell as “those whose end products are ideas”) or experts (defined by Roger Koppl as “anyone who gets paid to give an opinion”) who make a living studying and communicating ideas. In a division-of-knowledge economy (which includes the marketplace of ideas), we rely greatly upon intellectuals and experts to tell us what is true or false in things about which we are rationally ignorant and correct our thinking on things about which we are rationally irrational.

But here’s the problem: people are people. Even intellectuals and experts are subject to limitations and biases like the rest of us. While intellectuals or experts may “know” more than many members of the public do when it comes to the areas they research, that doesn’t mean they will always get it right in the end. And quite frankly, there may even be a market for providing misinformation that people want to hear. Truth is not always what is supplied or demanded. As economists Justin Callais and Alexander Salter argued in their great article “Ideologies, Institutions, and Interests”:

The popular metaphor of a “marketplace of ideas” is misleading. Sometimes ideas outcompete other ideas not based on truth but because of convenience or bias. Ideas compete on margins not necessarily related to truth, which should make us skeptical that good ideas triumph over bad ones when they clash. The selection process is driven by a host of criteria, and in any particular case criteria other than veracity may prevail… Truth can be part of the equation, but it is rarely the determinative criterion for promoting some ideas over others. Ideas are subscribed to by people; people interact within institutions; the institutions work as filters that determine survivability. For ideas… survivability and truth need not significantly overlap.

Thus, there may be “market failures” that occur in the marketplace of ideas when intellectuals and experts consistently get things wrong, not unlike what occurs in other markets. When incentive structures insufficiently promote the production and dissemination of true ideas, or even reward false ones (see Sowell’s “Intellectuals and Society” and Koppl’s “Expert Failure”), there may indeed be a lot of failure.

The Threat of Government Failure Is Still Worse

The question, then, is whether the institutional context of a free market in ideas is better or worse than government intervention in the form of suppression or censorship. On this score, the marketplace of ideas at least has this going for it: intellectuals and experts must ultimately rely on people to adopt what they say as the truth. Censorship or suppression of ideas prevents this feedback mechanism from operating.

Now, the marketplace of ideas could be better. In fact, as Koppl argues, some of its failures stem from experts using government power to raise the cost of entry and limit supply for their services—thus insulating themselves from competition—through licensing, accreditation, and other means to maintain a monopoly on who can get paid for their expert opinions. Moreover, as Sowell argues, the supply of those who work in ideas likely far outstrips demand due to massive subsidies toward institutions that generate ideas, such as academia and the arts. This results in far too many highly educated people looking for work in a limited number of available jobs and ending up disappointed by the market process. Many of these people end up working in nonprofits, government bureaucracies, and ideological movements, and share a vision that sees the market process as harmful. 

What does the marketplace of ideas select for in this institutional environment? For intellectuals and experts—whose ideas and opinions are not ultimately traded in a market that selects for what consumers want produced in the most cost-efficient manner—other criteria must be applied to determine the success or failure of those ideas. For idea people, the criteria of success tend to center on what other intellectuals or experts think. As Sowell put it:

For intellectuals in general, where the primary constraint is peer response, rather than empirical criteria, currently prevailing attitudes among peers may carry more weight than enduring principles or the weight of evidence.

This problem is intensified by the fact that—as argued by Callais and Salter, as well as Koppl—there is often a symbiotic relationship between the government and institutions that produce ideas, and this relationship may engender the production and adoption of ideas favorable to government interests, even if they are only tangentially related to truth.

But by far the worst situation is when the government establishes itself as the final arbiter of truth. When government experts are in charge, their ignorance and biases now face no check—at least, if they are able to censor or suppress the speech of others. It is one thing for government experts to share information they believe to be true, but quite another if they can foreclose others from disputing that information or sharing a different perspective. 

In other words, the defense of the marketplace of ideas being free from government intervention rests on the same fundamental basis of why the marketplace for anything should be free from government intervention: the government only makes things worse. As Koppl put it:

The liberal defense of free speech is not based on any claim that the market for ideas somehow eliminates error or erases human folly. It is based on a comparative institutional analysis in which most state interventions make a bad situation worse. Free speech is the worst possible rule, except for all the others.

Applying These Insights to Social-Media Misinformation

In the online world, the marketplace of ideas includes institutions like social-media platforms (who themselves rely on intellectuals and experts for fact-checking) that evaluate “misinformation” in some areas as part of their moderation policies. And these institutions have an important function in separating truth from fiction for the many people who use those platforms to get more information about the world. This doesn’t mean they will always get it right. But in a competitive market, they will have to answer when they get it wrong.

Compare this to the situation of government intervention. While it is all good for the government to share with social-media platforms what they believe to be true, it is a real problem if they take over that important institution’s role by coercing them to censor their users’ speech.

For instance, conservative critics of the major social-media platforms point to things like the Hunter Biden laptop story and the suppression of discussion about COVID-19’s origins or the efficacy of public-health policies as examples where the socia-media platforms—relying on supposedly objective government “experts”—got it wrong and suppressed true speech. But it appears that this is the result of government failure and coercive intervention into the marketplace of ideas.

The answer, from a First Amendment perspective, is clear: when it comes to ideas, government failure is a bigger threat than market failure. Let Facebook, Twitter, YouTube, and the rest get it wrong, so long as it is the result of market-driven content-moderation policies. That is the marketplace of ideas in action, as mediated by the market for private speech governance.

But don’t let the government intervene into the market process by coercing those entities into censoring or suppressing speech. This will distort the market process, which has proven itself the least-bad process at promoting truth.