1. The law serves a primary purpose of publicity, and advertising for a polity, and also the law serves symbolic functions. People still don’t give Singapore a break for making chewing gum illegal and the like, even though this restriction is not in fact a big source of tyranny there. I don’t see it as good for the United States and its reputation to make blackmail legal, even if the “legalize blackmail” arguments are perfectly sound in a Steve Landsburg kind of way. It’s just not worth the bad publicity.
2. As Coase pointed out long ago, blackmail typically involves an exchange setting with bilateral monopoly. And the material in question is often emotionally fraught, such as knowledge of a crime, of an affair, photos of private body parts, and so on. The process of the trading is painful and stressful for many people. Limiting that process could produce welfare gains, or at the very least legalizing that process, and thus producing more of it, won’t involve huge benefits. When the process of trade and bargaining is itself painful, some of the welfare theorems need to be rethought a bit. Of course the unilateral release of gossip can be terrible too, but perhaps it involves less potential for drawn-out situations and painful bargaining because the transacting it not allowed in the first place.
3. As Scott Sumner points out: “In practice, I suspect that most blackmail involves issues of sex, gender and drugs. (Soon we’ll have to add race to this list.) I don’t expect to convince others of my views here, but let me just say that I believe that our society is unable to think rationally in these areas. Thus I don’t see any great value in legalizing blackmail.”
4. Sometimes the efficient blackmailers are your immediate family, not strangers. Outlawing blackmail from outsiders gives them a semi-monopoly for an efficient, do-it-yourself at home, low transactions cost Coasean deal (“Darling, someone needs to take out the garbage…”). Let’s do blackmail right! And privately, out of the public eye, to avoid the problems discussed under #1. And as a matter of justice, shouldn’t it be the aggrieved spouse getting the gains here, not the National Enquirer?