Allowing blackmail seems prima facie good to me, since it's a tax on covert illicit behavior. Zvi seems to think, to the contrary, that it's prima facie bad.
Robin Hanson argued: If there exists some information about someone that, if revealed, would cause people to coordinate to punish them, then it's good for this information to be revealed because on average it's good for such people to be punished. Blackmail rewards people for investigating covert illicit behavior that would otherwise remain undetected, and correspondingly punishes the people engaging in that behavior.
Zvi offered two interesting arguments against this, which I'll address one at a time.
The argument against leverage
First, Zvi responded that blackmail is obviously bad because it creates the incentive to pressure people into covertly behaving in ways that would get them in trouble if revealed, in order to to have leverage over them - which can then be used to force more covert bad behavior for yet more leverage. When done at scale, this can lead to both large amounts of bad behavior which would not have otherwise occurred, and large levels of extraction.
People can get away with subtle and indirect blackmail already. But so long as it's technically illegal, repeated leveraged blackmail at scale is not a feasible strategy; a large firm specializing in blackmail would quickly become unpopular, and the target of regulatory scrutiny.
This argument assumes a prior state where some agents already have enough leverage over most people to force them to engage in mildly illicit behavior. But any agent in a position to do that could easily use their leverage to force their victim to extract some sort of perfectly legal further leverage, such as borrowing at a high rate of interest, or making their lifestyle depend increasingly on some core bottleneck controlled by the extortionist. This too constrains the victim to do what the extortionist says, lest they default on their obligation and lose everything.
This argument against blackmail is not specific to blackmail, but seems instead to be a general consideration against capitalism, privatization, and doing business at scale - since these empower positive feedback loops of rent-seeking behavior.
The argument against information
Zvi also offers an argument that is more purely targeted against blackmail. Even without leveraged schemes to manufacture ever-increasing amounts of illicit behavior as the raw material for blackmail, allowing blackmailers to go into business at scale would increase the total amount of blackmail performed, extracting large amounts of wealth from people doing perfectly ordinary illicit things. Most of us do things that we would be punished for if they were revealed, and it can't be good to take money away from nearly everyone, so we shouldn't legalize blackmail.
Crucially, Zvi treats revealing the information as a net harm here. It's even worse, on his model, than extracting money from the victim; it's a deadweight loss, harm inflicted on the victim with no corresponding benefit to the blackmailer.
This argument fails in a more interesting way, since it denies the fundamental premise of Hanson's argument: that we benefit both from finding out about illicit acts, and by punishing them. Zvi instead seems to think that if society as a whole were better-informed about what people were doing, it would in general on average make worse decisions, by punishing more people who ought not to be punished.
Licit blackmail at scale wouldn't just punish people for hypocrisy - it would reveal the underlying rate of hypocrisy. Soon, everyone would know that it's an ordinary part of life to pay off blackmailers. People would have a general idea what sort of behavior is blackmailable, because the behavior of the occasional person who refuses to pay would be revealed.
In a society that's trying at all to do a sensible thing, we should expect two things to happen in response to this situation. First, by effectively taxing illicit behavior, we should expect get less of it. Second, once people find out how common certain kinds of illicit behavior are, we should expect the penalties to be reduced.
Zvi counts both of these as costs, not benefits. But for more reliable punishment of and more frequent revelation of illicit behavior to be harmful, society has to be trying to get the wrong answer.
If you think that people are worse off when better informed - if our society is that perverse - then it's not clear what we're doing when we pretend to offer consequentialist arguments on policy decisions like whether to legalize blackmail. The general consideration that you expect people to make better decisions when better informed doesn't apply here.
Hoping for or against justice
Zvi's argument isn't analytically rigorous - it appeals to an implied shared feeling about blackmail. He doesn't articulate a clear model of how the relevant parts of the system work, and then show that in equilibrium, the harms caused by legalizing blackmail outweigh its benefits. He doesn't even assess its benefits. He just tells a vivid story about some possible costs it could impose.
I notice I'm inclined to do the opposite - focus on ways blackmail repairs problems. I think this reflects two very different perspectives on how justice relates to hypocrisy (though I'm used to seeing Zvi on my side on this issue and am still a bit surprised we seem to be disagreeing here).
In the traditional Latin mass, judgment day is described as a catastrophe from which the singer seeks refuge:
Dies irae, dies illa
Solvet saeclum in favilla,
Teste David cum Sibylla.
Quantus tremor est futurus,
Quando judex est venturus,
Cuncta stricte discussurus!
Tuba mirum spargens sonum
Per sepulcra regionum,
Coget omnes ante thronum.
Mors stupebit et natura,
Cum resurget creatura,
Liber scriptus proferetur,
In quo totum continetur,
Unde mundus judicetur.
Judex ergo cum sedebit,
Quidquid latet apparebit.
Nil inultum remanebit.
Quid sum miser tunc dicturus?
Quem patronum rogaturus,
Cum vix justus sit securus?
Here's an approximate translation:
The day of wrath, that day
shall dissolve the world in ashes,
testifies David with the Sibyl.
What trembling there will be
When the judge shall come
to weigh everything strictly!
The wondrous trumpet scattering sound
Across the graves of all the regions
Calls all before the throne.
Death and nature shall be stupefied
When Creation arises
Responsive to the Judge.
A written book shall be proffered
In which all is contained
Whereby the world shall be judged
When the judge takes his seat
all that is hidden shall appear
Nothing will remain unavenged.
What shall I, a wretch, say then?
To which patron shall I appeal
When even the just man is barely secure?
The Jewish liturgy about divine judgment is quite different. Every week, at the beginning of the Sabbath, Jews around the world sing Psalms a collection of psalms focused on the idea that the world is rejoicing because God is finally coming to judge it.
From Psalm 96:
Say among the nations that the Lord reigns: the world shall so be established that it shall not be moved: he shall judge the peoples with uprightnesses. Let the heavens rejoice, and let the earth be glad; let the sea roar, and its fullness. Let the field be joyful, and all that is in it: then shall all the trees of the wood sing for joy. Before the Lord: for he comes, for he comes to judge the land: he shall judge the world with justice, and the peoples in his faithfulness.
From Psalm 98:
Melodize to the Lord with harp; with harp, and melodic voice. With the trumpets, and the voice of the horn, shout before the king, the Lord. Let the sea roar, and its fullness; the world, and those who dwell in it. Rivers shall clap their hands; together, the mountains shall sing for joy. Before the Lord: for he comes, for he comes to judge the land: he shall judge the world with justice, and the peoples in his faithfulness.
In one of these outlooks, humans can't behave well enough to stand up to pure justice, so we should put off the day of judgment for as long as we can, and seek protection. In the other, the world is groaning under the accumulated weight of hypocrisy and sin, and only the reconciliation of accounts can free us; in constant flux due to ever-shifting stories, which can only be stabilized by a true judge.
We can't reconcile accounts if that means punishing all bad behavior according to the current hypocritical regime's schedule of punishments. But a true reconciliation also means adjusting the punishments to a level where we'd be happy, not sad, to see them applied consistently. (Sometimes the correct punishment is nothing beyond the accounting itself.)
In worlds where hypocrisy is normal, honesty is punished, since the most honest people will tend to reveal deprecatory information others might conceal, and be punished for it. We get less of what we punish. But honesty isn't just a weird quirk - it's the only way to get to the stars.
"The first principle is that you must not fool yourself, and you are the easiest person to fool." - Richard Feynman