Saturday, January 20, 2007

American Hypocrisy About Government 'Meddling'

In David Moss' When All Else Fails: Government as the Ultimate Risk Manager it is clearly laid out how much help state and federal governments provided for business and manufacturing in the late 1700s and throughout the 1800s: governments provided loans, allowed businesses to raise money through lotteries, provided cash awards for high quality textile products, passed laws enabling incorporation allowing companies to raise money from many passive investors, and passed laws allowing investors to assume only limited liability if the company failed to pay its debts.

Again, many people thought these aids were a good idea and if you do too that is fine. They probably were a good idea. But if government intervention was 'good' when it was helping businessmen to accumulate the fabulous wealth and power they did in the 19th and 20th centuries, why did it become 'bad' when governments turned to help workers and consumers in the late 19th and 20th centuries? I believe it is because having accumulated the vast wealth and power businesspeople had, they then used this to actively promote an ideology protecting their privileges and power. Since many attempts to help workers and consumers would cost businesses somewhat more, and since regulations inhibited the freedom of business to do what it pleased, businesspeople and their many allies within universities, the press, the legal profession, among politicians, et. al. aggresively promoted the laissez faire philosophy that said it was very bad for the government to 'meddle' in the economy.

It had been great for government to do all those things to help business but that was long ago and few remembered or reminded us about all that government had done. After the industrial revolution had completely changed the face of American society creating a huge working class and huge cites where before an agricultural society had existed, now it was bad for government to 'meddle' by passing child labor laws, legislating to protect women workers, passing laws for workers compensation for on the job injuries, etc.

And one of the major arguments used by opponents of legislation to aid workers was that such laws would create 'moral hazard.' If we passed legislation protecting workers against on the job injuries then workers would be encouraged to be more careless and would be discouraged from saving for their own security. Horrors! However, earlier legislation allowing businesses to incorporate and attract many passive investors and limiting the liability of these passive investors--this legislation won the day. Yet, a momemt's thought suggests that allowing corporations and limiting the liability of investors obviously created its own 'moral hazards.' Allowing corporate directors to raise large amounts of money from passive investors would encourage corporate directors to be more careless with Other People's Money than they would have been with only their own at risk. As David Moss wrote (p. 64):
With little or no control over the day-to-day affairs of their corporations, passive investors were largely at the mercy of the corporate directors who managed their companies.
This limited responsibility of corporate directors would encourage irresponsibility or 'moral hazard.' The passage of limited liability laws protecting investors from responsibility for corporate debts also would create moral hazards: such laws protected the director-investors too, thus encouraging them to take more risk with their limited responsibility, and these laws would encourage investors to be less careful with their investment dollars because their corporate debt responsibilities were limited. But, somehow all these pro-business 'moral hazards' that seemed to have worked out well for economic growth were forgotten. When it came to protecting workers and consumers imagined 'moral hazards' were conjured up to oppose and defeat such legislation.

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