One More Point About Hypocrisy Regarding 'Moral Hazard'

I have often been impressed with how arguments can be creatively twisted in public debate and in courts of law to support almost any outlandish position. In my last post I noted how first state governments passed legislation enabling corporations thus making it possible to collect the money of many passive investors and place it in the hands of corporate directors, and then these state governments passed limited liability legislation protecting investors from responsibility for corporate debts above the limit of their personal investment. I noted how both the allowance of corporations and limited liability law created their own 'moral hazards.'

It is interesting to note that when Massachussets was debating whether to pass limited liability legislation the then Governor, an advocate of limited liability, used the following argument (David Moss, When All Else Fails: Government as the Ultimate Risk Manager, 2002, p. 64):

"It is not reasonably to be expected," Governor [Levi] Lincoln had observed in 1825, "that prudent men, except under particular circumstances of personal confidence in their associates, should be ready to incur even the possible risk of utter ruin, for the chance of profit, in the joint stock of a manufacturing concern."

In other words, the Governor was arguing that since investors in joint stock corporations were only passive investors, they required the guarantee of limited liability to be encouraged to invest where they had no opportunity for 'personal confidence in their associates' because the corporate directors were likely not personal associates.

So first the state of Massachussets passes legislation enabling corporations thereby creating a class of passive investors and creating the moral hazard of directors risking other people's money; and then, arguing that this newly created class of passive investors would not be sufficiently motivated to invest unless the state limited their liability as well, created yet additional moral hazards both for corporate directors and passive investors. Instead of arguing that perhaps the state shouldn't have enabled corporations and passive investors in the first place, the Governor parlays the original bet on corporations into the perceived necessity to limit the liability of passive investors in order to provide them sufficient motivation to invest.

To me this is a fascinating use of argument. Instead of considering the hypothesized reluctance of passive investors to risk their money in joint stock companies as perhaps a reasonable hesitancy of 'prudent men', or considering this reluctance as a possible indication that joint stock companies may have been a flawed idea, Governor Lincoln argued that this reluctance to "incur even the possible risk of utter ruin" must itself be swept away by limiting the liability of passive investors and actively encouraging them to risk their capital in joint stock companies.

If one is convinced that corporations and passive investors and limited liability are essential prods to economic growth I guess the Governor's argument makes sense. But there is an interesting lack of concern about moral hazard when it is argued that initial moral hazards were not enough and now we are required to create yet additional moral hazards to encourage both corporate directors and passive investors to take risks they might not normally be willing to take. In this phase of American history government is aggressively intervening in the economy to encourage risk taking. Later it will be argued that workers must take total responsibility for themselves and any even imagined possibility of certain types of risk taking on their part must be severely discouraged.