Why Is 'Moral Hazard' a Problem for the Less Privileged But Not for the More Privileged?

The concept of "moral hazard" is an interesting one; one definition is "if you cushion the consequences of bad behaior, then you encourage that bad behavior (see On the Genealogy of Moral Hazard, Tom Baker, Texas Law Review, December 1996, 75 Tex, L. Rev. 237)." This was a concern with business fire insurance in the 19th century because the latter might increase the likelihood of arson by an unscrupulous businessman. I'm not entirely sure why this isn't an argument against all insurance; if the insurer takes on a good deal of the risk of loss wouldn't the moral hazard argument suggest that the insured would have less incentive to protect against loss? Insurance could be considered a relative of socialism in that it replaces individual responsibility with social responsibility. Of course insurance began with the more privileged classes; merchants wanted to protect themselves against being wiped out by loss of a shipment so they devised methods of sharing risk. When the gentry does it it's not a problem.

Former-Congressman Dick Armey was fond of saying, "social responsibility is a euphemism for individual irresponsibility." This implies that insurance encourages individual irresponsibility as do limited liability legislation, business bankruptcy legislation, etc. However, demagogues like Armey don't attack the latter, they save their venom for legislation that would protect less privileged individuals against risk.

In an interesting book called When All Else Fails: Government as the Ultimate Risk Manager David Moss describes how it was a terrific idea to protect business from risk in the United States in the 19th century by the use of limited liability legislation for corporations, controls on the issuance of bank notes, bankruptcy legislation to give businessmen a 'fresh start', etc. However, when we get to the beginning of the 20th century and there is a movement for workmen's compensation legislation, or social insurance to protect workers against unemployment and provide for old age, now come the privileged classes and their hired guns screaming that such protections would create 'moral hazard', workers will be motivated to take less care in the workplace, be less motivated to find work, and be less motivated to save for their own retirement.

And we still hear the same worn arguments to this day. If government is called on to help bail out the savings and loans at taxpayers expense that's necessary, however, if government could solve the healthcare insurance mess this would lead to moral hazard and people either using too much health care or not taking good enough care of their health.