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.

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.

Conservatives, Liberals and Authoritarians: Cleaning Up American Political Terminology

In her The Authoritarian Dynamic, political scientist Karen Stenner has been a great help in clarifying the landscape of American political ideology. On p. 138 Stenner wrote that "the way in which the notion of 'conservatism' is typically employed in American politics... hopelessly entangles... three dimensions we have so far striven to distinguish: authoritarianism, status quo conservatism and laissez faire conservatism.... In contemporary U.S. politics, 'conservative' does tend to mean, all at once, intolerance of difference, attached to the status quo, and opposed to government intervention in the economy."

Stenner correctly distinguishes these three ideological stances and argues that they can be largely independent of one another; one can endorse laissez faire and be quite critical of the status quo (say you were a bourgeois for laissez faire in Louis XVI's pre-revolutionary France), one can support the status quo and be opposed to laissez faire (say you were a loyal Communist under Brezhnev), and, most important of all for my purposes, being a 'conservative' who wishes to avoid radical or abrupt changes in the status quo does NOT make you an authoritarian (say you are a moderate Republican critical of the Bush-Cheney administration's super-patriotism, hyper-nationalism, moral intolerance, and subversion of political dissent).

Stenner, with characteristic conceptual care, differentiates 'status quo conservatism' from authoritarianism (p. 151): to status quo conservatives “a stable, institutionalized, and authoritatively supported respect for diversity should always be preferable to dismantling those well-established protections and moving toward an uncertain future holding out prospect of greater uniformity of people and beliefs, yet at the cost of intolerable social change and uncertainty.” In other words, if you want to preserve the status quo and you in fact exist in a society respecting diversity, then that’s the status quo you’d wish to preserve; however, if you’re an authoritarian existing in a diverse society you might wish for even abrupt radical changes in the status quo if they promised more uniformity of people and beliefs. A 'status quo conservative' presumably would support whatever status quo existed in his/her society; an authoritarian is predisposed to want uniformity of people and beliefs in whichever society he/she lives and may be willing to risk change to increase uniformity.

Let's parlay this into a clarification of American political ideology.

1) As both of the two patron saints of laissez faire doctrine, Milton Friedman and Friedrich Hayek believed, those supporting laissez faire should not be called ‘conservative’ at all, but ‘classical liberals’ (here I depart somewhat from Stenner in that I agree with Hayek and Friedman that 'laissez faire' and 'conservative' designate different views). If contemporaries won't take the word of Friedman and Hayek that 'conservative' is an inappropriate term it's because ideologues like William F. Buckley wished to 'fuse' disparate and often contradictory ideological traditions for their own intellectually inconsistent political purposes. Buckley and those around him in the 1950s put together a witch's brew of 'conservatism' that still confuses American political discourse today. A true conservative, like Edmund Burke, refers to someone who opposes abrupt and/or radical changes in contemporary social institutions but supports temperate evolutionary changes as needed. (Two qualifications: 1) in the U.S., with its longstanding and widely held commitment to less government and more 'free' market, a Burkean respecter of the status quo would also tend to support laissez faire, but this is a culturally and historically specific association; historically specific because there were times in American history when leaders who were in many ways staus quo conservatives advocated more government intervention in the economy: e.g., Alexander Hamilton, Henry Clay; 2) since capitalism is always a force for innovation, change, and "creative destruction", it is difficult to be consistently pro-capitalist, i.e., laissez faire, and be a Burkean respecter of the status quo. Go figure. I suspect laissez faire and status quo are too often contradictory.)

2) Classical liberals, like Friedman and Hayek, are opposed to undue interference in the economy, and in society more generally (they would oppose legislating morality), by the central government. The libertarian (see U.S. Libertarian Party) of today tends toward the beliefs of the classical liberal, but also strives for consistency in pursuing liberty by supporting strong civil liberties, opposing government legislation of morality (support for women's rights to abortion), and opposing a meddlesome, interventionist foreign policy requiring the central government to have a huge 'defense' and 'national security' establishment.

3) So what's a 'liberal'? The ‘modern liberal’ or ‘progressive’ believes that the rise and growth of modern corporations in the America of the 19th century has interfered massively and significantly in the 1825 (pre-industrial) world of the classical liberal; this growth has enabled corporations to interfere with the ‘free market’, enabled representatives of corporations to exercise excessive influence over government and elections, and enabled the ‘collectivism’ of the corporation to exercise undue influence over most social decisions (environment, health care, retirement, unionization of workers, development of law, popular tastes, favored entertainments, use of the broadcast airwaves, etc., etc., etc.). Thus the modern liberal believes that government--as the only institution within modern capitalist society having adequate power to regulate the corporation as well as being under some popular control through democratic elections--that this central government must be supported in its role of corporate regulation. Other than this, and with some notable backsliding (McCarthyism, the Cold War, the 'war on terror'), the modern liberal probably agrees with the libertarian on many issues. That the three examples of 'backsliding' that came to mind concern foreign policy is no coincidence; probably the biggest problem for modern liberalism is that 'liberals' support aggressive, 'idealistic' foreign policies in which the U.S. brings its 'superior' values to the poor and benighted of foreign lands. I believe such interference in the affairs of sovereign countries contradicts liberal principles of freedom, equality before the law, and self-determination for all peoples.

4) What is an "authoritarian" or pseudo-conservative? As Stenner argues, an authoritarian is someone who likely has an innate disposition to strongly favor uniformity of beliefs for all members of society, and sameness of characteristics of all members, and thus tends to be racially, politically and morally intolerant of diversity and dissent; the authoritarian when threatened or challenged by a perceived excess of diversity and/or dissent responds with an aggressive, coercive punitiveness aimed at suppressing unwanted difference and enforcing uniformity upon others. Thus, George W. Bush and Dick Cheney, along with many of their most fervent supporters, are more accurately considered authoritarian pseudo-conservatives and should never have been labeled 'conservative' at all. Republicans like Dwight Eisenhower, Senator Robert Taft (1889-1953), and George H. W. Bush might more accurately be considered 'conservative'.