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.

What Does 'Conservative' Really Mean?, Part 4

I think there is at least one more basic principle of conservatism that I left out in Part 1, Part 2, and Part 3: this involves a distrust of 'direct' or 'plebiscitary' democracy. Ryn, in America the Virtuous (p. 50-1), wrote, "Plebiscitary democracy aspires to rule according to the popular majority of the moment.... The American Framers... had a very low opinion of what they called 'democracy' or 'pure democracy.' They associated it with demagoguery, rabble-rousing, opportunism, ignorance, and general irresposibility.... While envisioning broad popular participation in politics, they sought to shield most of those charged with making decisions from the momentary popular will."

This mistrust of direct democracy may be in part a corollary of the first principle mentioned: since humans are subject to base motives it would be dangerous to trust too much in direct democratic decisions that were not sifted through a system of representation, division of powers, and checks and balances; the latter would increase the liklihood that prudence and moderation would prevail. Again, a problematic tension is created by recognition that governments are frequently more servile to privileged classes and may tend to ignore the less privileged. If a representational system, with division of powers and checks and balances were significantly unfair to less privileged groups and gave little opportunity for change, problems of justice and fairness would likely be created. Such a system might protect against the baser motives of the less privileged while facilitating the selfishness, greed and will to power of the privileged. Indeed, it has been argued that the American Constitution itself was created by and for the more privileged classes of the 1780s (see Charles A. Beard's "An Economic Interpretation of the Constitution", first published in 1913 and still very readable and interesting; of course, as might be expected this book was savagely criticized by others who thought it was 'un-American'; but see Robert A. McGuire's "To Form a More Perfect Union: A New Economic Interpretation of the United States Constitution", 2003; apparently some still believe that Beard's thesis had merit. For an interesting case study of the privileged classes taking advantage of the less privileged in Massachusetts under the Articles of Confederation see Leonard L. Richards' "Shays's Rebellion", 2003.)