Yet more moral hazards

In any country there must be people who have to die. They are the sacrifices any nation has to make to achieve law and order.~ Idi Amin Dada (mid-1920-2003)

A reply to the latest comments by threeportdrift and Peter Horne (see previous post).

Economic and moral hazard

There is indeed an economic hazard: if the authorities allow a failing bank to go under, confidence in the banking system might collapse, leading to the kind of financial crisis that the world suffered after 1929. And this is the moral hazard: by seeking to avoid the economic hazard, the authorities create a different one; banks will not be so careful in the future, so there is a risk of further failures. They will not be constrained by the need to look after their future well-being because they will expect the authorities to do so. So there is a trade-off. The authorities, in the case of Northern Rock, chose to avoid the economic hazard and no doubt they will bring in a raft of regulations to try to minimise the moral hazard they have created. "Moral hazard" is, perhaps, a misnomer in this case because the real effect is a shift in the nature of self-interest which must be the core of any business motivation. The important thing is that the trade-off is recognised for what it is, and that the authorities make a clearly thought-out decision based on the balance of dangers.

Help the poor

You are quite right to point out that this is similar to an argument that can be – and often is – made against providing financial support to the poor. If you give money to the poor, they will be discouraged from seeking gainful employment, others will lose their incentive to work and more people will choose to live on welfare. This is indeed a "moral hazard".

You also point out that the motive for supporting the poor is an ethical one (we don't like to see others suffer), while the motive for supporting a failing bank is an economic one (a failing bank could precipitate the collapse of the financial system, leaving the economy and all its participants devastated and unable to recover).

You don't say whether you think that the ethical motive is worth risking the moral hazard – a scrounger's charter as right-wingers would say. I suspect that you do and, if you do, I agree with you. But I would be cautious about how the poor are defined and how they should be helped. Without going into detail, people who are poor because they are unable to work should be first in the queue and the method by which their incapacity is assessed should be simple and clear, and should not be humiliating. (I have long thought that complaints about means tests are misplaced since everyone who works has to fill in a tax form, which itself is a means test. But listening to the debate about incapacity payments, I realised that the complexity of the rules and the humiliation associated with the tests are the real problem)

Falling on hard times

I also believe that people who have fallen on hard times should be supported financially and helped to recover. And the nature of the support should be such that they are given a strong incentive to go back to work (the poverty trap is an iniquitous moral hazard that has to be removed). And so on...

Taking advantage

To summarise, I believe that, when acting to solve a particular economic or ethical problem, the benefits should be weighed against the dangers of moral hazard. There is an unintended, but often predictable, danger that people adapt their behaviour to take advantage of the open hand of the state. And in framing its benevolence, there is always a risk that the state can find itself with a large and never-ending obligation.

Respect for the law

Now to your second point about loss of respect for the law. This goes to the heart of my point about moral hazard. The reason this issue is so important is that the law must earn respect, it should not be taken for granted. It is wrong that governments, like those of Robert Mugabe get away with grave misdeeds just because they are in charge of making the laws. It is iniquitous that a monster like Idi Amin was allowed to live out his life in comfortable exile just because he was a former leader of state. And in a different league, it is wrong that the British government should hide behind the doctrine of Crown immunity.

When I drafted my reply to your first comments, I tried to set out a list of necessary conditions for any law to be based on a firm foundation. It was too tough a task for a short note so I gave up. (It did, however, bear some relation to the list of criteria which Peter Horne cited.)Perhaps I should have persisted.

Bringing law into disrepute

My first criterion is that laws should not discriminate against any significant minority of the population. And I think all the examples that you cite are cases where efforts were made, not only to discriminate against minorities, but also against majorities. So the laws that so troubled Ghandi and the other notable civil rights protestors you mention would have fallen at the first hurdle. Your examples illustrate my point; they do not undermine it. If a government tries to do something by passing laws which brings the law into disrepute, it runs the risk of undermining respect for the law and opens the door to legitimate protest. This, as we saw in Northern Ireland, can lead to serious and fatal civil unrest.

Euthanasia

Other areas where there is "civil disobedience" on a lesser scale include the laws against euthanasia. The objection to these laws is widespread. Institutions which practice it are tolerated but any individual who participates in the act risks prosecution and incarceration. But this depends on the whim of the authorities, not a happy situation in an open society.

Sailing close to the wind

I do not agree with your last point about the effects on moral standards of moral turpitude of some of those in the public eye and those who feel they can circumvent the law. People will question their moral compass. It is human nature to sail close to the wind, but a complex and poorly-enforced legal structure has the paradoxical effect of creating a race between law-makers and the rest of us to find or to plug the loopholes in the law. A simple legal structure which reflects a morality which most of the population accepts will result in a decent and law-abiding society.

Law and religion

As for the escape to religion and fundamentalism, I believe that the horrors of Sharia law, the burning of heretics, the unofficial imprisonment of young women in the Magdalen Laundries of Ireland, and the social mayhem created by missionaries in the nineteenth century all speak for themselves. Legal structures based on religious conviction have repeatedly shown themselves to be fatally flawed. The fact that there is now an upsurge in evangelical movements is itself a demonstration of the way in which society is losing moral cohesion. And this, I believe, stems from governments legislating without giving full consideration to the moral hazards which their laws will generate.

Peter Horne and Leslie Stephen

In reply to Peter Horne's comment, I would agree that all human action has an impact on others, but the degree to which it affects others can vary considerably.

I agree that moral issues should be considered when deciding whether to curtail the liberty of individuals. It is the complexity of deciding what is worth doing, and whether the law is an appropriate mechanism for achieving any given aim, which makes me think we should err on the side of caution. My object has been to draw attention to the way the flood of laws introduced by the present government has made us all a little bit nastier. And that includes government ministers, political parties, civil servants and other administrators who, instead of focusing on serving society, duck and dive to gain advantage. One human quality that has vanished because of this over-administration is compassion. Automatic penalties without the intervention of a human being are becoming the norm.

Authority and autonomy

Swinging the emphasis in defining what laws are acceptable, from preventing harm to others towards which restraints are injurious, makes – to my mind – little difference. The point is that, in both cases, there is an authority which claims to know best what is good for others. And I deny that this is ever true (except for children or persons who are seriously lacking in mental or moral capacity). The key to good law lies in the three tests you mention, in research to discover what measures will be effective, and in open discussion and debate. With the vast number of laws that have recently been passed, it has obviously been impossible to carry out this process. And we are all paying the price.

Comments

[Peter Horne]

Thanks for replying to my comment.

I think there may be a further moral hazard
involved in the NR bailout in that it was presented in part as an attempt to protect the interests of small investors and shareholders. Should all small investors in all kinds of businesses be protected in this way? There is
also the question of coercion.There is no moral case for taking money from one person to give to someone else. This is also the problem I have with state welfare. Of course, I'm not advocating a return to Victorian social conditions.I just think that the state is rubbish at actually alleviating suffering of any kind and that if people were allowed to keep more of their own money they would make much better decisions. A whole raft of friendly societies, mutual organisations and insurance companies, which existed before the welfare state would re-establish themselves. The present system really does involve an elite who believe they know what's best for ordinary people. They don't.

"My first criterion is that laws should not discriminate against any significant minority of the population. "

This sounds like an argument for the rule of law and more particularly, equality before the law. The latter is essential for an ordered society and respect for the law. At present we have the spurious concept of group rights which effectively make some groups more equal than others and which leads to envy and competition for privileges between groups. Henry Sumner Maine in "Popular Government" said such a process would be disastrous and take literally hundreds of years to correct.

"Swinging the emphasis in defining what laws are acceptable, from preventing harm to others towards which restraints are injurious, makes – to my mind – little difference."

In practical terms you're probably right, although you would be missing one or two opportunities to do some good.Making motor-cyclists wear crash helmets, for example is a good idea, easy and cheap to enforce.

Liberty is of course defined by the constraints placed upon it. Among them law, morality, religion, public opinion etc. They all involve coercion of some kind. Mill's conception of liberty effectively delegitimises most of this, leaving us with only the law. The law can't be everywhere and is singularly unsuited for the job it is being asked to do. We need to stop making laws and repeal most of what presently exists. As for research, this would have to be separated from the state and politics or the temptation to skew the results in one direction or the other would be too great for most politicians.

[Paulus]

Thank you so much for your comments Peter. They have provoked me to think about the relationship between capitalism and poverty. Not in the way most people think about it, I hope. I am working up an article on the subject but it may be a while before it is ready because I need to give myself a bit of a break. I also wanted to post something about Benazir Bhutto's assassination which is coming out tomorrow. Thanks again.