Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Much of the criticism levelled at the various forms of bank bailout (from economists rather than tabloid writers) has decried the heightening of the moral hazard produced as a result.
In brief the worry is this: capitalism relies on individuals/colorations calculating the most efficient use of their money in a risk vs reward payoff; even though it is not a zero-sum game the creative destruction of failed enterprises is a prerequisite for continued change and growth; the motivation for managing capital (money) well is the risk of failure resulting in it’s loss; without the fear of failure capital can be employed in the riskiest regardless of the consequences; government underwriting of this fiscal and monetary collapse means that banks will calculate that in the future they will bailed out again, leading them to take on even riskier positions in the future.
That may not the most accurate or precise definition but it will do the job I hope.
Any how, the question has struck me as to the applicability of this theory to other walks of life, namely does the state create a moral hazard through employment insurance?
The only common capital we all share is our bodies and the ability to turn our activity into useful economic output. We are in effect micro-corporations (although in fact it is more accurate to say that a body corporate is actually just a legal construction of a person that is not physically manifest), and we theoretically chose how best to employ our working capital to maximise gain.
I say theoretical because often we have far less choice than we’d like. I’d choose to be the CEO of the Sutton Trust, but that option is not on the table, some people would choose to invest a few years at university in order to increase the market rate for their work through specialisation, but may not be able to make the upfront investment required to get the long term benefit.
In every day life then the decisions faced are more mundane but like a bank faced with choices as to its strategy, an individual faces different risk paths. To disagree with one’s boss at the risk of trouble, to quit one job to pursue a more exciting opportunity, to change careers to something more rewarding.
But the question arises, is there a moral hazard in that I know that if I fail, I will always receive the ‘micro-bailout’ of jobseekers allowance? In effect the state enters into a long position with me, betting that if it provides me with revenue for a while, I can restructure my CV back into a new job, and the taxes will eventually pay off the government’s investment, plus a nice return. Is one’s choice about exercising the freedom to work for whom one chooses slightly altered by the fact that one will not end up starving, unlike a medieval peasant who chooses to give up tilling the crops and instead decides they’d rather join an exciting new start-up in the crusading industry?
Does the social safety net cause people to take risks, or allow them to? I have no idea but it is an interesting question
