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View Full Version : The Importance of Being Earnest: Moral Hazard & the Free Market




Lightfiend
06-13-2010, 07:46 PM
The concept of “moral hazard” is one that arises often in libertarian philosophy. It stands to reason that the farther a person is removed from the consequences of his or her actions, the more willing that person may be to risk disaster for personal gain. We see it often in the realm of government — politicians willing to sacrifice lives in war because, of course, it is not they who will be subjected to the killing fields; politicians willing to drive families from ancestral lands because, of course, it is not they whose families will be dispossessed; politicians willing to deliver future generations into pauperism because, of course, it is not they whose progeny will become destitute. We as libertarians see these actions and decry both their consequences and justifications as abuses of arbitrary power.

But what of that stronghold of libertarian principle, the supposed bedrock of free market capitalism — the corporation? It strikes me that there are countless instances in which dealing as a single corporate entity may simplify commerce. Yet at its most rudimentary level, such an entity primarily serves to limit the individual liability of its constituents. Would that not entail some form of moral hazard in its own right?

BP will lose billions of dollars in its effort to clean up the gulf of Mexico, and billions more in stock as a result of market uncertainty. The actors, however, who laid the groundwork for calamity will remain relatively unscathed. Tony Hayward may lose his position as CEO, he may never again work as a high profile executive, but with a personal net worth well into the millions he and his family will never go wanting. Federal monetary policy and subsidy programs encouraged many of the risky lending practices that led to the real estate bubble, but the largest banks were themselves responsible for inventing the mortgage-backed derivatives which wreaked havoc on US financial markets. The individual architects and sellers of those derivatives may (or may not) have lost their jobs, but they made their money and are unlikely to face significant punishment in the foreseeable future.

It is individuals, and not entities, who reason and act, and if there is to be any earnest discussion on the topic of individual freedom, it seems it must of a necessity include discussion of individual culpability, as well. Yet calls to drastically rethink regulations governing corporate legal structures are strikingly absent from “mainstream” libertarian dialogue (at least that with which I am familiar). It is time to put to rest the claim that libertarianism and free market capitalism are solely concerned with a powerful elite, profiting at the expense of masses. It is time for liberty and responsibility to again walk hand in hand.

SOURCE (http://www.libertarianminds.com/the-importance-of-being-earnest-moral-hazard-the-free-market)