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moral hazard: now coming to your neighborhood!

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David Cameron, today, in a speech on the riots:

We talk about moral hazard in our financial system – where banks think they can act recklessly because the state will always bail them out…

…well this is moral hazard in our welfare system – people thinking they can be as irresponsible as they like because the state will always bail them out.

Impressive. We’ve gone from metaphorical slight of hand in one direction (the national economy is like your household economy, when dad’s out of work then it’s time to cancel the sky tv etc.) to exactly the other (the poor are like bankers who when over-protected by the state act badly) with hardly a blink or a skip. I guess, given what’s happened with the banks, he’s implicitly saying that Sure, we fucked that one up with the bankers. But we’ll get “moral hazard” right now that we’ve been given a second chance with the welfare recipients! 

Interesting thoughts to be had, I think, on the matter of “moral hazard” in general and its deployment both in the discourse of banking and, now apparently, welfare. It doesn’t take much research to see where the interest might lie – wikipedia lays out some of the issues very clearly. First of all, the meaning of  moral in moral hazard is historically complicated. The phrase seems to have been around since the 17th century, and early on meant what it sounds like (moral = ethical etc) but over the years came to mean simply “subjective.” (This makes sense – not lots of room in economics for morality in the usual sense….) Obviously it would be better to work this through with something more in depth than wikipedia, but for now, as it says there: “The concept of moral hazard was the subject of renewed study by economists in the 1960s, and at the time did not imply immoral behavior or fraud; rather, economists use the term to describe inefficiencies that can occur when risks are displaced, rather than on the ethics or morals of the involved parties.”

In short, what the term means is something like this: When I rent a car and take out the full insurance policy, I am obviously far less careful about where I park the car than if I was uninsured. It is not a matter of “morals” – I am not behaving unethically when I do this – it’s not my “duty” to the rental company to go out of my way to protect their vehicle. It’s simply the fact that I’ve already paid, say, Enterprise $25 for cover that makes it a dumb bet for me to worry about parking the car in a private lot rather than on the street for free. Were I to forgo the insurance – or were Enterprise not to offer me any – I would be faced with a decision… a decision grounded in tension, in precariousness. I could either invest some of my money in protecting the rented vehicle or I could take my chances with the street. The same goes for banks: if financial institutions have some reason to believe that they are “too big to fail” no matter how badly they perform, then there is an incentive to take on risks that they wouldn’t otherwise take.

What Cameron is up to here is taking advantage of the etymological blur and definitional over-determination of a term of economic art. When he applied “moral hazard” to welfare recipients, he means us to hear the ethical dimension that’s not really meant to be there… very much rhyming with his new meme of Britain’s “moral decline.” But what is clear, if implicit, in Cameron’s analogy, is that the flip-side of the moral hazard is precarity. Borrowing an often misunderstood economic term, he’s found a phrase that allows him to advance a deeply pernicious rebranding of welfare while sidestepping that perniciousness with the murky language of morality. (When the term is used in its vulgar sense, no one is in favor of “morally hazardous” things…) While we would definitely prefer our banks to live precarious lives – fearful that if they fuck up too badly they will, in fact, pay the price for their missteps – I’m not sure that we want a definition of social welfare that sees it from the eyes of the insurance actuary: social welfare is that which encourages non-optimal behavior.  The riots become equivalent to someone parking the rental car in a stupid place – or even taking advantage of an insurance policy to roll the car off of a bridge. Thus it’s the insurance itself that has to go – or in this case the benefits, which according to the logic of “moral hazard” can be seen to have indirectly but significantly caused the riots.

Further, precarity moves from being – in the discourse of power – a naturally-occurring side-effect of economic development and change to a desirable condition in and of itself, desirable in that it promotes “good behavior.” Of course we’ve known for a long time that the latter is the case – but it’s frightening to hear it straightforwardly adopted as a desired end of the government, a plan. 

More to say, but have to get back to revising my book. Sorry that this is a bit notebookish / sketchy…

Written by adswithoutproducts

August 15, 2011 at 12:59 pm

Posted in precarity, riots