Markets, hazard and perception

Recent posts to Liberty center on the response of agents in a free society to an uncertain world. Responses to uncertainty range from those grounded in optimism or confidence in the ability of the individual to use individual knowledge to achieve individual purposes to pessimism in the ability of individuals to either process knowledge for their own use. The former is the basis for the planning that Boyes critiques in his latest post. The dismissal of individual liberty is at the heart of the expansive state. If individuals are not up to the task of making decisions in their own interest, then the alternative is state action.

The Boom v Bust video uses humor to identify the absurdity of this argument. But there are several seductive elements of state action that entice support - both from the masses yearning for security and for the elite hungering for power.

The mass of our society have been bombarded with misinformation about the consequences of state action. From an early age, school children learn a very biased view of American economic history - from the New Deal of FDR, to the expansion of the welfare state under LBJ. That is, information is provided to our fellow citizens that fails to consider the economic way of thinking. That is, all actions have costs, these costs may have consequences in the future and that people react to incentives in predictable ways.

So, as Boyes illustrates with the moral hazard of the recent financial crisis, who would not play a game that says - heads I win, tails you lose? That is, I can buy a house, make a profit, keep the profit and move on or, if the house falls in value, I walk away and the taxpayer bears the cost.

In this example, my profit is immediate (upon the sale of the house), the cost is in the future and I do not bear the cost (actually I might bear a tiny part of the direct cost in higher future taxes and clearly I lose liberty with the expansion of the state - but this might be a tradeoff I would willingly make in the face of the potential profit from this transacton).

So, Boyes describes moral hazard and I think it is worth emphasizing the moral component of this consequence.

If liberty is both an instrumental and ultimate value and the markets capitalism are grounded in individualism and freedom, it appears that there can be an argument that markets are moral in the same dimensions.

Coercion, on the other hand, is immoral - the use of force to achieve actions contrary to individual desire. And, as Boyes argues, this coercion leads to moral hazard that destroys wealth.

The state, then, destroys wealth and the moral foundations the support the existence of a free society.