diet coke for breakfast

Tuesday, August 10, 2004

Posted by Jake
False Positive by Jacob S. Hacker

This is a really interesting piece in the New Republic. It goes to explaining something I have been thinking about lately: why when free trade and capitalism carry visible benefits, people reject them. I thought that part of the answer might be that proponents of the free market must labor against a deficit of good anecdotal evidence. It is much easier to pedal out the victim of a factor closing than the consumer who saved 50 cents on canned peas.

Hacker posits another reason: people show more aversion to risk of loss than they show appreciation of a comparable gain. In this sense, people are not being purely rational (much to the economists chagrin) but are still being reasonable. They are afraid of the risks that embracing the free markets entails: the near inevitability of at some time losing your job, the fear of health catastrophe resulting in an inability to earn, flux in the job market, etc. Competitive systems imply that someone is going to be on the losing end even if in the end everyone one wins, and people are averse to being on the losing end.

He also suggests an alternative that might entice people to the free market in spite of their sense of risk. Rather than a governmental program of income redistribution, he advocates the government as insurance against risk. It is not the job of the government to support you, but when you lose your job (it happened to the buggy drivers and it will eventually come to you) the government helps you persist long enough to be retrained to get another and likely better one. He frames this as a sort of "universal risk insurance".

The idea is appealing because it reconciles the liberal and conservative approaches to social welfare, liberals tending to argue for government support and conservative tending to argue against anything asserting that the benefits of capitalism should be sufficient. It is also appealing because it is an answer to the question of how to convince people to embrace what will ultimately be the most beneficial.

I am curious to hear what you all have to say about this, particularly Brian because I think this guy teaches at Yale. Also, could someone please define what a "moral hazard" is for me?


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