Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Yes, they talk about moral hazard as it supposedly relates to business, while ignoring the intra-business moral hazard. From wiki:
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. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. For example, an individual with insurance against automobile theft may be less vigilant about locking his car, because the negative consequences of automobile theft are (partially) borne by the insurance company.

Moral hazard is related to asymmetric information, a situation in which one party in a transaction has more information than another. The party that is insulated from risk generally has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.

A special case of moral hazard is called a principal-agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his actions or intentions than the principal does, because the principal usually cannot perfectly monitor the agent. The agent may have an incentive to act inappropriately (from the view of the principal) if the interests of the agent and the principal are not aligned.

There is a principal-agent problem in business. That is exactly what you are describing. So you do not disagree with the concept of moral hazard, but rather with the way in which the concept is being applied. Foundational criticism would have to go a bit deeper.

You also underestimate the awareness in ET of the current 'discussion' in the US on financial matters, we had a stream of diaries on that.

by nanne (zwaerdenmaecker@gmail.com) on Mon Apr 14th, 2008 at 06:19:29 PM EST
[ Parent ]
Well, he wrote "If moral hazard is to mean anything then the separation between those taking the risks and those getting the rewards has to be removed. In addition law breaking has to be punished at the personal, not institutional level. Firms don't break laws, people do."

So as I read it, it's the misapplication that is the point--so, if I've got this right (big if there! ;) if one looks at the concept "moral hazard" one discovers that the hazard is of being ripped off by those with more power; and companies may have power, but it is only such that individuals can benefit--with no humans left, the companies could get by on their own, with that dog-deer-humans-dancing-falling-over- animal they've built that Loefing posted--those will be their pets--the ones that built their masters--

So--I see it (robert's diary) as an attempt to deconstruct the concept such that its key elements are clear, and then look at how they can be put together--so faults are with the construction or the deconstruction (might be destruction either way--);

I'm interested in the (de)construction, it makes sense at times to stop and have a look at something, carefully work out the various parts, how they interact.

So if the theme is moral hazard, then yeah, you have to be responsible for your mistakes.

But as that tends to go very heavy on the population--no traffic lights, no glasses, no--

Why no glasses?  Because the concept of being made to pay for your every last mistake is biblical in its judgements--ye have all sinned!  Rather, those in power should simply and every day face the risk of dealing--unarmed, unprotected by any coteries, retinues, armies, militias, or other forms of armour--with the average person--maybe me or you or Robert--such that we personally can hold them to account via the laws of the land--there go those pigs--

Coz lawyers protect you from moral hazard--and they all work for the rich because money also protects you from moral hazard, as does a small milita--unless someone else turns up with better lawyers, more money, and a bigger militia.

Whereas, social structures that teach and practice best practice--praxis--should generate best practice, which can then improve and a virtuouso spiral riseth.

Would be how I'd put it, which is why I don't comment much in these kinds of diaries--all terms (for me) are attempts to nail down water.  Or wood, or rock, or plastic, so sometimes nails are good--they fix things into position, with precision, and the sound is whack whack whack,

I dunno....I think the idea in robert's diaries is to move a step back from the he said/she said and make sure we're all in agreement about what the terms we're using mean, so he sets up his stall and other viewpoints can set up theirs in the comments--maybe I got it all wrong--probably!

Me, I always bang my fingers when using heavy hammers, and if there are rocks, stones, or other sharp and heavy objects I bang into them--

Heh!  Nanne!  I hope you don't mind me going tangential below your comment, and robert, I'm sure I got it all wrong, but I hope you both like these:

Don't fight forces, use them R. Buckminster Fuller.

by rg (leopold dot lepster at google mail dot com) on Mon Apr 14th, 2008 at 08:10:03 PM EST
[ Parent ]
When people go off a tangent they deviate which is odd considering that tangents are straight lines.

There is some good stuff in rdf's diary, like on institutional learning. It's good to think about that.

Free marketeers will reply that the institutional learning comes from businesses failing, others succeeding, ignoring that a systemic crisis which causes a severe downturn once every 30 years cannot exactly set any kind of incentives for the day to day business of a stock company.

We've had that discussion, I think.

The thing is that the institutional rules set down as a case of learning are also baggage and their dissolution is therefore lobbied. And the political system in the US is institutionally corrupt. New regulation will collapse again in this setting.

What we'd need is a fundamental change in thinking that emphasises long-term viability and resilience at least as much as efficiency.

rdf and I pretty much agree on that, I suppose.

And I don't know about glasses, but we really do need no driving lights.

by nanne (zwaerdenmaecker@gmail.com) on Mon Apr 14th, 2008 at 09:09:21 PM EST
[ Parent ]


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