Economics and similar, for the sleep-deprived

A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?

Update: seemingly not

Update: Oh yeah!

Thursday, February 05, 2009

Moral Hazard: A parable

I'm still not talking about the crisis; specifically I'm not talking about all these plans which, at this late date, are still banging on about "moral hazard" and "the need to bail in private creditors" and so on. But I can tell stories:

I once knew a guy who trained martial arts, a lot. He had a proverb he was fond of. He used to say "Pain is just the sensation of weakness leaving the body". And so he kept on training, even when it really hurt, because he knew it was just weakness leaving his body. And it worked; over a period of twenty years, nearly all the weakness left his body. When I last saw him, there wasn't enough weakness left in his knees or ankles for them to even bend. He walks with a stick, of course. Turns out that you probably ought to leave a bit of weakness in there.

All right, let's look at it another way. Once, the Guardian Notes & Queries column had a question in it, asking what the economic consequences would be if suddenly God stepped in and made us all honest, and made it so we all knew that we were all honest. The idea was that it would quickly result in economic collapse; between security guards, ticket inspectors, makers of Tensator queue management equipment, some ungodly part of a modern economy is based on people being employed to check up on one another. It was quite a good laugh as a thought experiment about an economy exposed to a sudden technology shock.

But of course, the world would get used to it, and a new economy would grow up based on our universal trust, and one with a much higher average standard of living, since basically unproductive labour would be replaced by the production of goods and services. What would happen to such an economy if the devil came in and reintroduced dishonesty? Absolute collapse, surely; vast amounts of previously productive effort would have to be diverted once more to constantly checking that relationships which had previously been implicitly recognised to be completely free of risk were actually valid and that every single party to a transaction could be relied upon to meet their obligations. If you had a system of relationships based on more or less unquestioning trust, and then you broke that trust, how on earth could you expect the system to function again until the basis of that trust was somehow replaced?

Anyway, I'm just saying.
17 comments this item posted by the management 2/05/2009 12:16:00 PM

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