The State Enforces Moral Hazard

“The state has only one mode of being: expansion. It has no internal mechanisms for reducing its power, reach or control. From the state’s point of view, everything outside its control poses a risk, and the only way to lower risk is to control everything that can be controlled.

By centralizing power, the state creates and enforces patronage and privilege. Privilege institutionalizes moral hazard, which is the separation of risk from gain. The key characteristic of moral hazard can be stated very simply: People who are exposed to risk and consequence make very different choices than those who are not exposed to risk and consequence.

The potential for loss (i.e. risk) is an essential input in decision-making and the allocation of resources, capital and labor. Decisions made when the risk of losing have been offloaded onto others are very different from decisions made by those with skin in the game, i.e. those exposed to risk. Decisions made by those with no skin in the game can be high-risk, because the risk has been offloaded onto others.

High-risk bets are generally bad bets. Systems that institutionalize privilege institutionalize moral hazard. These systems are intrinsically unproductive, because moral hazard breaks down the mechanisms that reward productivity and punish costly gambles.

When speculative bets can be placed by the privileged and the state absorbs the risk, the state enables moral hazard. In other words: the state = enforced privilege = institutionalized moral hazard.

The state also separates the consequences of failure, waste and inefficiency from those making state policies. Those working in state agencies do not suffer any consequences should the agencies fail to achieve their public purposes. Since state employees don’t lose their jobs, benefits or pensions if the agency performs poorly, they have no real skin in the game.

The moral hazard that is institutionalized by the centralized state has numerous negative consequences. Authors Franz Kafka and George Orwell addressed these consequences in their writings. · A lawyer by training and practice, Kafka understood that the more powerful and entrenched the state bureaucracy, the greater the collateral damage rained on the innocent, and the more extreme the perversions of justice. · Orwell understood that the State’s ontological imperative is expansion. Once the State has expanded beyond the control of the citizenry, it becomes the haven of those seeking to leverage its power to their own advantage.

Protected behind the thick walls of the state, the few are free to plunder the many without risk of consequence. This is the primary lesson of the financial crisis and the emergence of too big to fail, too big to jail banks protected by the state and central bank. This is how societies fail: centralized power protects the privileged few from consequence, at the expense of everyone else. We can now understand Wallerstein’s characterization of the current system as “a particular historical configuration of markets and state structures where private economic gain by almost any means is the paramount goal and measure of success.”

Any system riddled with moral hazard cannot boost productivity or distribute the gains from productivity widely, as gains are siphoned off or gambled away by the privileged few. Centralized states are not characterized by corruption, favoritism, cronyism, too big to fail banks, fraud, embezzlement, sweetheart deals, insider trading, free-riding, unproductive investments, waste and endemic inefficiency by mere accident. These are the inescapable fruits of privilege and institutionalized moral hazard.”

A Radically Beneficial World: Automation, Technology and Creating Jobs for All: The Future Belongs to Work That Is Meaningful, pp. 106-108, Charles Hugh Smith