Shankar Vedantam on the problems of “social” governmental intervention, including increased moral hazard (HT: Arts and Letters Daily):

While it seems like common sense to pump money into an economy that is pulling the bedcovers over its head, the problem with most social interventions is that they target not robots and machines but human beings — who regularly respond to interventions in contrarian, paradoxical and unpredictable ways.

Too true. So much for homo economicus. I might also add that the unpredictability, or should I say spontaneity, of human reactions in all kinds of situations is pretty strong evidence for the reality of free choice and against mechanical determinism.

  • While it’s true that not all details of human behavior are predictable, this much is certain:
    *incentives matter*.

    This is also true of risk.
    Thus, if one change reduces risk (airbags, helmets), it is likely other, more risky behavior will compensate, so that the total risk profile is changed less than expected by the single variable introduced.

    The moral hazard of big-company bailouts, from Long Term Capital Management bailout through Bear Stearns, has meant that big companies make MORE risky bets, where they get all the benefits of a win, but the taxpayer / inflation sufferer pays the price when they lose.
    That is NOT free market, nor moral, nor good in the long term.