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30/9/2017

In Praise of Moral Hazard

Why do we need sociopaths [1]? We need them to take risks for us. We need somebody to shrug their shoulders and say "fuck it" otherwise, nothing would get done. And we need that person to be able to play, what Venkatesh Rao calls "heads I win tails you lose" - HIWTYL (or "Hightail"). The sociopaths in our companies need to be passably good at playing a game where when things go well, they take the credit and when things go badly someone else takes the blame to make sure that things don't get messy, most of this blame is diffused using another concept "Hanlon's razor". Hanlon's razor states that one should "never attribute to malice what can adequately be explained by incompetence." So when things go well, a good sociopath takes the credit, when things go badly she shrugs her shoulders and complains generally that you can't get the staff.

Moral hazard - it gets a bad press, but like so many other things, in itself it isn't bad or good, it's the proportion of moral hazard that is either a good or bad thing. The way that I saw this explained which allowed me to finally get it was in a book by Buckminster Fuller - Grunch of Giants. He tells a creation myth about merchants in Venice. When you're a merchant and you own one ship, when that ship comes in, full of goods from far off climes, you're in the money, but if that ship sinks? You're ruined. So at some point, maybe in Venice, maybe somewhere else somebody came up with the idea of the limited company (look, the history of this isn't important at the moment, what's important is that it happened). What's limited in a limited company is the amount of liability if ships sink. But also what's limited is the amount of responsibility. One merchant isn't going to have to live the rest of his life, not only with the opprobrium of being broke, but also with the guilt and disapproval of letting down his friends (because in such a system, most of your money for such ventures is lent to you by your friends).

In a way what the invention of the limited company and limited liability did was take us off the "gold standard" of human business relations - where every business deal was backed up by a real human being that, ultimately, you could supposedly find and ask for your money back. That disappeared with the invention of limited liability. The Wizard of Oz became separate from the man behind the curtain, who, when things went totally tits up could, in most cases, simply run off and start "Sapphire city" and maybe "Ruby City".

Stopping making people responsible for their actions? That sounds like a terrible idea doesn't it? It would be a terrible idea apart from one thing - it generates huge amounts of wealth. Making the consequences of failure, and hence of risk-taking less catastrophic for a single individual allows some individuals to me more risk-taking and reap the rewards of taking those risks. And then lots of other people make a living off of these people - some of them a good living, some of them barely a living, but it's a living.

Of course, every now and then, things go crazy. The ability to form organisations that aren't backed by a real individual who really has money (and whose money is backed by gold) results in being able to sell shares in this new kind of entity, a limited company, which in turn enables people with a weird mathematical bent to sell things like futures - promises to buy and sell shares in the future and then that leads to a whole bunch of other derivatives which at some point lead to someone thinking that's a good idea to sell some of the "good risk" on a loan to one lot of people and the "toxic" risk to someone else. And it some point the whole thing reaches a point where no one understands it, and at some point beyond that, it crashes. And the crashes are bad. So moral hazard is bad - right?

Er no. Don't think so. What's wrong, on occasion, is the level of moral hazard. Don't ask me what the right level is, seems to me that that's a question for the whole of humanity to wrestle with. The only two things I know are that the right level isn't zero and there is such a thing as too much.

[1] I'm not really happy with this terminology, but it's the terminology that Venkatesh Rao uses and it's a separate exercise to come up with your own. I'm starting to think that there might be a mapping between these categories and more standard personality types e.g. the Jungian types of King, Warrior, Magician, Poet. The mapping would be King = Sociopath, Warrior = Clueless, Magician = Loser, and then there wouldn't be a mapping for Poet. One of the interesting things about this classification is that it instantly brings with it a whole load of fascinating commentary on the nature of kingship by people such as Shakespeare e.g. King Lear - King gets old and forgets the rules of being a sociopath, his sociopathic daughters eat him alive and his Loser daughter is no fucking help at all. King Lear stands about in the rain with his Poet/Fool who ends up being hanged. Does Edgar get enough of an unsentimental education from being fooled by his uber-sociopathic brother? Does it get completed when he gets to watch his blind dad try to commit suicide by jumping off a non-existent cliff in the middle of a field? Mmm. Maybe.