A role for government is to insure against every possible risk that markets do not cover, says Harvard Business Professor David Moss:
…one of the underpinnings of our living standards is government’s willingness to reduce risks by being society’s insurer of last resort.
This is because a notable flaw of the free-market system is the inability to create risk markets for everything.
“Most markets operate well, but one market which has never been nearly complete is the market for risk,” he said. “You can buy insurance in case your house burns down, but you cannot insure against the price of your house going down. Or against a decline in your wage or salary at work.
After reading this, I couldn’t help but to think about Hoppe’s Natural Elites, Intellectuals, and the State.
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Heh heh.
this old argument self-defeats magnificently: If ( Big IF) the market can’t solve a risk problem, that problem will definitely be insoluble in the hands of any bureaucrat, or collection of bureaucrats.
David
Putting aside whether you’d NEED to insure price-declines on your house if the Fed wasn’t around, the market HAS produced such insurance, imminently available after many years of regulatory hurdles (of course): http://www.cme.com/trading/prd/env/housingover16250.html
I just heard a story about revenue loss/interruption insurance, especially useful for municipalities in hurricane-stricken areas. One municipality took out a revenue interruption policy 6 months before Katrina struck, and was able to maintain services and payroll even when their taxpayer base was absent. Apparently, many private companies take advantage of this type of insurance, and municipalities are starting to take notice. It’s relatively inexpensive, but one of those products that really makes sense.
Yes, the State will use your money to insure you whether you want it or not.
There are only two ways that the value of your home can go down. The first one is the destruction of your own property – either naturally or by direct human action. The other is to have voluntary actions actions of other people in your neighborhood effect your property. The best only real way to prevent the latter is to go around with a war club preventing other peoples’ voluntary actions. This is were the government comes in.
The market solution is great – as long as it never resorts to limiting the actions of others. Which I suspect it does not.
Any market solution (to preventing one’s neighbors from doing things that devalues one’s property) would limit the actions of others by definition. They may take on that limit voluntarily, or you would have a claim for some abstract destruction of value – if your property goes down because they destroy something tangible on your property, say a garden, shed, or garage, that is actionable. However if it loses a greater value because they create nusiances (odors, noises, blocking scenic views, etc.), why is that so different?
I know the theory – if the original owners weren’t creating nusiances before, they don’t “own” whatever abstract property the nusiance destroys, it is somehow owned by those who didn’t have to put up with the nusiance.
I don’t have a link, but it was described – I think by mises or rothbard – in the railroad engine producing sparks that would burn a farmer’s crops – who owns the land the sparks land on? If the farmer owned and used it first, he would own it and could sue the railroad, otherwise if the RR owned it first, the farmer is out of luck. (They don’t cover the case where the RR introduces a bigger engine with more sparks).
Government might be a blunt instrument, but it is not as if the market isn’t going to do surgery if the same goal is to be obtained. Neither are “gods”, though the former is much like a devil who is filled with pride and greed and lust and wants to consume and destroy.
Today’s Mises quote is about something I keep asking about:
The idea that political freedom can be preserved in the absence of economic freedom, and vice versa, is an illusion. Political freedom is the corollary of economic freedom.
While most will recognize the problem with political coercion, most ignore or don’t admit economic coercion, or don’t consider it coercion (maybe because it is in the negative – instead of having to actively shoot you if you won’t agree to become my slave – isn’t that a free choice since there are two alternatives – I can leave you trapped somewhere isolated where you will die of starvation or dehydration if you won’t agree to become my slave).
Political freedom can destroy political freedom, but I don’t see that Economic freedom can’t be equally abused.
And we again miss the third column – volunteer organizations. I just finished “The Johnstown Flood” in audiobook. I would recommend it to everyone here just to see how things were done in 1889. The disaster was equally uninsurable, but everyone got together and sent massive aid to Johnstown. There was a small use of the army but other than keeping peace it would not have been missed. Society is not two dimensional, with the state and the market, it has a third dimension. Mises.org and LRC to a large extent are part of that 3rd dimension.
I think proper insurance companies might straddle the market and volunteer sides. One problem is that the future is unknown, so it works until the risk becomes excessive. Insurance is based on measuring and spreading risk – if 1 in 100 cars will be damaged, then it makes sense for 100 people to pay 1/100th of the price of a replacement car into a fund. Or even 2/100th until some is saved up after low risk years. Then the main parking structure collapses and 80 of 100 cars are wrecked…
The problem is just like fractional reserve banking – the insurance company will assume they will only have to pay on a fraction of policies, just like the bank assumes only a fraction of depositors will demand cash. It works until it doesn’t. If the insurance company had to have in reserve physical gold equivalent of the price of an entire car for every auto policy, it woudn’t be affordable. So how are the two different in that they both expect to pay only a fraction of clients and fail if this fraction grows too large?
I saw someone who wrote a book about the insurance industry (he might have been a lawyer who sued) – but you see a lot of shifting. Hurricanes are wet, so if your house is damaged, there will be water damage. The insurance agent who sold you the hurricane rider will now insist that it was “a flood” and so is not covered, although all the water came in the form of 100+mph randrops, not any torrent or overflow, and if you disagree, get a lawyer. And it works on the other side – the furniture that was damaged months before is now part of the claim.
The one thing this author didn’t suggest is starting his own insurance company, charging whatever the necessary premiums are, and delivering on the promises strictly.
I think people prefer a game where they pay cheap rates up front (It is a pleasure car and I never drive it to work…) but then get to play a game when they file claims. Both sides deserve each other, but realize it is based on deceit. Fraud on both sides, even with regulation.
Professor Moss is wrong in two ways: 1) Risk insurance isn’t a need, it’s a luxury. 2) Anyone cany insure against anything by saving money. It’s the best insurance against long term illness, job loss, storm damage, etc.
Tz:
“The problem is just like fractional reserve banking – the insurance company will assume they will only have to pay on a fraction of policies, just like the bank assumes only a fraction of depositors will demand cash. It works until it doesn’t. If the insurance company had to have in reserve physical gold equivalent of the price of an entire car for every auto policy, it woudn’t be affordable. So how are the two different in that they both expect to pay only a fraction of clients and fail if this fraction grows too large?”
The similarity between FR banking and insurance is extremely superficial. A checking account is a demand deposit. It is the same as storing your physical goods with a storage company and expecting at any time, to be able to go to storage and remove them completely. It is fraudulent for that company to lend out most of your goods on the premise that you will seldom ask for all of these goods in storage back at once.
In contrast, there is no inherent fraud in insurance. It is easy to see that something like house fire insurance is something that can be provided because the likelihood of house fires is low and can be predicted from statistics. The holder of insurance does not own the value of the claim if his house never burns down. One does not buy house insurance on the plan and intention to definitely one day collect. One plans, hopes and intends on never collecting. Collecting the premium is the last resort after doing what you can to avoid a fire.
To me, this makes the two scenarios so completely different as to render the comparing the two useless.
Roger, it might be more appropriate to say that insurance isn’t a right (except in the case of ‘self-insurance’ that you mention). The distinction between needs and desires (luxuries) is a difficult one to make.
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