Date created:29/8/03 Last modified:29/8/03 Maintained by: John Quiggin John Quiggin
1 August 2003
Review of Moss, D. (2002), When All Else Fails: Government as the Ultimate Risk Manager, Harvard Uinversity Press, Cambridge MA, pp viii+465
The past is inevitably viewed through the prism of the present and the imagined future. The emergence of new concerns about the future inevitably involves a reassessment of the past and a rewriting of history in the light of contemporary preoccupations.
This point is nicely illustrated by David Moss, who surveys two centuries of American history, in which he presents the state as 'the ultimate risk manager'. It is unlikely that theorists of the state would have taken this view in the past, or that many previous historians would have presented the development of the limited liability corporation part of the same historical movement as the New Deal.
But it is fast becoming a commonplace that 'risk' is the central idea of the early 21st century. Just as happened with 'globalisation' a decade ago, it is necessary to reassess the experience of the 19th and 20th centuries in the light of new ways of thinking about the present. David Moss has fulfilled this task admirably.
He begins with a nice primer on risk and the history of thinking about risk and uncertainty (an adequate exposition of the subtle differences between these concepts would require a book in itself). It is a striking fact that the concept of probability, fundamental to any formal reasoning about risk and uncertainty, was not developed until the 16th century. Despite some insightful contributions in the 1920s by John Maynard Keynes and leading Chicago economist Frank Knight,serious economic analysis of problems involving uncertainty did not until the second half of the 20th century.
Although probability estimates are now part of daily life, from sporting odds to weather forecasts, the relatively recent development of probability as a concept is an indication that it is not part of our natural mental equipment. As a result, reasoning about probability is typically heuristic in nature and characterized by a range of biases, many of which were catalogued by Amos Tversky and Daniel Kahneman. In particular, people like certain sorts of gambles (those with a lower bound on losses and a small chance of a big payoff, as in a lottery) and dislike others which, under certain consistency assumptions they should rank similarly. Even more strikingly, the way in which a risky prospect is presented or 'framed' may have a large impact on its perceived. As Moss shows, these facts must be taken into account in policy analysis and policy formulation.
Moss distinguishes three phases of public risk management in the United States. The first, 'security for business', encompasses innovations such as limited liability and bankruptcy laws, introduced in the period before 1900. The second phase, 'security for workers' includes Progressive initiatives such as workers compensation and the core programs of the New Deal, unemployment insurance and social security. The third phase, 'security for all', is still under way and includes such diverse initiatives as consumer protection laws and public disaster relief.
In many ways, the discussion of bankruptcy and limited liability laws is the most interesting section of the book. These institutions have been established for so long now that they seem like a natural part of the capitalist order of things. Yet, as Moss shows, before their introduction, they were vigorously opposed by defenders of the free market, who saw them as undermining the principle of individual responsibility and promoting what is now called moral hazard.
This responsibility associated with shareholding was certainly a heavy one. As Moss observes, prior to the introduction of limited liability, the shareholders in a company were jointly and severally liable for its debts in most jurisdictions. That is, any shareholder, no matter how small their holding, could be pursued for the entire debts of the company and made to contribute their entire wealth. Since most of the same jurisdictions allowed imprisonment for debt, these institutions were not particularly conductive to shareholding. In the face of these disincentives, arguments that unlimited liability was the best guarantee of individual responsibility failed to command much support.
A free-market critique more congenial to modern tastes was put forward by the (then newly-established) Economist in 1854. The Economist argued that individuals and companies were free to enter into contracts that limited liability in the event of default. Hence, a specific rule limiting liability was at best superfluous and at worst (if it proved impossible to contract around limited liability) harmful. Although the Economist had changed its mind about limited liability by 1926, this kind of argument has resurfaced again and again, in relation to workers compensation, consumer protection and many other instances of public intervention in risk management.
The shift from an economy dominated by agricultural smallholdings to a manufacturing-based economy in which most households depended on wage employment produced the second of Moss' three phases. In this phase, workers received systematic protection from the impact of industrial accidents, through workers compensation, and from the risk of unemployment, the natural counterpart of wage employment.
Moss presents a fascinating analysis of the arguments used by the advocates of reform to press their case, and of the debates among them as to the most appropriate form of social security policy. In a point of particular interest in the light of current policy debates in the United States (and also in Australia) he shows that health insurance came very close to being included as part of the Roosevelt Administration's Social Security package. It was dropped in the face of fierce opposition from the American Medical Association among others. As a result, Americans turned to their employers for medical insurance, creating a unique and problematic set of institutions for financing health care.
Moss's treatment of the third phase, 'security for all', is brief and focuses on the relatively minor example of disaster insurance. He mentions Medicare and other aspects of public involvement in health insurance, but only briefly. And he omits altogether the biggest risk management innovation of the second half of the 20th century, macroeconomic stabilization policies, based on Keynesian fiscal policy and, more recently, on countercyclical monetary policy. Given the huge literature on both topics, this is perhaps a sensible acknowledgement of comparative advantage.
Moss confines his attention to the United States. He argues persuasively that the risk management devices he describes can be seen as reflections of a distinctively American approach to the role of the state. In this approach, American governments have sought, as far as possible to act indirectly, through institutions that are nominally private (such as the mortgage guarantee corporations Fannie Mae and Freddie Mac) or at least designed to closely resemble private institutions like insurance companies (as in the Social Security system).
Moss' analysis is convincing and appealing for those who have long been puzzled by the evident fact of American exceptionalism. By European or even Australian standards, the American state seems weak and underdeveloped in domestic matters, a sharp contrast with its awesome and largely unfettered military power. Culture-based explanations, harking back to the frontier spirit seem unsatisfactory in view of the fact that for practical purposes, the frontier ceased to be a meaningful concept in 1869 with the driving of the golden spike that completed the first transcontinental railroad.
As Moss argues, the difference is as much cosmetic as real. The American state fulfils most of the same risk management functions as the social democracies of Western Europe, but does so in a way that maintains the appearance, and to some extent the reality, of private operation and individual self-reliance. The result is, in most cases, less comprehensive public provision of risk management than is provided elsewhere, but considerably more than would be supposed from a superficial survey.
The idea that risk could be better managed by individuals and markets than by governments enjoyed a resurgence during the boom of the 1990s, and was an important component of the 'Third Way' thinking of theorists like Anthony Giddens. But the worldwide financial disasters of the late 1990s have undermined this belief. The question of how society can best manage risk in an increasingly diverse community will dominate policy debate for many years to come.
Professor John Quiggin is an Australian Research Council Professorial Fellow based at the University of Queensland and the Australian National University. Professor John Quiggin is a Federation Fellow in Economics and Political Science at the University of Queensland.Read more articles from John Quiggin's home page
