March 16, 2008
Individual Responsibility
The Erosion of Individual Responsibility-BECKER
Hardly a day goes by during this housing crisis that the media does not report on families in foreclosure proceedings, or in arrears in repayment on mortgages that had close to zero down payment requirements and low "teaser " interest rates. The many excuses offered by some home owners for their plight, and also eagerly by the authors of these human interest stories, is that the borrowers did not understand that these introductory interest rates might rise a lot after a few years, or that they would have negative equity in their homes if housing prices stopped rising and began to fall. An obvious alternative explanation for their behavior is that they gambled that the good times would continue indefinitely.
This type of response to failed decisions is not unique to the present housing crisis, but is part of a strong trend toward shifting responsibility to others. Women who sign a pre-nuptial agreement specifying the amount of their husband's pre-marital wealth that would be theirs in the event of divorce often try to have the agreements overthrown in divorce litigation. They claim that they did not understand what the agreements meant, or that their husbands took advantage of them in other ways to get them to sign the agreements. Usually they signed simply because that was the only way they could marry the men they very much wanted to marry, perhaps in part because the men were wealthy.
Many criminals who confess to or are convicted of serious crimes try to have the courts excuse or mitigate their behavior. They allege that they had uncaring or abusive parents, or that fathers, relatives, stepfathers, or other adults molested them as children. Abusive treatment is awful, but still the vast majority of children abused do become law-abiding and responsible adults. That is a major fact that courts should pay attention to.
Successful attempts to shift the responsibility for bad decisions toward others and to society more generally create a "moral hazard" in behavior. If individuals are not held accountable for decisions and actions that harm themselves or others, they have less incentive to act responsibly in the first place since they will escape some or all of the bad consequences of their actions. It does not matter greatly whether this moral hazard resulted from the shifting of blame for unsuccessful actions to the "small print" in a contract, to an abused childhood, to a mental state, or to many other efforts to shift responsibility away from oneself.
An important foundation of the philosophy behind the arguments for private enterprise, free economies, and free societies more generally, is that these societies rely on and require individual decision-making and responsibility. This philosophy not only emphasizes the moral hazard reasons to require individual responsibility, but also "the use it or lose it principle", a colloquial expression indicating that various mental and physical capacities wear down and erode if they are not used on a regular basis. This principle implies that people who are accustomed to having other persons or governments make their decisions for them lose the ability to make good decisions for themselves. Free societies lead to better decision-making partly because men and women accumulate more experience at making decisions that affect their well-being and that of others.
Of course, I recognize that not all individuals are equally capable of making decisions in their own interests. Clearly, the mentally retarded have trouble understanding complicated decisions. People sometimes get fooled by how contracts and transactions are presented to them, perhaps because of cognitive quirks. College-educated persons generally manage their financial assets better, and respond more successfully to many types of economic, health, and other stresses, than persons with less schooling. For example, educated residents of New Orleans reacted more effectively to the challenge of the Katrina hurricane than did high school dropouts. Similarly, the anarchy in Russia following the collapse of communism greatly lowered the life expectancy of all Russian men except those men with a college education. These men continued to improve their life expectancy throughout the economic crisis that engulfed Russia.
Still, greater practice in making decisions, and greater responsibility for the consequences of one's decisions, usually significantly improves decision-making by the vast majority of adults, regardless of limitations in their education and cognition. Moreover, many of the decisions and actions that do not work out well are not due to low education, inability to understand what is going on, or biased and incorrect information. For example, the sub prime mess that continues to devastate financial institutions of the United States and elsewhere is not due to the limited information given to borrowers since this crisis has also financially ruined many highly educated and sophisticated bankers, hedge fund managers, and others with years of experience dealing with complicated financial assets. Borrower and lender alike, regardless of their financial experience, were caught up in the atmosphere brought on by a bubble that seemed to promise perpetual good times in financial markets.
What if anything should governments do to help out in this present financial crisis, mindful of the many kinds of moral hazard that are lurking, but also mindful that the financial structure is delicately balanced? Despite the moral hazard risks, interventionist policies might be justified not because some borrowers or lenders were taken advantage of, but if these interventions would help the economy recover more quickly, and insure that the recession is neither prolonged nor deep. Still it is difficult to see the merits in the Fed's efforts to help the sale of Bears Stearns to JPMorgan Chase by guaranteeing many billions of mortgage and other assets of the company.
Individual Responsibility--Posner's Comment
Becker makes two principal points in his interesting post: that free enterprise encourages people to take responsibility for their actions and thereby make better decisions; and that there is "a strong trend toward shifting responsibility to others."
I would qualify these points as follows. Free enterprise requires individuals to make a variety of decisions, concerning both production and consumption, that in a socialist system is the responsibility of government officials. It does not follow that people in free-enterprise societies "take responsibility," in some psychological sense, for their actions. The tendency to blame others when things go wrong is deeply rooted in human nature and I imagine no less common in America than in any other country. In fact, in a free-market system, competition places significant limitations on the freedom of choice of consumers, investors, and workers.
But has the tendency toward shifting responsibility for our actions to other people perhaps become more common over time? Maybe so, with the erosion of belief in free will. In the traditional sense of that concept, a sense most highly developed (so far as I know) in Christian theology, uncoerced decisions, such as a decision to commit or refrain from committing a crime, are deemed to be uncaused. They are deemed the "free" choice of the person making them, so that if he makes the wrong choice he has no one to blame but himself. (There is an odd exception: some Christians believe that a person can be "possessed" by the devil, in which event he is not responsible for his actions until the devil is exorcised.) I find it hard--maybe for lack of imagination--to believe that decisions have no cause. I assume that they are determined by the balance of advantages and disadvantages as it appears to the decider, though he may not be fully conscious (or conscious at all) of the considerations that are moving him. Those considerations are influenced by background, intelligence, experiences, and other factors most of which are not, in any meaningful sense, within a person's "control."
On this view, to call a person "responsible" for a decision (such as the decision to take out a no-down-payment mortgage with an adjustable interest rate) is just to say that his process of weighing the pros and cons of the decision was not overborne by force or fraud or thwarted by a mental deficiency. The decision may not have been blameworthy in any very deep sense; it may have been foreordained by psychological factors. Becker mentions "greed." Why are some people greedy? Because they choose to be bad? Or because their psychology, which they are not responsible for, has produced in them an abnormal demand for money? All "freedom" means is not being subject to certain kinds of coercion. Freedom so understood expands the opportunities open to people, but how they exploit their opportunities is the product of the interaction of their genetic and financial endowments, their upbringing and other environmental factors, and their good and bad luck.
Moral hazard is thus not a defect of the will, but a rational response to one's opportunity set. If one has medical insurance without deductibles or copayments, the marginal cost of medical care will be low (even zero), so one will consume more of it. If one is confident that in the event of a flood or an earthquake there will be a government bailout, one will buy less or no flood or earthquake insurance. The government's bailing out of investment companies, banks, and mortgagors will induce those entities to take more investment risks in the future than they otherwise would, and so will increase the risk of future housing bubbles and credit crunches. This has, I think, always been so. That is, there was never a time when, because people were averse to taking advantage of opportunities to shift costs to other people, moral hazard was not a social problem.
Criminals will sometimes try to place the blame for their crimes on a bad upbringing. That is nothing new. A criminal (or his lawyer) will make any argument that might reduce his sentence; he would be irrational not to do so. And it is plausible that a bad upbringing, along with a low IQ, increases the likelihood that a person will become a criminal, by reducing his alternative legal opportunities. But as Becker points out, most people with a bad upbringing (and equally most people with low IQs) do not become criminals. This has, to my mind, a practical rather than a moral significance. It suggests that the threat of punishment can deter even a person who has had a bad upbringing. So by adding that threat to the considerations that a person will weigh in deciding whether to commit a crime, society can reduce the crime rate. We may even want to punish the criminals with the bad upbringings more heavily than other criminals, in the belief that they can be deterred only by a threat of heavier punishment. On this approach to crime and punishment, we punish criminals not because they "freely" chose to do bad things, but because by punishing them we can at tolerable cost reduce the prevalence of activities that generate net negative social costs. We make people do the "right" thing not by appealing to the exercise of their free will but by increasing the cost to them of doing the wrong thing. Fortunately, few judges, whether or not they believe in a strong sense of free will, allow the excuse of a bad upbringing to mitigate punishment.
As for the people who took out risky mortgages in the expectation that house prices would continue to rise, they should not be bailed out (that is the moral hazard problem) by government even, I think, if they were victims of fraud. But if they were victims of fraud, they should have legal remedies against the people who defrauded them. Of course, if there were no legal remedies against fraud, people would be more careful--but they would be too careful; they would incur high costs of self-protection. It is cheaper to punish fraud, just as it is cheaper to punish burglary than to tell people to fortify their houses.