Change, Chance, and Politics

We live in a world that can be scientifically (and poetically) described as uncertain, probabilistic, and risky. Politics is defined as the “art of governing,” in other words, managing the affairs of the citizenry. This definition implies the imperative of setting social priorities and making social choices. So, to complete the big picture, we have a landscape that is uncertain, probabilistic and risky, and on that landscape we live in human societies that collectively try to manage their survival as the landscape constantly changes through time. This is how we should conceptualize the political.

This essay is not about the method of social choice, such as voting and various theories of government such as democracy or autocracy, but about the goals of politics given the uncertain state of the world. At the turn of the 15th century, Niccolo Machiavelli, who spent considerable time contemplating politics, surmised that our fate was determined by two factors, in about equal parts: one’s virtù (or character), and pure random chance. A successful “prince,” or political leader, was one who possessed noble virtù, but who was also able to adapt to the changing times. In modern terms, we interpret this to mean successful politics is promoted by institutions that are rooted in timeless principles of human nature, but are flexible enough to adapt to changing conditions. Sometime around the 19th century, science came to accept this idea that the world was not deterministic, but probabilistic. Kings became kings not because of ancestral claims or divine right, but due to a series of random historical events. Governments designed by the people were products of their constitutions, nothing more.

It’s odd that more than a half a millennium after Machiavelli’s insight and more than a century after science’s confirmation, many people adopt a governing philosophy, unwittingly perhaps, that assumes government policy is deterministic, rather than probabilistic and uncertain. Such people believe that if the government passes a law, the outcome is a given. If the government doubles taxes, then revenues naturally double. Of course, if laws were deterministic, we would have no need of courts, judges, or juries, but such inconveniences are easily overlooked or dismissed by believers of a deterministic world.

The salient point here is that the ‘government,’ as a collection of fallible and self-interested human beings, cannot really ‘manage’ the economy. It cannot manage global climate change. It cannot manage its citizens’ political preferences. What it can do, quite unintentionally, is mismanage it all. But we do need functioning institutions to manage social choice, so we stumble along with the best we have, which in our case is some form of participatory democracy. But the governing function of ‘managing change’ is severely limited. The best the government can do is help its citizens to manage the uncertainties of change.

This is not as intangible as it sounds. We have all been blessed by nature with a keen sense of how to survive by managing the risks we face in an uncertain world, as have all living species. Nothing has changed that much in a few million years. Nature manages the risks of change and random chance through biological diversification. We also diversify our risks by pooling them with others for mutual protection. I would guess that this was one of the primary motivations for creating tribes, communities, cities, and nation-states in the first place (the other being our innate sociability).

At this point we should make the connection to modern politics and democratic government. Pooling through diversification is merely a definition of insurance, such as what you buy for your car or your house. And social insurance describes the logic of entitlement programs, such as Medicare and Social Security. Bismarck is credited with introducing the first examples of state-managed social insurance in Germany in the late 19th century. More than a century later, social insurance entitlements make up the largest share of government budgets in all advanced democracies. Should we assume that this demonstrates the best government can do is provide cradle-to-grave social insurance to manage the vicissitudes of an uncertain world? On the contrary.

There is a cost to insurance that sometimes outweighs its benefits. The primary cost is called moral hazard. Insurance can cause people to assume excessive risks. The common example is a driver who drives more recklessly because he has insurance, imposing more costs on the insurance company than they receive in premiums. Another case with social insurance is that Social Security causes people to reduce saving for their retirement, making them more dependent on the program than they would be otherwise. These moral hazard problems show up with deteriorating financials for the pool – in the private case the insurance company would go out of business, in the public case we get ever-increasing deficits in the programs. (Social Security and Medicare are not true social insurance pools, but inter-generational transfer programs—this creates another whole set of problems.) Either way, the pool will eventually fail. Private insurance avoids this fate by monitoring the behavior of its participants and pricing accordingly (i.e., a speeding ticket results in an premium increase). But social insurance, as part of a social compact, cannot discriminate between risky and prudent behavior, so the good risks end up subsidizing bad risks and the bad risk pool grows. In other words, if you get subsidized healthcare, why eat well and exercise? Why not just indulge? Somebody else will pay for it. And that’s what we do and the deficits grow. (Politicians also increase benefits without increasing tax contributions in order to win votes for re-election. This would be like an insurance company approving all claims no matter how frivolous and never raising premiums, kind of like Santa Claus. The company would be out of business rather quickly.)

So, private insurance is always more efficient, cheaper, and more abundant than social insurance. This implies that the government should do what it can to assure a functioning, competitive private insurance industry. Our government has failed us in this regard by hampering competitiveness and fostering monopolies. More importantly, the most efficient form of insurance that avoids all moral hazard costs is self-insurance. We self-insure when we save for a rainy day. We can design tax and regulatory policies that empower self-insurance across the population by allowing for private asset accumulation and diversification. (This essentially is what insurance companies do with your premiums in order to make a profit.) Why can we not have tax-free accounts set up for healthcare costs, educational costs, retirement, and even first time housing purchases? Then we could assume most of our own economic burdens in life that currently flow unnecessarily and inefficiently through the government. Self-insurance also fosters a competitive market in the goods and services we need by creating a discriminating consumer market. Our politicians have made such private alternatives overly restrictive and over-regulated instead of making them more available.

Social insurance, private insurance, and self-insurance are all complementary means to managing the risks of change in an uncertain world. Social insurance must be the last resort when private markets fail, but we should never allow social insurance to drive out the more efficient alternatives offered by a thriving private economy. That is how a free society and a free people will best ‘manage its affairs,’ in a world of constant change and uncertainty.

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