There are certain lightbulb moments in political economy: the first time you understand price fixing as it relates to shortages and gluts; the first time you understand minimum wage in terms of price fixing; the first time you understand opportunity costs the way Bastiat meant when he wrote of the seen and the unseen; the first time you grasp what is meant by externalization of costs, the tragedy of the commons, moral hazard…

Jörg Guido Hülsmann’s “The Political Economy of Moral Hazard” is the type of essay that turns on the lightbulb. It’s not that I hadn’t grasped the concept of moral hazard before. I had. But somehow JGH puts it all together in a way that seems so simple and obvious and yet it helps pieces slide into place that had perhaps been at odd angles before. It is one of those clarifying essays that won’t let you see the world the same way again:

Moral hazard is the incentive of person A to use more resources than he otherwise would have used, because he knows, or believes he knows, that person B will provide some or all of these resources. Many economists have concluded that moral hazard entails market failures.

Jörg Guido Hülsmann shows, however, that moral hazard arises anywhere there is a separation of ownership and control — and further, that moral hazard entails expropriation when ownership and control of a resource are separated without the consent of the owner. This is, in fact, the essence of government interventionism: institutionalized uninvited co-ownership. FULL ARTICLE