With all the mess that’s been going on with Lehman Brothers suddenly having the market value of snails on toast and Fannie & Freddie Mac falling deeper into the mortgage meltdown morass, I drifted away to thoughts of a radio show.

Once upon a time in a galaxy not too far away, I accidentally turned to KPFT for the news. Now those that aren’t familiar with Pacifica Radio, should know that KPFT out here in Houston is so liberal that it would make Dennis Kucinich a smidge uncomfortable. So on this morning when I’m driving up the street, a call-in radio show host posits the idea that in this country, we are all too eager to privatize profits and socialize loss. So basically when things go well, few stand to benefit but when things go wrong, the ills are passed on to the masses to absorb.

That’s a fair reflection methinks. With all the bailouts - it’s hard to believe that it’s not true. The question is, wherein lies the end?

So dear reader, just think about it, are we just left with a system that privatizes profit and socializes loss? And why is Mr. John Q. Taxpayer left holding the bag?

So we’re being capitalists when we make money but communists when we fail?

Privatizing profit & socializing loss.

Them be fighting words.

I found a wonderful article that speaks of the motivations behind some of the above thinking and why failure and success must be privatized. It’s an article by Joseph Rowlands in The Free Radical. I copy it in it’s entirety lest such words be lost to vacuum of the web. (All copyrights rest with author and/or publisher)

http://www.freeradical.co.nz/content/60/Socialising.php

Socialising & Privatising by Joseph Rowlands

I went to a lecture the other day and one of the speakers called himself an “egalitarian libertarian.” That’s a very interesting mix, so he described what it means. He’s an egalitarian, so he believes that too much inequality is bad, and he generally supports a “safety net.” Which means he accepts the principle of the welfare state. But then he said he believed that other than that, people should be given the maximum freedom they can.

His view was based on a belief that people should be able to make the most of their lives. And to do that, they need the liberty to do what they want. Well, we can all support that notion. But he also believes they should have the financial means to do it as well. Little details like who’s going to fork over the financial means weren’t too much of a problem for him. Politics follows ethics, of course.

And you can see how his view of things is very similar to the standard Democratic Party line. They also believe in freedom in social affairs, and a safety net for the poor. Fortunately they don’t call themselves “libertarians” yet.

But he got me thinking about what that would mean in practice, and why we haven’t had such a thing. You could argue that the Republicans always like to force people to do their bidding in social affairs, where they try to legislate their own religious ethics. But I started thinking about it in a different light, and realized the results of such a system almost require giving up one or the other.

There’s a way of analyzing economic activity. You think about costs and profits. And you decide if each is socialized or privatized. Socialized in this context means to disperse over a large group, whereas privatize means to concentrate onto the person doing the acting.

Generally, socializing costs makes an action more likely to be done, because the full penalty is reduced. Government officials who upgrade to first class when taking flights are a good example. They don’t have to pay the cost themselves, so the cost of the action isn’t a concern.

Privatizing costs makes people more responsible. They have to be careful about losing or wasting money, because they are the ones who ultimately pay.

Privatizing profit allows an incentive to act in a particular way. You benefit from the action if it goes well, so you’re more likely to do it.

Socializing profit kills the incentive. You might still benefit marginally, but it’s usually not worth the effort of doing it.

And now you can think about the combinations of profit and cost.

Communism is a system of socialized costs and profits. You never really benefit from your actions, but at the same time you aren’t hurt by the costs. If you screw around and do nothing, it has essentially the same effect as any action. This makes rational decision-making impossible, because every action leads to the same result.

Privatizing costs and socializing profits is a tough one to enact. Atlas Shrugged had examples of this, where Rearden was supposed to run his factories at a loss so that others could benefit. This is the worst situation for someone to be in. They can never hope to benefit, but they know that they will incur any costs. This is when people shrug. If the government creates laws that have this effect, you’ll find businesses going bankrupt and industries going barren.

The “egalitarian libertarian” above is an example of socializing costs, and privatizing profit. People are allowed to do whatever they want, and costs are essentially covered (or reduced). Whenever this happens, you get irresponsible get-rich-quick schemes that pop up. Poor people lose nothing for gambling their money with bad odds, because they’re guaranteed a minimum condition of living no matter what they do. If they happen to win big, they get to keep the money (minus taxes). The concept of “moral hazard” describes this idea of businesses doing irresponsible, irrational things because they know they can’t lose. A government that says do what you want, and we’ll take care of you, whether to business or to individuals, is always going to encourage reckless behavior.

Privatizing costs and profits is of course the only rational possibility. It leaves incentives, but only for rational behavior. The other three lead to disasters in practice. From reckless behavior, to apathy, to widespread bankruptcies, the outcomes are always undesirable. And each of these outcomes requires further intervention.

The socialized costs and profits kill incentives so the government needs to create new ones. If self-interest isn’t a motivating force, governments turn to fear and violence. Communists resorted to slaughtering their own citizens and secret police in order to try to create “incentives.”

The socialized profits and privatized costs would require literal enslavement of people. Nobody with a choice would ever voluntarily stay in such a situation. Either the government gives up its bad policies, or uses violence to achieve them. Lesser forms of this system happen frequently, though. Profits are still allowed, but are limited. The result is an unwillingness to expand business, to try new ventures, or to take any business risks. Stagnation is the result. This system kills vibrancy in an industry.

And the socialized costs and privatized profits require all kinds of actions to be outlawed. If the system creates reckless behavior, then the government will need to step in and limit the recklessness. It does this by outlawing actions it deems as reckless.

This is why I said the “egalitarian libertarian” would seem to require giving up either the welfare state, or what’s left of the individual liberty. When reckless behavior is encouraged, costs skyrocket. The only solution is to ban reckless behavior. Pretty soon smoking and drinking are illegal, fattening foods are illegal, gambling is illegal, etc.. And the justification for this is simple. If someone else is footing the bill, you have to live by their rules.

The welfare state is incompatible with human liberty, even just the so-called social freedoms. Inevitably every use of force must either perish or multiply. There can be no compromise.