I haven't read all the messages on this thread. Just a quick note out of nowhere. There's ambiguity in the notion of "moral hazard" as it used in economics.
In general, it refers to cases in which insurance (in any form) shifts the "best" actions of people towards more risk. As such, it's a neutral term. Obviously, by definition, the induced actions are good for individuals -- they are "best"! That said, "best" individual actions can be socially good or bad. Moral hazard can have good or bad social effects. In the narrower sense, "moral hazard" refers to socially-bad cases. Often, the distinction is blurred. Also common, unwarranted assumptions about what the social good is are smuggled. In general, insurance means the purchase of non-systemic individual safety (the transfer of non-systemic individual risk) at a premium. If the premium is "actuarially fair" (net policy equals odds ratio times premium), then there's no externality, no free riding. If the insurer is risk loving, he may not need to diversify away his non-systemic risk -- i.e. use the law of large numbers to his advantage. But, whatever happens, with or without the assistance of the law of large numbers, systemic (or global or macro) risk remains. >From the standpoint of social welfare, there's nothing inherently bad in insurance. The problem is that the main, prevailing form of insurance under capitalism (i.e. private ownership) is too narrow. Those with wealth cling to it to lower the variability of their future aggregate returns. They purchase some measure of private non-systemic safety at the expense of others, nature -- even themselves in the long run (that's why I typed "best" above). Their asymmetric position vis-a-vis the uninsured (the property-less) induces in them a most vicious, socially reckless type of moral hazard. But in this general sense, marching in mass against the war, organizing a union, building socialism are forms of insurance. Public ownership is the broadest form of insurance, the only one that can in principle vanish most non-systemic risk. Nobody knows the human powers it could unleash, powers repressed by the pervasiveness of private non-systemic risk. And since insurance won't be asymmetric (everybody is insured), then the socially-bad type of moral hazard can only go down.
