Moral hazard logic destroys trust because trust requires rule ambiguity

Evidence

The moral hazard logic embedded at the core of public choice arguments covers, and infects, all possible circumstances. Yet in doing so, it mistakes the mechanisms that generate trust—diffuse reciprocity, norms of mutual aid, and so on—for naïve weaknesses that can only be eliminated by more rules and stronger sanctions: exactly the things that eliminate the possibility of trust. While social capital does not trump moral hazard per se, when policy makers view all mutual interactions as agency problems, where one party will inevitably take advantage of another, the only solutions imaginable are the elimination of institutional ambiguity, the tightening of rules, and the writing of superficially complete contracts—which looks a lot like current Eurozone reforms. The problem is that what economists call moral hazard is what normal people call trust. You cannot eliminate the former without destroying the capacity for generating the latter. Without some degree of rule ambiguity and norms of reciprocity, trust cannot emerge. The EU’s political project was built on trust, not the elimination of moral hazard. That’s why it worked. Its monetary project is based on opposite principles. Yet at the end of the day, how can you run an economy, especially a pan-European monetary economy, without trust as its basis? While the German word for debt has the same root as the German word for guilt, schuld, the Italian word for belief forms the English root for the word credit, credere. At their base, money, trust, guilt, and faith are all norms, not rules. Smith’s self-interest and ordoliberal rules can only get us so far. — Mark Blyth, Austerity, 430

Categorization

• DEEPTHINKING: The shorthand ‘moral hazard is what normal people call trust’ plus the etymological link between guilt/debt and belief/credit compresses a genuinely paradigm-shifting argument about money and the EU, worth sitting with.
• XREF: Builds directly toward Mattei’s critique of austerity’s legal fixation, and echoes Coleman’s social capital work on trust as a non-rule mechanism. — connects to: Ethics cannot supply a general rule for when to trust — Niklas Luhmann, Trust and Power, 302; Trust cannot be governed by clear-cut ethical instruction
• SEED: The word-root argument (schuld/guilt, credere/credit) is a ready-made essay hook about how Europe’s monetary union was always a moral project, not just an institutional one.

Broader Connections

• Ethics cannot supply a general rule for when to trust #corroborates (0.92) — Niklas Luhmann, Trust and Power, 302
• Trust cannot be governed by clear-cut ethical instruction #corroborates (0.90)