Opinion: 100 years after the Titanic - and we're still sinking

Search form

Opinion: 100 years after the Titanic - and we're still sinking

Opinion: 100 years after the Titanic - and we're still sinking
Thu, 4/26/2012 - by Chris Gay

Photo: Eddie Justino.

“World’s Largest Metaphor Hits Ice-Berg” -- headline from The Onion, April 16, 1912

America’s finest news source, insightful as ever, was on to something within hours of the great, made-for-Hollywood tragedy. To this day, in fact, science has yet to discover an agenda that the Titanic can’t be reshaped to serve, whether it’s about hubris, vanity or the evils of government. Stay with me.

You will recall that laissez-faire economics – at least the faith-based caricature marketed by the Free-Market Noise Machine for the past 40 years – holds that government intervention of any sort necessarily yields perverse outcomes, or at least outcomes inferior to what self-interested market actors would produce. The Titanic is yet further proof, writes Chris Berg, a fellow at the Institute for Public Affairs (IPA), a free-market think tank in Melbourne, Australia.

What cost so many lives in 1912 was a lethal shortage of lifeboats. Why were there so few? James Cameron’s “Titanic” suggests the reason was aesthetics (too many needless boats would clutter the deck) while others say it was plain old corner-cutting. Mr. Berg says it was regulations.

By 1912, great passenger liners were considered so safe (they were built to stay afloat for hours, even when heavily damaged) that lifeboats were necessary only to ferry passengers to other vessels in an emergency. You didn’t need a lifeboat seat for each and every person aboard. How many did you need? Britain’s Board of Trade decreed 16 lifeboats for vessels larger than 10,000 metric tons. White Star gave the Titanic 20 – but the ship was 46,328 tonnes. The board hadn’t revised its regulations in decades. By the time White Star realized that there were still situations where you might indeed need a lifeboat seat for everyone on board, it was too late.

Anchor a Way

Mr. Berg interprets all this as yet another instance of meddling regulators getting wrong what savvy private actors would have gotten right. He argues that White Star’s idea as to how many lifeboats the ship needed was constrained by the regulatory requirement, and that it’s not White Star’s fault that the regulation proved inadequate. Mr. Berg seems to be hanging his case on a cognitive bias that some psychologists call the “anchor effect,” whereby some numerical benchmark – in this case an outdated one – becomes a baseline that informs and constrains all else. “Once government takes over,” he writes, “what was private risk management becomes regulatory compliance … regulated entities tend to comply with the specifics of the regulations, not with the goal of the regulations themselves.”

In other words, regulation is always futile – actually, worse than futile, because it inevitably produces perverse outcomes that rational market actors wouldn’t. Absent any external regulation, we’re to believe, White Star would have made a more prudent assessment of the number of lifeboats needed – not because White Star was altruistic but because it was selfish. Guided by the ubiquitous benevolence of Adam Smith’s “invisible hand,” self-seeking enterprises reliably produce better (in this case, safer) outcomes than bumbling regulators.

This sort of regulatory nihilism is about as hackneyed a theme as conservatism has to offer. And yet it still has a certain power for people grasping at anything, anywhere, to discredit government. Laissez-faire purists have even ginned up several plausible-sounding schools of thought (see “Public Choice Theory”) which purport to explain that government always fails for the same reason that markets always work: because humans are, above all, opportunistic and self-aggrandizing. Whereas government merely allows the opportunistic to exploit a captive, tax-paying polity, markets channel opportunism to socially optimal ends.

But of course. Just remember how the rational, self-interested owners of the Triangle Shirtwaist Factory bent over backwards to assure the safety of their beloved workers. Or how the efficient, profit-maximizing BP and its partners went the extra mile to protect the fragile Gulf. And need we even mention the decent, self-regulating folks at Lehman Brothers, worried sick lest their highly leveraged real-estate investments burn some innocent pensioner? (Couldn’t you just hug Richard Fuld?)

Public Choice apostles might be inspired here to note that lax securities regulators (actually housed in Lehman’s Manhattan premises) were too inept to notice the accounting fraud that fueled the firm’s failure – once again, the heavy hand of government making matters worse. Problem is, government failed this time because it wasn’t heavy enough. Alas, not a very convincing argument for no government at all.

Two Assumptions in One!

Which brings us to the heart of conservatism’s incoherence when it invokes the invisible hand as the remedy for perverse outcomes. Remember, the great virtue of free markets is supposedly that they allow rational self-interest to guide all decisions. And yet to expect an unregulated White Star, BP or Lehman to forfeit relatively certain, short-term profits to hedge against relatively uncertain, longer-term hazards, you have to assume that market actors are both rational and irrational at the same time.

Mr. Berg himself seems to understand that on some level. When he writes that regulated firms “tend to comply with the specifics of the regulations, not with the goal of the regulations themselves,” he’s conceding that high-risk enterprises are incentivized to provide as little safety as they can get away with, not the most that might be necessary. But isn’t that an argument for prudential regulation, not against?

I understand that Mr. Berg works for an outfit funded by folks who have vested interests in vilifying government, and surely he has scored one for the team with his buzz-generating subject. But once in a while it’s best to turn off the ideological autopilot, lest you end up crashing headlong into an absurd conclusion. It’s one thing to say that regulations need periodic revision, as was apparently the case in 1912. It’s another to suggest that “private risk management” alone would produce safer outcomes. Before you bet the farm that high-risk enterprises are inclined to self-regulate, may I suggest you have a word with Alan Greenspan.

Chris Gay is a veteran of financial journalism. He writes from New York City.

 

Article Tabs

FarmDrop and Open Food Network stress the desire to create positive, systemic social change that disrupts the existing dominance of supermarket provision of food.

Republicans are arguing that Wall Street should have the constitutional right to influence politicians and the investment decisions those politicians make on behalf of pension funds and pensioners.

As the outrage in Ferguson takes on new forms and becomes less openly confrontational, the shooting of Michael Brown has started a nationwide dialogue about race, class and American law enforcement.

The vote on Independence is a moment of unprecedented possibility for Scotland to peacefully reject the U.K.'s failed neoliberal agenda.

Grassroots organizations that once made American democracy strong plummeted in the Reagan era – when political parties stopped representing the views of constituents and turned instead to money.

Charlie Hardy, the 75-year-old former Catholic priest now running for Senate, wants to halt NSA spying on ordinary citizens and overturn Citizens United with a Constitutional amendment.

Posted 6 days 14 min ago

A group of watchdogs at Maplight has introduced an interactive tool to track not only the level and location of political donations, but how the money impacts specific pieces of legislation.

Posted 6 days 19 hours ago

If we want a healthy society that follows its laws and applies them equally to everyone, we must demand a full investigation and criminal prosecutions for everyone involved in the mortgage backed securities fiasco.

Posted 3 days 15 hours ago

The vote on Independence is a moment of unprecedented possibility for Scotland to peacefully reject the U.K.'s failed neoliberal agenda.

Posted 2 days 20 hours ago

From clashes during the Occupy movement to violence this month in Ferguson, Mo., researchers say protests get ugly when officers use aggressive tactics, dress in riot gear and line up like military.

Posted 6 days 3 min ago

Here are the top ten examples of corporate welfare and welfare for the rich.

The U.S. president need only inform a federal judge that Paul Singer is interfering with the president's sole authority to conduct foreign policy – so why hasn't he done it?

McDonald's believes that in an economy where labor no longer can meet basic human needs, it is the government's responsibility to support its citizens.

Huge, explosive fires are becoming commonplace because climate change is setting the stage with higher temperatures, widespread drought, earlier snowmelt and spring vegetation growth.

Sign Up