Should government have prevented the oil spill?
Risk and regulation
Life is chalk full of risk. Most everything we do entails it, to varying degrees. There is risk inherent in using a toaster (it could electrocute me or light my house on fire), walking to work (I hope those drivers are paying attention at this early hour!), and even sleeping (i could roll off the bed and crack my head).
In general, the level of risk in everyday activities is pretty low — things with high probabilities tend to have small consequences while things with high consequences tend to be low probability — so I am happy to accept it. We each make some subconscious decision about how to balance risk and benefit. In the case of using the toaster, walking to work and sleeping, I have judged that the benefits (breakfast, paycheck, and rest) outweigh the inherent risk. But there are obviously some things for which I have made the opposite determination – that the risk outweighs the benefits: take swimming with sharks, for example.
In the business world, too, risk is ubiquitous. In fact, gaming risk is basically what business is all about. An individual puts down money to open a business hoping that she will recoup expenses and make a pretty penny. A company offers flood insurance expecting that the premiums will more than cover any costs from flood damage. A financial institution buys up cheap sub-prime mortgages hoping they will get paid off. High risk bets tend to yield high payouts, while safer bets produce lower gains. People buy stocks and mutual funds and government bonds with this idea in mind.
In liberal capitalist societies we tend to find this risk game — both in business and individual life — to be fair. When someone buys a stock that does well we celebrate their success. When a company goes under we say they should have made safer choices. At times, government promotes more risk averse behavior, by enacting seat belt laws and tax incentives for retirement savings. But, as a rule, we are generally OK with an individual taking on risk and benefiting (or suffering) from its consequences.
But often times risk calculus is not so simple, for it is not always about the potential costs and benefits to me of a choice I make. Often it is the case that the consequences fall on others as well. If I lose control of my car while speeding and slam into a pedestrian, that person (and his or her friends and family) suffers the consequences of my choice more than I do. If a mutual fund invests in a risky financial product, it is the investors in that mutual fund as much as the people behind the fund that stand to lose. And as we see so clearly in the Gulf of Mexico, when an oil company fails to take sufficient safety precautions, the consequences can be far greater than lost profit and sunk costs (excuse the pun).
In each of these examples, an individual or businesses is making a choice to engage in an activity with inherent risk to others. More importantly, those others to whom the risk applies are not necessarily making a choice to incur the risk (though you could argue they are in the mutual fund case). Should they be allowed to make this choice and, if so, under what conditions? The answer we have taken in the U.S. is that they should, but under constraints imposed by government regulation designed to lower the risk level. The driver must remain under the speed limit; the mutual fund manager must disclose information about what the mutual fund is investing in; and the oil company must comply with certain safety standards.
But while government regulation may reduce risk in all of these cases, it can never completely eliminate it. The difficult question for public philosophers, then, is this: to what level of risk must regulation reduce these choices for society to accept others’ right to make them?
-Marc
Photo by Flickr user uscgd8 used under a Creative Commons Attribution license.
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