What is the root of all evil in business, construction and finance?

Answer: the “moral hazard” problem.

What is the moral hazard problem?

It means that someone else is paying my actions….and if someone else is paying, why should I take due care?

… in fact perhaps I will make things worse if it can benefit me personally.

Examples of Moral Hazard in Action:

Consider the following cases:

• If I rent out a car, and I have insurance (with zero excess): why should I take care of the car? Why would I minimise risks? If were my own car, would I not avoid driving it on road might cause it damage? Wouldn’t I clean it with a dyper at the end of every day. But if it’s someone else’s: who cares!? Like a fellow in our church said: “not my problem”. In this case, I will be making the car worse, if it can benefit me personally.

• If I lend out money - someone else’s money - why should I care if it is repaid or not? I will not care - I cannot care, because it doesn’t matter to me. I will lend it all out to Mexican straw berry pickers (who earn $5 / hour, cash in hand), and Las Vegas crack cocaine addicts. If they repay: great. If not, that’s fine too. If I am a shareholder in the bank - then perhaps I will care. But even then - I won’t: because the government will make me whole…..which begs the question: why should a government bureaucrat care? He will be bailed out by the tax payer. This is why no government program will ever succeed: because a bureuacrat will never spend someone else’s money, with the same care with which he spends his own. And should the tax payer care? Perhaps if he was forced to pay up in specie - yes, the tax payer will object strenuously, but if the money supply spigots could be turned on - then the tax payer will not care. He doesn’t readily see someone sneaking into his wallet, and ripping out the change………and so the cycle continues with an insiduous form of tax: price rises, and the eventual collapse of the dollar. It is as inevitable, as the sun rising and setting.

Moral Hazard in Building and Construction

The same problem exists in building and construction. The consultants are not at all incenvised to:

• coordinate with each other.
• to reduce costs,
• to return answers promptly.

Why not? Because they’re not carrying the can.

The Opportunity

If you can devise a better structure, in which costs can be imputed back to the people who cause them, then, and only then, will the costs of construction plummet.