AOM 4 - Insurance and Economic Incentives

From the beginning of time, humans have been pack animals who care for each other. Insurance is an extension of this: we all pay in so that whoever is in need can be taken care of. As Nial Ferguson points out, the more people are in on this sort of system, the better it works. But he later makes the interesting claim that insurance removes people’s incentives to work, using the example of stagflation in Japan in the nineteen-seventies. According to Ferguson, the reason for stagflation in Japan was that the social safety net (a form of nationwide insurance) was so strong that people stopped feeling the need to work! I disagree with this claim.
Firstly I will discuss the argument in general, and then I will talk about the example he gave. The argument is that if a social safety net is in place that prevents people from starving, going without medical care, or dying by various other forms, people will lack incentives, and will therefore stay home. Distilled further: without the threat of death, people do not do work. I see this argument as absurd, but why don’t we, for a moment, assume it to be true. Is this not a shocking indictment of the system Ferguson supports? In Ferguson’s eyes, the optimal economic system is one where all workers are forced to work at figurative gunpoint! I appreciate his forwardness. When it comes to Japan specifically, all that is required is to look at the rest of the entire world over the same period of time. In doing so, one will quickly notice that stagflation was a global phenomenon, affecting countries like Japan (strong safety net) and the United States (extremely weak safety net) just the same. If modern economies with strong and weak safety nets were affected identically, clearly Ferguson's explanation is not quite right.

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