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April 12, 2008

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Nato

As a practical matter, any equivocation over the obligation of subsequent governments to repay debts incurred by predecessors would dramatically raise the risk of lending, with all the predictable effects of available capital and equilibrium interest rates. Perhaps giving capital to autocratic regimes is counterproductive enough to where it should be all but halted, but it would also create entanglements between financial markets and regimes in which a great deal of money is motivating various players to maintain the status quo, not matter how brutal and oppressive. We saw this in Iraq, for sure. If financiers think they're likely to get their money back even after a regime change, the usual suspects might be happier to allow democratic governments rise from the ashes of dictatorships; or even lend *based on* a mutual expectation of liberalization - after all, improved governance gives tremendous return on investment. I believe this is the semi-articulated purpose of the IMF and WB.

The goal should be, as usual, to engineer a system in which self-interested interactions serve the common good rather than promulgate a set of moral rules by which the various actors should behave. Not that this is a perfectly clean division.

Nathan Smith

re: "The goal should be, as usual, to engineer a system in which self-interested interactions serve the common good rather than promulgate a set of moral rules by which the various actors should behave."

Yes, that's a nice goal, the sort of goal economists, who are typically a bit uncomfortable with the concept of morality at least for professional purposes, would like. But I suspect that not only is it impossible to create, as I've heard it said, "a system so perfect that people don't have to be good," but that the appearance of systems where at least a moderate standard of good behavior is consistent with self-interest is usually a side-effect of a commitment to and exercise of moral virtue as such by some group from which the new systems emanate. As a case in point, I think average Americans would be *morally* horrified by the idea of failing to honor the national debt, and as a side-effect of this moral horror, it is also not in our interests to default on the national debt, because a general awareness of our ultimately moral commitments are an economic asset which gives us access to low-interest borrowing (better yet, in our own currency!) which we would fools to forfeit. And yet if we decided one day that honoring the national debt is an amoral question, to be done only to the extent that it serves our long-run interest, investors would rationally conclude that the chances of default had considerably risen, and demanded higher interest rates for the increased risk, which in turn would alter our incentives for default and might well make it advantageous for us to default. We may have a curious case of multiple equilibria in which ethics are one of the determinants of the equilibrium we come to.

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