How idiosyncratic a insured and risk mitigated through mutuality in a Civilsed Nation State

Dewey the former President of the US in his book ‘Moral principles’ wrote, “ a country where people don’t care about each others welfare is like a country where blind men leads blind men”.

Alan Greenspan in his book “Age of Turbulence” states that those who have low bearing on economic science can be deter efficient policies to be enacted”. He also says “people who derail efficient policies in a Nation State has fraud in mind.”

As I stated in my previous many posts, the economic agent ie; each citizen of a Nation faces two types of risks, idiosyncratic risk and aggregate risk. Idiosyncratic  risk can be diversified away, other need to be shared.

Legal system is one way the idiosyncratic risk can be diversified or mitigated. Contract Law is a means to do so. Devoid of which the citizen resorts to irresponsible bargaining and cheating each other. In a contract two parties come together, one offers, the other counter offers, and after negotiation they agrees on the terms of the contract. Contracts can be verbal or written. On breach of which strict penalty is imposed even to ‘punitive’ damages where the agent who breaches contracts pays even up to 10 times the damages on top of basic damages.

Law of ‘negligence’ is another law which can be used to insure against ‘idiosyncratic risk’. Here every person is assumed to owe a duty to the other, if there is a breach of duty and there is proximate cause costing damages to anyone he can move against the other causing damages for restitution for negligent conduct.

Even remote manufacturers are responsible for vending unreliable and hazardous products through a retailer. It is called the ‘long arm theory’. GM had to pay high damages to customers for vending through selling agents cars that had brake problems.

To avoid punitive action by consumers retail outlets and departmental stores in US have ‘replacement’ or ‘return’ windows where an aggrieved consumer can get full money back if he is not satisfied with a product with interest on the cost he paid for purchasing it.

These laws are derived from a principle called ‘mutuality principle’ where two parties share the idiosyncratic risk originating in a transaction.

Even the presence of a sign board which attracts a consumer for business transaction in US tantamount to a contract unwritten that the place will cater products that ‘fit enough for standard consumption, merchantability and use”.

Without these laws in a Nation State the culture degenerates, citizen will act like swindlers and thieves and it will turn itself into a Banana Republic with Draconian structure of administration where the endowment of citizen is