Friday, May 15, 2015

Our discomfort with reward from risk leads us astray

Maybe the central dilemma arising from the human sense of self awareness is our failure to solve the capriciousness of nature.  How much of the religious impulse throughout history has been related to the need to define cause and effect in the face of uncertain outcomes?  How many goats have been sacrificed along with prayers for a good harvest?  How many people in the depths of suffering have been banished because their woes were a sign of angry deities?  Einstein echoed the history of human intuition when he insisted, "God does not play dice with the Universe."

The problem isn't limited to the mismatch of deserts and prosperity.  Nature's caprice undermines even the identification of desert.  Even in the various forms of the ancient parable of the ant and the grasshopper, our moral intuitions are fickle.

This discomfort plays out in a discomfort with capital, which at its foundation is reward for risk.  For centuries, human society has settled comfortably in the face of extreme inequality.  Those inequalities always took the form of genealogical legacy and political power.  We aren't uncomfortable with inequality.  We are uncomfortable with uncertainty - nature's caprice.  For centuries, wealth came through conquest and pedigree.  For only a few hundred years has there been the modern acceptance of wealth accumulation through commerce and production, but it seems that there is a human intuition against commerce and capital.  This intuition goes back to our lack of a resolution regarding the ant and the grasshopper.


One idea that seems to enjoy a consensus acceptance is that employment has become ever more insecure.  Corporations which used to embrace a code of loyalty toward their workers now just treat them like numbers on a spreadsheet to be used and discarded.  (Oddly, I don't believe that I have ever heard any opinion expressed about changing loyalties of employees toward their employers.)

But, notably, we have just seen a new record low in the number of new unemployment insurance claims as a proportion of total employment.  There has been a 40 year downward trend in unemployment claims.  This downward trend shows up in Layoffs in JOLTS data, also.  The data says that American workers have never been more secure.

I think the insecurity that is felt is real, but because of our intuitions to be distrustful of capital, we pin these insecurities on the wrong source.  In fact, the reason we are insecure is because we areincreasingly, capital. Skills are capital.  Education is capital.  Capital is risk.  We are not a nation of insecure laborers.  We are a nation of insecure human capital - that special form of capital that can't be traded, saved, or diversified.

I'm not sure this is a problem that can be solved.  We have been regarding the ant and the grasshopper with ambivalence already for millennia.  But, the one place where we will not find a solution is in the selective application of our feeble intuitions and ancient prejudices against private investment and unreliable fortune.

As a first step, we can remind ourselves that education is a form of investment.  It is a form of investment especially prone to inequitable outcomes because of the illiquidity of human capital.  And, looking across the grade ledger of, say, a typical linear algrebra class, what are we seeing if not monopolistic competition?  So, if there is some sort of policy to reduce this insecurity by placing fetters on corporate capital, that policy probably applies ten-fold to human capital, including education.


Don Boudreaux has a great post today about President Obama's recent support of free trade.  Politicians have to genuflect to our rotten intuitions, so that even when they support good policies they often must defend them with the wrong reasons.  Don points to Obama's 5 points in favor of free trade, which are all about producers.  As Don points out, the overwhelming reason for free trade is because it is good for consumers.  I loved his last paragraph:
Celebrating free trade because of the benefits it yields, not to consumers, but to producers is akin to celebrating new life-saving medical breakthroughs for the benefits they yield, not to patients, but to physicians and big pharma.  It misses the point completely.
Our ambivalence about risk is not usually aired explicitly.  Instead, we have many different versions of the story, which use tonal choices to implicate either the ant or the grasshopper.  Within Obama's error on trade, his statement commits this sort of omission.  His benefits all accrue to "workers"  (with one reference to "entrepreneurs").

This is similar to how the Keystone pipeline is defended, as a job-creator, and any profits that are earned on it, if anything, are treated as negatives.  And, as with trade, they miss the fact that the true benefit comes from the efficient transportation of fuels, not from the cost of its construction.

Gains to producers will be shared in a fairly predictable way between capital and labor, but can you imagine if Obama posted 5 benefits of trade that mentioned only corporations and not workers?  Not only are producers the least important benefactor of expanded trade, but the division of income between capital and labor is a particularly uninteresting factor among those benefits.  This is similar to how we frequently hear about how low interest rates harm savers but help "Wall Street".

We freely switch the protagonist and antagonist between the ant and the grasshopper, but we switch their modern representatives along with them so that our palpable antagonists remain fixed.  When the ant is our protagonist, it's a saver or a worker.  When the ant is our antagonist, it's "Wall Street" and its cache is "capital".  We make these switches very easily.  We understand loyalty deeply and unconsciously.


Today, on NPR, the show "Here and Now" had a story on a proposed privatization of our Air Traffic Control system.  The system is, in the words of the host, "antiquated".  It still relies on radar in an age where satellite GPS is ubiquitous.  The host also mentioned that the ATC systems in at least 40 countries are already privately run.  The show didn't go into the details of the system, but by all accounts, it appears to be decades behind the state of the art.

The host asked, "When you have a private entity controlling the funding for air traffic control in the United States, are there not safety concerns because isn't this the same pool of funding that the FAA's safety funding comes from?"

There is concern that the airlines will put their own aircraft, staff, and customers in peril if there isn't full federal operational control over air traffic control.

So far the commenters at the "Here & Now" site are unanimously against privatization.  I have seen no sense of irony from the commenters or the show's host that they are voicing these concerns on a segment where the explicit topic is that the state of the current system is absurdly out-dated.  If the system was already privatized and was in its current condition, the topic of the show would be about tarring and feathering the CEO of the firm in charge.  The system, as it stands, is far outside the condition anyone would stand for if it was private.

She ends with this question, "I just wonder, I mean, there have been discussions about modernizing the FAA and the air traffic control system for decades now without much progress.  Why is it so hard?"

I wish it weren't so hard.  But it is, and I suspect always will be.


  1. Privatize the FAA...and the VA. For a start.

    1. Yes. If they were privatized and managed half as poorly as they are today, there would be marching in the streets to socialize them again. It seems that there is a vestigial biological imperative to consider "profit" demeaning. "Profit" makes everything unclean, in the Biblical sense. There have been many other urges which we have managed to lose in our path to modern civilization. It would be nice to lose this one, too, but if it ever happens, I'm afraid it's decades, if not, centuries away.

  2. I know what you mean. I love reading Nick Rowe's posts, but whenever Woolery opines I shudder. Today's argument for a wealth tax is shockingly, but no surprisingly, ignorant.

    1. Hmm... I wasn't sure what you were getting at, but then I saw your comment at WCI. Interesting.

      Do you think there is anything to the idea that wealth provides utility beyond the potential income?

      Even if it does, there is the question of whether taxation should reflect efficiency or utility equalization. I can accept the concept of this qualitative value of wealth, but I'm not sure if it holds any weight if a wealth tax is less efficient.

      Property taxes are a sort of wealth tax, and I think it may be an effective tax for several reasons. But, maybe the difference between a wealth tax and a capital income tax is mostly semantic. If the tax was applied to wealth with a flat rate, that would favor higher risk investing over lower risk investing, I think, which might have a positive effect. But, as your comment at WCI points out, there are always subtle unintended consequences when we nudge markets from their chosen equilibriums.

      Interesting issue.

    2. There are like 10 things wrong with his treatment.

      1. If wealth/savings provide more benefits than we currently think then wouldn't that be a reason to tax them LESS? You want more incentives to produce thigns that are good, not fewer.

      2. He implicitly assumes the case that there is a linear relationship between wealth and its "other" values. If you can self insure a car with $10,000 in the bank, it doesn't automatically imply that two people with $5,000 each has an equal or greater value than 1 guy with $10,000. Take it to the extreme, 10,000 people with $1 each in the bank means that zero people can self insure, while 1 guy with 10k and 9,999 with 0$ hs 1 guy that can self insure. His post assumes there are benefits to wealth accumulation without even mentioning costs of reducing wealth accumulation.

      3. It is even worse than that- since 1 guy wqith 10k can start a small business with his wealth, which will provide opportunities for the other 9,999 people to increase their wealth.

      4. If there is any variation in people's individual decision making then transfering from savers to non savers converts savings into consumption. Even without considering incentives of savers you end up with less wealth, and more consumption. The better you think accumulation of wealth is, the less you want this.

      its feeding time, but you get the gist. If our current levels of quality of life are due primarily to any one thing it is savings. The invention of savings is by far and away the single greatest thing that has ever happened to man.

    3. Brilliant, baconbacon. Those are all such great points, so well put, I'm embarrassed that I didn't fully imagine them before reading your comments. Your last sentence is a great postscript to my post.