Conversations in which the participating talk past each other have an odd pull to me -- I always have the idea that somehow I can get the other person to understand the way I'm looking at things, but in this case our differences seem fairly irreconcilable. As best I can figure out, Bruenig's issue is that he thinks proponents of capitalism need to come up with some sort of unified philosophical principle which explains why capitalism should exist (investors should be allowed to invest in companies and achieve profits in return, etc.) However, he holds a very abstract view of what's going on in an investment relationship. The question he kept coming back to was basically the same one which I'd quoted on him on in his discussion of risk in the post. Here he is via Twitter:
@Brendan_m_Hodge How can two people do exactly the same things take exactly the same risks and wind up VASTLY unequal from it?
— Matt Bruenig (@MattBruenig) October 3, 2014To my mind, the problem here is that he's seeing the action as "taking a risk" rather than "investing in Company XYZ".
Taking a risk, clearly, is not itself going to result in a result. If risks were guaranteed returns, they wouldn't be risky. Risk is simply a way of describing that the thing which the investor is actually doing (investing in a venture) has only a certain probability of working out.
This seems like an example of how trying to work in a totally abstract fashion when looking at an activity which takes place in the concrete world can lead you into certain confusions. Bruenig wants to look at the question as if "taking a risk" or "making an investment" is something which is done in an abstract sense, rather than being a relationship between the investor and some form of venture. Sometimes, admittedly, people are pretty abstract in their investing choices. For instance, my in 401k I have a lot of my money invested in an S&P 500 Index Fund. What funds do is simply invest money in the stock of companies listed on the S&P 500 Stock Index, thus mirroring the growth of the index as a whole. Clearly, in that situation, I haven't done a lot of thinking about the individual companies involved. However, I do still have a relationship, though a couple steps removed, in that I have given money to a fund, whose managers have committed to buying shares of stock in the various companies and balancing those holdings to reflect the return of the index as a whole. In other cases, decisions to make an investment are much more personal. I wrote a while back about the one "brilliant" investment I made in my life -- buying Apple stock back in 1996 because I had a deep belief in the quality of the company's products. (The fact that I put very little money in at the time and pulled a lot of it out later means I'm not rich by any stretch, though checking to write this post I see there's been a nice stock split since I wrote the post in 2011.) Again, though, it's significant that I invested in a specific company, I didn't merely "take risk". (Another time I invested money in a company I was fascinated by which built rocket boosters and it promptly went out of business. That's about when I realized that Apple aside I wasn't much of a stock picker.)
I'd tend to say that trying to come up with a unifying principle of what people should be rewarded for and then inventing an economic system that will reward that is itself a somewhat doomed endeavor. I have no real faith in invented economic systems. Indeed, I question where there is an economic "system" as opposed to a set of cultural institutions and expectations guided by applications of moral reasoning to various types of situation. One of the things that I think is good about "capitalism" is that it's a system which emerged gradually as people did this work of applying moral reasoning to different types of market transaction. If Malcolm invests in Jerome's venture and Jerome agrees to split any profits with him, then Malcolm profits if Jerome succeeds because Jerome, in justice, owes Malcolm the promised share of the return. You can't look at Malcolm's action of "taking a risk" and try to come up with a justification for why that should be rewarded in the abstract, because it's through Jerome's relationship with Malcolm and his just action in relation to him that the profit emerges.
There are a couple definitional problems. MB would be right if he said that two people doing the same thing in a market should earn the same result: if you invest $1 in XYZ at the same time, same class of investment, you should get the same payoff. If you don't, there is something unfair in the market.
ReplyDeleteBut taking 'the same risk' isn't that at all. That is doing two things with a measurably identical statistical distribution. Those people do get the same 'central tendency' of payoff, but some win, some lose. This is like investing the same amount of money in two different stocks, each with the same basic properties but not correlated together. Risk generates inequality. That's the nature of risk - it produces variance from uniformity.
Now, we can discuss two things:
1. Should risky behaviors on the whole payoff more than you put in?
In this case, it is more an issue of delayed consumption than an issue of the risk itself. The challenge is that delaying consumption inherently risks some loss in value (future discounting) including the probability you may die and not get to consume at all. So, you are trading some chance of not enjoying the resources for some additional return in the future.
2. Should we allow any increases in inequality?
This is a very simple discussion in some sense - everything conceptually has an inherent risk. You buy a house, there is some risk that even an identical house will or won't burn down. By taking any particular action, there is random variation from the central tendency of the outcome you abstractly intended. We can't abolish this, but some people would love to use regulatory mechanisms (like mandatory insurance) to try to do so. The inherent problems are friction and moral hazard. People may be less prudent, and the system as a whole becomes so cumbersome that society grinds to a halt.
I think your summary statement is very telling. "...because it's through Jerome's relationship with Malcolm and his just action in relation to him that profit emerges." (Emphasis added.)
ReplyDeleteThis is the humane portion of capitalism emerging. It's about how capitalism is a set of rules that facilitates relationship-building among people, and how those relationships allow positive economic activity to be rewarded.
As you note, the risk is a sideline. It's a chance that things won't work out. This is an uncertain world, and risk captures that.