The Rhetoric of Bearing Risk

by Henry Farrell on May 29, 2009

This “common trope”: (this particular example is taken from Marc Ambinder) in discussions over the auto industry seems to me to be based on faulty logic.

Bondholders are kicking and screaming, but it appears as if General Motors Corp. is headed for an orderly bankruptcy, and the Obama administration is about to be handed the keys to a venerable corporate institution. Again. And again, the administration seems to be rewriting the rules of capitalism to fashion a deal to its liking. Purists — and virtually every academic economist one happens to encounter — wonder what happened to the once inviolate principle of rewarding risk-takers. Unsecured creditors will get less of a stake in the new GM than its employees, and you can forget about poor unadorned stockholders.

As I understand it (commenters may have different rationales), the idea that people should be rewarded for taking risk is that people making risky investments should receive higher returns on those investments in order to compensate for those risks. In capitalist systems, you often see the argument being made that the owners of capital should receive high returns on their capital to compensate them for the risk that the companies they have invested in go bust. But this does _not_ mean that capital owners should have first bite at the cherry if the company _does_ go bust. The risk that the company goes bust – and that capital owners lose their shirts in the process – is precisely the risk that they are supposedly already been compensated for. In other words, you can’t have it both ways – getting special compensation for the risk that you will lose your money if the firm goes bust implies that you shouldn’t get special compensation in the event that the company does go bust. Or you wouldn’t have been taking any risks in the first place.

So I simply don’t see that this cod-Schumpeterian argument makes any sense. A real Schumpeterian, I suspect, would be saying that no-one should get compensated at all, either capitalists or workers, and that the companies should be allowed to go bust (but that of course is a quite different argument). You could perhaps make a case on normative grounds that people who took a higher risk should get a bigger share of whatever is left. But you would have to take account of the fact that it isn’t only owners of capitalists who take these risks. Workers in GM have made risky investments themselves – in specialized skills that are difficult to sell on the market – and these risks were arguably greater than the ones taken by capitalists (bankers and investors, for all their travails, are surely doing better than unemployed auto workers).

The Circus Is a Terrible, Wonderful Thing

by John Holbo on May 29, 2009

But first: why aren’t you reading more Squid and Owl. It’s cheap and morally improving. For example, last night’s exciting episode:

52 - Squid and Owl steal furtive looks ...

What we learn from this is, for example, that we should read comics. But which? (you gesticulate approximately and therefore helplessly?) Some are good, but some are bad. I have recently enjoyed the Eisner-nominated The Amazing Remarkable Monsieur Leotard [amazon], by Eddie Campbell, who has a blog. Since First Second has a generous preview online, you could sample before buying.

And, under the fold, I’ll just tuck a few circus-related images I’ve stumbled on on Flickr: [click to continue…]