February 24, 2002
Risk and humans are old friendsPosted in · 1 comment ·
A man walks into a pub late one afternoon. He sees a beautiful woman at the bar. She is alone, apparently unattached, reading the paper. He strolls up to the bar and orders a pint. After a couple of words with the barman, he catches her eye. She lingers just long enough before looking back at her book. It’s not an invitation but neither is it a shut out.
Game on, he thinks, and in a flash assesses the odds. 100 to 1 she invites him back to her place there and then; 20 to 1 she pours her gin and tonic over his head. Anything under those odds must be worth a try. He says hello and the flirting game begins. Risk and reward — the perennial pursuit of humanity — in operation once again.
Humans have been trying to assess risk and reward or predict the future for as long as history. Archaeologists point to the chipped knucklebones of sheep littered in prehistoric graves as evidence of primitive games of dice where our ancestors gambled on future outcomes. Yet it is only since the Middle Ages that risk and controlling risk became a central characteristic of modern societies.
Until then, religion and a belief in fate implied that there was no risk. Man’s destiny was not in his hands, and therefore assessing risk was pointless. In effect, societies were backward-looking. Traditional societies had no concept of the future; as far as they were concerned, the future copied the past. The weather dominated commerce and the weather was unpredictable. If storms ruined your harvest, the gods had decided as much and the subsequent famine was the wrath of the gods in response to some heinous crime that then had to be concocted and avenged on earth to satisfy the heavens.
The discoveries of America put paid to all that and risk and probability became central to commerce. “What is the probability that my cargo will return safely from the Caribbean?” became a key concern of trade.
Around 1700, data and statistics were scoured for patterns for the first time. These patterns could be used to assess the likelihood of certain events occurring. The insurance market evolved from understanding risk and with it a highly lucrative branch of international finance emerged.
The finest mathematicians of the enlightenment period dedicated themselves to the study of probabilities. With a framework for understanding risk, came a framework for speculation. Stock markets emerged. Investors began gambling on future returns and more patterns emerged. Colonial speculation characterised the first 100 years of the London Stock Exchange and with speculation came swindles and scams, culminating with the South Sea Bubble, which almost bankrupted the City of London in the 1740s. Yet so strong was the seduction of beating the future and the perception of “if you don’t speculate, you don’t accumulate”, that these swindles had only a temporary effect on man’s desire to gamble.
But with the rise of modernity came a society bent on changing the future. As statistics and mathematics developed, so too did philosophy. Enlightenment thinkers saw the future as a territory that could be occupied and colonised. They believed that it could be possible to shape history and get away from God, dogma and the influence of the past.
Mathematicians — some of them holy monks working at night in hushed cloisters — armed philosophers with the necessary intellectual sticks to bash the hocus pocus of the church. In the battle between science and divinity, divinity came off second best.
Harnessing risk became the cornerstone of the modern western economy. The energising effect of risk-taking, which is apparent to all of us in our daily lives, made itself the driving force of the society, and attitudes to risk gradually began to distinguish people from each other. At its root, the market economy is a forward-looking instrument with ongoing risk assessment at its very core.
If you take a job, you are thinking to yourself: `Where will this lead me?’ If you have a punt on the market, a similar calculation is made: `Should I buy a house now or hold off a while?’ or `Is a fixed or variable mortgage better?’ All these decisions taking place in people’s lives every day are about the future and trying to second-guess it.
How dull would our lives be without risk? To answer this, just think of the Soviet Union before Gorbachev. Of the many arguments put forward to explain the collapse of communism, probably the most plausible one is that it died of boredom. Without the vibrancy of risk, the system ground to an apathetic halt.
Looking back, the history of left-wing economics has been one long struggle to avoid risk. It has sought, from the welfare state in Europe to its more extreme cousin in Russia, to minimise risk. A more benign interpretation of the welfare state is that it pools risk, but fundamentally the left regards economic risk as a negative to be insured against rather than a celebratory, positive force.
While rightly recognising that we all have differing attitudes to risk, left-wing thinking aims to homogenise the entire economy in a risk-free straightjacket. Given humanity’s love of the flutter, it is amazing that left-wing thinking on economics persisted for so long. Many would argue that it goes against our nature completely.
Now that the market economy has become the system of choice for more and more countries, a key political concern must be to locate the faultline.
What will be the big ideological issue of the future? Will it be right or left? As our politicians grope around for issues ahead of the election, it is clear that they have not found the big issue, and without the big issue the `vision thing’, which characterised politics of the 1950s and 1960s, is also lacking, leading to apathy.
Maybe the big issue for future societies and economies will not be capital and labour, or taxes and spending, or treaties and territories, but risk. Societies of the future might be broken down into areas of risk. Where is the risk in society, who takes risks and do the people who take risks, energise the economy and create wealth, end up subsidising those who are risk-averse?
Will the Ireland of the future be divided between those who take risks and those who exclusively buy insurance? Should the risk-averse be punished via higher tax or rewarded through risk-free employment? Should society put a premium on risk by abolishing capital gains tax or go further and have a capital loss grant?
If society comes to be divided up into these two types of people, how will politics deal with the inevitable friction between the camps? The risk-averse will always try to get a free ride on the risk-takers, while the risk-takers will grumble that they are being forced to subsidise the others. At the moment, some would argue that social partnership and the evidence that public sector spending and salaries are increasing rapidly implies that the risk-free parts of the economy are getting a double free lunch — job security and a pay rise.
The conflict between the two may well intensify over the year ahead. As long as a man is tempted to roll the dice, whether on the market, in business, in the bookies or in the bar, the thrill of risk and beating the odds will energise. The big question in the years ahead is whether society can keep the peace between those of us who are afraid of the future and those who believe that tomorrow’s world is their oyster.