Saturday, February 9, 2019

409. Revival of risk and variety

The Dutch political scientist Paul Frissen proposed that a number of countries (he pointed to the Netherlands) are caught between a cramp of control and a cramp of conformity. The cramp of control arises from the modernist, technocratic dream of a society that is rationally designed, and where all risks and contingencies are under control. The cramp of conformity arises from a romantic populism of national spirit and culture that are to be kept pure and uncontaminated by foreign influence.

This is a disastrous situation. Especially for a country (such as the Netherlands) that used to derive its strength from pragmatic improvisation and tolerance of the foreign. Attempts to eliminate risk yield a glut of regulations and restrictions that squeeze out all room for novelty and creativity, and produce an explosion of cost. Xenophobic elimination of difference kills the variety that is a source of novelty and creativity. Together, risk avoidance and xenophobia suffocate society. The first halts breathing and the second takes away the oxygen.

How to get away from this? How to regain room and incentives for risk taking and variety? Those are precisely virtues of markets. I am deeply critical of market ideology, but instead of eliminating markets, if anyone were to plead for that, I advocate to harness their power while bending it and preventing perversities.

In this blog I discuss economics and markets. I argue that the core virtues of markets are that they allow for and utilize diversity, variety of local ideas and initiatives, while efficiently selecting out ventures that are not viable. This selection of course entails risk of failure, the risk of entrepreneurship. Not many people would want to take such risks, but entrepreneurs do. The virtue of markets is that they privatize risk. Risk are not imposed on unwilling taxpayers but on entrepreneurs, who take them voluntarily. But then they must be allowed to reap the advantages of profits when those occur, at least up to a point. And obstacles from institutions and vested interests must be eliminated to give them room.

In a perverse effect of markets, the conduct of bankers led to the reverse, the socialization of risk: private risks of banks were hived onto the public.

There are complications. Entrepreneurial innovation entails creative destruction, eliminating old technologies, industries, skills and employment. Unjust consequences for the victims are to be compensated by schemes of re-training and of social security for those who cannot catch up.

This is my not so new plea for an apparently neglected combination of markets and social security, in a society that is open to diversity and to risk and compensates for the latter’s injustices when those arise. We had that to some extent in past capitalism, but have somehow lost it.

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