The Two Faces of Risk
DECEMBER 01, 1983 by ERNEST ROSS
Mr. Ross is an Oregon commentator and writer especially concerned with new developments in human freedom.
Assessing risk these days is a risky business. In times when we are deregulating our economy, are we to assume that risk will be increasing-or decreasing? Should we expect that businessmen will face greater risk—or lesser? Will the “dog-eat-dog” world of purer capitalism force entrepreneurs to take more dangerous chances than under a controlled economy—or more benign ones? In short, how do we judge the importance of risk in our future?
Judging anything requires that one start with a standard. Judging without one is like measuring without a common unit. What can we use as a unit of risk-measurement, as our standard for judging risk?
Risk means the possibility of losing something of value. If so, our standard involves the pursuit of values. Economically, a value is anything an entrepreneur wishes to obtain or retain in the marketplace. (This is the Austrian School of economic values—which says that in dividuals create their own values by the choices they make—i.e., that values do not exist independent of man’s decisions and actions.)
What is the condition of the marketplace which most enhances one’s ability to obtain or retain values—for instance, to start a new business, to create new goods and services, to secure new markets, to earn a profit? What is the condition which offers the greatest number of opportunities to pursue one’s goals? It is, of course, freedom—the condition of human action which exists in a society when only the first-use of force (or its threat) and fraud are outlawed.
When only coercive or fraudulent activities are forbidden, all else is open to entrepreneurial pursuit—in other words, open to all of us, for in a free society because we must make our own economic decisions and take our own economic actions we are all entrepreneurs. In a most fundamental sense, freedom gives us the greatest number of options for gaining and preserving any economic values we might choose to pursue or defend. In the widest view, when options are maximized, risk is minimized. This is not the conventional view, which holds that freer people face greater risks.
Examine the point from another angle—from the angle of a controlled economy or an anarchistic one where the first-use of force and fraud are not outlawed. What happens to one’s options for obtaining or retaining his values then?
The essential economic characteristic of societies which accept force and fraud is that markets do not have to be earned, merely taken. Consider monopolies. Monopolists can both gain and secure their markets by compulsory laws of all types forbidding others from selling or dealing within a specified territory or in a specified category of goods and ser-vices-or, in the case of anarchies, by intimidation (“Buy from us—or else!”)!
This internal protectionism favoring the force-wielders’ business friends drastically restricts one’s market opportunities and his options for minimizing the possibility of losing his values—for minimizing risk.
Because in controlled societies most if not all categories of economic activity are restricted, openings for entrepreneurs are severely constrained. One cannot initiate new economic action when nearly every field of endeavor is locked up and coercively protected for the politically favored and powerful.
Now under such conditions, because nearly everyone is also “guaranteed” a job (or forced to take one), it may appear that most men are working under risk-minimized conditions. But that is illusion. There is no greater risk to a man than to be totally at the mercy of coercive masters. The illusion of risk reduction masks the reality of absolutely enormous risk—the risk of being found “out of favor” with the state and thus deprived of means of self-support, a deprivation which can amount to a sentence of slow death, or at best, abject poverty.
The only persons who operate at minimized risk in a controlled society are the controllers—but only so long as they hold the reins. The beast of coercion is difficult to ride. That is why a controlled economy is characterized by a constant, deadly power struggle—a truly “dog-eat-dog” society!
In judging risk, it is crucial to distinguish between risk magnitude and risk diversity.
Risk magnitude is highest in compulsion-based economies where the state lowers not only the responsibility but the opportunity for preserving life itself. Risk diversity is greatest in a free economy where each man is accorded not only the most options for success, but for fail ure as well. The difference is that failure under freedom is followed by the same opportunities for success which existed before the failure. In a controlled economy, failure is punished by total loss of opportunity—one is “locked out” of the system and perhaps permanently marked as a failure; in a free economy, failure means only that one has failed this time—while the door remains open to all future options for achievement.
Another way of putting this point would be that in heavily regulated economies there may be fewer risks to take, but each risk is more dangerous.
Of course, it is also possible to take dangerous risks in a free society—but the dangers are cushioned: (a) One is not forced to take such risks; (b) he can often earn high rewards for severe risks; (c) he can (although sometimes at substantial cost) buy insurance in order to ease the impact which failure might have on himself or his family; (d) except for death, he will never be completely locked out of further opportunities to better himself.
Thus, a free economy’s dangerous risks are voluntary, compensatory, insurable, and limited; in unfree economies the same level of risk is “built-in” to the system—involuntary, not justly compensated, uninsurable, and unlimited (except by death).
How Attitudes Are Affected
Naturally, these differences of dangerous risk magnitude depend greatly on how free or controlled an economy is. We live in a system which, like many modern ones, is a mixture of both. However, for the sake of clarity, let us briefly examine the “human” effects of the two faces of risk, risk in a fully free society and risk in a totally controlled one—i.e., how does each type of risk affect individual attitudes and behavior?
First the bad news.
The attitude toward risk in a controlled economy is, “Don’t take chances!” One can see why. To take a chance is to take one’s life in his hands—to risk losing all of the benefits of society if his superiors frown upon his thoughts, decisions, or actions. In effect, the price of risk in a controlled economy goes far too high for most people to afford. As a result, except for the risks which the state mandates on the individual (such as compulsory employment), he is either prone to stagnation—or enters politics, the only arena in which the high price of risk may appear justi fied in society’s “approved” channels of operation.
(The underground economy, the primary unapproved channel, is almost always a third option. But it, too, is dangerous, sometimes penalized by execution, and almost always carrying stiff prison or labor camp terms. It is not uncommon for the average citizen to dabble in the underground economy—but most do not choose steady or deep involvement because the risks are too dangerous. This is especially true in controlled economies where the state has “turn in your neighbor” spy systems—as in the modern Soviet state.)
If the citizen chooses the political road to success, he must, in effect, choose between being dominated or dominating. To use the vernacular, he must either “go with the flow”or control the flow. The important point here is that in either case—whether one chooses to play serf or master—he will encounter much greater repercussions for risk-taking than will the citizen of a free nation.
High risk magnitude results in the controlled citizen being a less productive one. Risk- taking is essential to productivity because innovation requires risk. Only innovation leads to new machinery and other laborsaving technology which can ira-prove productivity. Raise the price of risk too high and you also prohibitively raise the price of productivity. (This, incidentally, is one reason why controlled societies bribe, steal, and cajole to obtain new technology—their systems effectively inhibit the native risk-taking necessary to produce their own high technology.)
The burdensome cost of risk in a controlled economy also limits the variety of jobs available to the average citizen. When innovation and productivity are stifled, the state economy must employ more people fulfilling the “basic” needs (food, clothing, shelter, energy)—which necessarily decreases the number of people employable in other lines of work. And because low-productivity jobs (often called “labor intensive” in American political circles) on balance require less knowledge and less mental challenge, these jobs involve more drudgery.
When risk is constantly too severe, a terrible thing also happens to the spirit of a people—they lose their buoyancy, their lust for life. They become victims of a perpetual undercurrent of fear and apprehension—which in turn erodes their self-esteem. Without self-esteem, without the feeling that life is worth living because one can take risks with a good chance of being rewarded, no nation’s citizens can maintain a truly human spirit. Their psychology becomes a twisted thing, defeated and deformed, the kind of spirit that views life not as a series of opportunities—but as a minefield. (This is perhaps why a common foreign observation about the freest citizens of the world, Americans, is: “They are so optimistic—and so unafraid!”)
Personal Initiative Stifled, Anxiety Takes Control
There are other effects of the heavy risk level in controlled economies—such as fewer consumer products, a lowering of the quality of all goods and services, an increased driving of economic activity underground with attendant official corruption, and so on—but the two most important effects are to stifle personal initiative and breed anxiety.
The good news, of course, is that the free society type of risk does all of the opposite things:
(1) It encourages people to take risks, to “Go for it!”—to progress rather than stagnate; and because the rewards for private market risk-taking are so great, it discourages power-seeking. (After all, when one is already his own master, what real incentive does he have to dominate others in order to enhance his self-preservation?)
(2) It generates productivity to the greatest degree because people want to innovate in order to maximize personal satisfaction and material gain—i.e., happiness.
(3) It creates a fantastic variety of jobs and business opportunities because the risk-taking- induced productivity frees so many people from working in the basic needs industries. (As a dramatic illustration of this, look at the gargantuan size of the U.S. entertainment industry—films, video tapes and games, books and magazines of all types, television and radio, cable, music, sports, and on and on—as compared to the almost nonexistent entertainment industry of the Soviet Union.)
(4) And, as earlier touched upon, it nurtures a love of life, an optimism, a sense of self- esteem, and a spirit of opportunity-seeking.
So, to answer our original question—as we move toward a less-regulated economy, should we expect risk to increase or decrease?—there are two parts: First, the sheer numbers, the variety, of available risk will be more. But, second, the severity, the dangerous magnitude, of risk will be less. As our society becomes more free, there will be more opportunities to fail, but we will broaden our opportunities to rise again when we fall—and risk will become less risky!