Friday, June 08, 2007

Risks, rewards and reality

By Mark Dorroh

Editor's note: This essay was posted May 5th and re-edited for style May 18th.

In Anne Applebaum's column of May 4, 2007, she identifies a principle of human conduct which has been poorly served by the Social Democracies of Old Europe. Her column's main focus is the upcoming French national election in which a center-right candidate is saying the unsayable: that Britain is attracting hundreds and thousands of Frenchmen and -women, many of them the best and brightest, to live and work in the UK.

These born-and-bred Gallic cousins have become frustrated with their nation's removal of much of the risk-reward relationship from career choices, and they are voting with their feet and their pocketbooks.

Applebaum, writing for the Washington Post, notes that during Candidate Nicolas Sarkozy's recent visit to London, he called that ancient capital "one of the great French cities." He did so not just because of the military events of 1066, but also because so many modern French citizens, liberated by the economic consolidation of Europe, now choose to live somewhere other than France. They live instead in a nation where rewards are more commensurate with risk.

They have moved to the U.K. specifically, according to Sarkozy, because "they are risk-takers and risk is a bad word in France."

This is significant. It indicates that even the strongest and most stable of governments can be blinkered beyond all reason regarding the essential nature of the human animal. To pretend that risk and reward have no significant relationship is to ignore the entirety of human history. All great military, economic and political systems have been based on risking much to seek great rewards.

For specific instance: The U.S. Constitution, created by many of the greatest minds of the Age of Reason, was a huge gamble. Expecting a population of farmers and mechanics, many of them illiterate, to be capable of responsibly choosing their own leaders was an expectation which flew in the face of everything our European forebears believed. In place of the Divine Right of Kings, Americans believed the common man was every bit as able as ancient councils of elders and church bigwigs to discern leadership abilities.

The gamble paid off, and we're still reaping the rewards 15 and 20 generations later.

In the same spirit Americans believed that economic choice is as important as political choice. Thus was born the purest form ever of a government's acquiescence to and endorsement of Adam Smith's doctrine of the Invisible Hand of the Market.

The Framers' theory of economic liberty was based in the notion that a mostly unrestricted relationship between risk and reward should be protected as one of the chief duties of any responsible government. The wording of the Declaration of Independence which referenced "life, liberty and the pursuit of happiness" was originally "life, liberty and property." Thomas Jefferson was talked into editing in the more felicitous and poetic phrasing - which meant much the same thing - by delegate consensus at the 1776 Continental Congress.*

By way of contrast, Eurasian civilization in the 20th century went out of its way to select the alternative economic model. In place of risk and property protections, economic security funded by income redistribution became the highest national mission.

The results are manifest and not particularly good: France and Germany have frozen levels of unemployment between 7 and 9 percent, at least partly because employers are loath, for economic reasons, to hire more than the absolute bare minimum of workforce laborers, while their counterparts in this nation - and to a lesser extent in the UK - can risk hiring proportionally more employees in anticipation of growth. The deal is, for every franc or deutschmark paid out by an employer for labor and management, another franc or deutschmark must be paid to the welfare state. That money is them spent to minimize all conceivable risks to all workers.

By way of comparison, in the U.S., employers are required to pay about an additional 1/3 wages in matching payroll taxes. Curiously, our system seems to manage the security of workers rather well, although not at the extreme level of European worker protections.

Instead of 80 - 90 percent of working guaranteed pay upon dismissal, our employers pay about half. Human nature being what it is, the American worker, living on half-wages during a layoff, is more interested in getting back to his/her working rate of pay than the average Social Democracy worker.

This well-intentioned, draconian level of risk removal, coupled with the sky-high payroll taxes, has contributed to a barely sustainable level of unemployment for many of the Social Democracies. Having 1/11 to 1/13 of a nation's workforce on the dole is not a situation any government would see as salubrious, so nearly all the old-line Social Democracies are trying, against enraged popular opposition, to trim back the unintended consequences of their economic model.

Will the entrepreneurial class of Frenchmen ever return to France? Perhaps, but not with the French economy configured as it is now. Opinion polls tell the tale. In Applebaum's column, she quotes results of a poll taken by the French company TFN Sofres in which 93 percent of the two million-plus French expatriates say they are very satisfied with their lives abroad … and 25 percent of them believe their will never return to live in France.

As with the law of supply and demand, governments may seek to impose their will on the relationship between risk and reward. But such ignorance comes at a price, as those most likely to take risks will find places to live and work where such willful ignorance of natural principles is not enshrined in state code.

* The Framers also chose the alloidal system of property ownership, while most of Europe and Asia kept their feudal model. The difference is, in an alloidal system, property is owned by individuals and voluntary collectives such as corporations. In the feudal system, all property is owned by the sovereign, and all citizens reside upon it at the sufference of the sovereign. The alloidal system was enshrined in the original wording, "life, liberty and property" and remains in use, as a legal principle, today.