Knowledge And Decisions

Disinvestments made by a given decision maker for himself must be distinguished from disinvestments made for him by others. The legal system provides safeguards against private individuals’ disinvesting someone else’s assets. However, there is no legal protection against the government itself doing the same thing. For example, governments’ inflationary policies may disinvest part of any financial assets set aside for one’s old age, leaving less future real assets in the hands of the individual who saved them and putting more present real assets in the hands of the government that issues the inflated currency. The transfer is no less real for having been implicit and therefore not subject to constitutional limitations on confiscation of property “without due process of law.” Probably more assets have been confiscated this way than by the exercise of government’s right of “eminent domain” under constitutional guarantees. Nor are those who have lost their savings predominantly wealthy people with large bank accounts or stocks and bonds. Much saving takes place in forms not usually thought of as savings — life insurance and employee pension funds, for example. Through pension funds, American workers own a higher percentage of the total industrial assets of the United States than do workers in an avowedly communist nation like Yugoslavia.⁵ The confiscation of employee pension fund assets through inflation is not so much a redistribution from one income class to another as it is a redistribution from the pensioners’ future assets to the government’s present assets.

RISK

The element of time introduces the element of risk. Perhaps the most fundamental risk is that we may not live through the time required to see a given economic activity concluded and remunerated. Many other risks exist, of partial or total loss of whatever is invested, or even losses extending beyond the initial investment to reach other personal assets to cover damages or other liabilities incurred in the process of unsuccessfully seeking gain.

Although risks may be calculated mathematically, as in the actuarial tables of life insurance companies, the cost of a given risk is no more objective than any other cost. Some people can sleep soundly with their rent unpaid, and creditors threatening to repossess their car or attach their salary. Other people worry about their money in a government-insured bank account. In between are numerous gradations of individual concern for a given risk, and therefore a different psychic cost paid in carrying that risk, or different financial costs paid to reduce the risk. For example, bondholders may accept a lower rate of return than stockholders as the price they pay to reduce the risk of losing their investment.

The godlike approach to analyzing “society” and its (metaphorical) behavior often overlooks risk, the subjective nature of risk, and/or the wide variation of its cost among individuals. In the area of risk, as in some other areas, the diversity of individuals invalidates reasoning based on figures of speech about a society acting as if it were a single decision maker. With a given objective likelihood of various undesirable events, the costs of these risks to society at large can vary enormously, according to which particular members of the society are carrying how much of these various risks. If risky activities like drilling for oil wells (most wells have no oil) were financed by nervous people, the cost would be much higher than if such activities were financed by devil-may-care types who are happy to be able to dream of striking it rich some day. For an optimal distribution of risks, knowledge must somehow be communicated through the system as to who is more willing and who is more reluctant to bear the various levels of risk which are inherent in undertaking different economic (or other) activities. This kind of knowledge is far too specific and changing to be reduced to a science or to be mastered by “experts.”