Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Posting-Version: version B 2.10.2 9/18/84; site ubvax.UUCP Path: utzoo!watmath!clyde!burl!ulysses!allegra!bellcore!decvax!tektronix!hplabs!hpda!fortune!amdcad!cae780!ubvax!tonyw From: tonyw@ubvax.UUCP (Tony Wuersch) Newsgroups: net.politics.theory Subject: Re: Risk vs. Reward Message-ID: <118@ubvax.UUCP> Date: Mon, 4-Mar-85 14:05:26 EST Article-I.D.: ubvax.118 Posted: Mon Mar 4 14:05:26 1985 Date-Received: Sat, 9-Mar-85 10:49:31 EST References: <792@utcsri.UUCP> <1184@amdahl.UUCP> <458@ssc-vax.UUCP> Organization: Ungermann-Bass, Inc., Santa Clara, CA Lines: 82 > Employees more or less get full value for their labor. They > also have very little risk. Working, as I do, for the Boeing Company, > I can be fairly confidant that I will get a check every two weeks > for the full amount of time I put in. On the other hand, the shareholders, > who in aggregate own the company, have a bunch of plants full of > equipment, a number of airplanes in various stages of assembly, > zillions of parts, and a lot of risk. > > One of the most fundamental rules of investment is that the > risk you take should be proportional to the potential gain. This > applies to the laborer, who invests his time, as much as to the > venture capitalist, who invests money. > > Dani Eder / ssc-vax!eder / Boeing If a person works for MacDonalds in El Salvador, she makes perhaps 40 cents a day. If the same person works for MacDonalds in the U.S., she makes minimum wage. Perhaps without minimum wage she might make less, but it sure would never get to 40 cents. Why, then, given a huge disparity in the wages one might receive for the same labor, does Dani make a blanket statement like "Employees more or less get full value for their labor."? Define what is meant by value, please. Taking Dani's first paragraph into account, I assume he means to assert that a laborer gets the same return on investment given her chosen level of risk (minimal, he says) as a venture capitalist. If he means by this that the laborer receives the same marginal product that she contributes (and I'm afraid I can't go into the neoclassical micro details that this implies, though I'm sure that Dani must know what I mean if he says that laborers get an adequate return), then I would ask how he knows that this is so. Present some evidence, please. This is the real world, not the world of neoclassical theory. If he means something else, I would ask what he means, because I then don't understand it at all. I also question Dani's blanket assumption that laborers take on less risk than capitalists as a whole. Obviously, some capitalists take more risk and so do some laborers. But the blanket assumption is a general one. Since Dani doesn't explain what risk is in comparing laborers and capitalists, we have to suggest a plausible construct. I suggest that risk be expressed not in the individual contract, but in terms of a long- term investment strategy, a set of contracts. Furthermore, I'd suggest that the costs of withdrawal and transfer of investment be factored into the risk equation. Finally, I'd suggest that the risk chosen by an individual may not be a chosen number, it may be determined by other factors. If a person must accept the threat of brown lung in order to obtain subsistence income and hence continue to live, then her risk goes way up (I doubt her return would be sufficient -- let the reader judge here). A laborer's investment strategy, I'd suggest, involves heavy fixed investment (in housing, education, accumulated community ties [friends, counselors, etc.]), and high overhead (fixed and regular maintenance costs), relative to income received. In situations of high unemployment (i.e. most of the real world), the peaks and valleys of economic cycles may not permit an adequate income stream to maintain the laborer's fixed investment, since the maintenance of that income stream depends on the success of an all-eggs-in-one-basket investment -- the current job. The ability of a laborer to spread her investment is limited by the transportation and time constraints inherent in her physical form. None of these constraints limit the capitalist who can deploy his money worldwide. Any all-eggs investment strategy is high risk. No investment analyst would ever recommend an all-eggs strategy to a conservative investor. That almost all laborers carry out the investment strategy I've outlined above (and often the fixed investment becomes more extensive as the strategy enters its later phases), implies that said strategy involves a high level of risk, since no conservative investor in his right mind would ever pursue such a strategy. If Dani thinks that laborers get the right amount of return given their small level of risk, and their level of risk is what I claim it to be, i.e. much higher, then clearly laborers must be getting a grossly insufficient amount of return, or they are forced by circumstances to carry out a retarded, stunted, and defective investment strategy. I wonder what those circumstances might be? Tony Wuersch {amd,amdcad}!cae780!ubvax!tonyw