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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
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