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Taking risks for $73 million

This article, apart from its interesting discussion of the windfall profits that the Iraq war has bestowed on some pretty sleazy people, contains the following gem of a paragraph:

"The American economic system rewards those who take great risks with commensurate benefits," Mr. Rubin said of Mr. Brooks's stock sales and compensation [$73.3 million in 2004]. "The compensation Mr. Brooks received is directly attributable to the risk he undertook in aiding the capitalization of DHB and achieving extraordinary results for the company."

This is certainly the knee-jerk thing to say, but let's actually ask ourselves: do successful entrepreneurs "deserve" the piles and piles of money that they make because they "take risks?" Is it right that our economic system should reward "risk" so handsomely?

These are question that'll get me branded as a socialist kook. But before I go ahead and ask anyway, let's get at least one thing straight. The absence of any moral entitlement to such huge amounts of wealth wouldn't, by itself, be a sufficient reason to abandon our current economic system. Even if our super-rich don't deserve what they get, we could easily decide that any alternatives to our current system are less desirable than the status quo. Maybe they're all too impractical, or too risky, or just too dull and boring.

But it does seem a little strange that investing your money in a business that becomes successful somehow entitles you to such huge financial rewards. For one thing, this investment activity isn't anywhere near as "risky" as many other risks people take but which don't offer equivalent financial rewards. A soldier risks his life to defend his country, but our economic system doesn't reward him. A worker on a crab fishing boat risks his fingers, and sometimes his life, to do his job, but he'll never make $73 million a year catching crabs. If a mother goes without health insurance so she can provide for her children, her risks won't ever be rewarded with a financial windfall.

The risks that many entrepreneurs take are valuable, but are they so much more valuable than these other kinds of risks? They're certainly not more altruistic. The entrepreneur risks his money because he wants to get rich (he's 'incentivized'). These other kinds of risk-takers do it for the sake of someone else, or they do it because they don't have too many other options. From a moral perspective, it seems weird that the entrepreneur among all these people should deserve to take home so much more bacon than everyone else.

So what does it say about our economic system when its biggest winners don't always seem to be the most worthy? One thing I think it says is that "dessert" "desert" in a moral sense is actually pretty irrelevant. Some rich CEOs are fine people; others are complete jerks. None of that matters, one way or the other, for economic success. A capitalist economy just doesn't care.

Maybe that's a good thing. Non-capitalist economic systems that have tried to explicitly reward the most moral people have had to wrestle with the tough question of who's the most deserving. In practice, that usually ended up being the guy who ran the army or controlled the most effective assassins. I don't think it's easy for human beings to consciously decide who 'deserves' to have the most money, and the downside risks of even trying it are huge.

But let's cut the crap: next time some office-supply store owner starts feeding you the line about entrepreneurs "deserving" so much money because of the "risks" they've taken, think about the guys getting shot at in Iraq. We let the entrepreneurs keep their $73 million not because it's the most 'moral' thing to do, but because it'd be too dangerous to try to reallocate the money to the people who really deserve it.

Taxes are not, despite zealous protestations to the contrary, a reallocation. Only progressive taxation can even pretend to be, and none of that (in the U.S. at least) ever rearranges the hierarchy of financial winners and losers. Taxes simply allow for the state to pay for common expenses, and while we can argue about what these expenses should be, no one but a kook would say that they don't exist.

Comments

I know, personally, an entrepreneur who started a company from scratch and, 10 years later, sold it netting himself approximately $100 million, after tax.

He took some risks, to be sure. He worked out of his bedroom and required that his family live on pretty meager fare for many years. His risk was that the business would fail and he would have to go get a job to cover the potential fallout to his family. Over the years, he also bore an emotional risk that the company would fail and put the people he employed (and their families) at risk.

In the end, however, this person would argue (I believe) and I would agree that he took a minimal risk, especially as compared to the real and substantial risks of people like you mentioned.

In his case (and, I would argue, in many such cases) the reward was not based on risk (except in the narrow financial sense (an exception that probably accounts for the persistence of such risk/reward language)). Rather, his reward was for the insight to see what the marketplace needed and the skill necessary to produce the product and hire the right people to deliver the product to that market.

When he finally sold the company, he shared a substantial amount of his profits with the employees of the company. They, in turn, have done many good things, including starting up several additonal start-ups which now employ many dozens of additional people, putting children through schools they never would have otherwise had the opportunity to attend (they also include me, now with the opportunity to go to law school), etc. And, then he became a philanthropist working with orphanages and homeless children.

In his case, our system worked well, I think, for the benefit of all involved. I do not begrudge him his wealth.

One thing I think it says is that "dessert" in a moral sense is actually pretty irrelevant.

Actually, I find that cheesecake is of particular relevance to many people in evaluating moral principles.

(You know I'm in no position to tease anyone about spelling, Carey. But I couldn't resist, since I just handed in a four page paper and then found I'd spent a few thousand words talking about dessert-based morality. I share your pain.)

;)

Denise, I think you're right.

Our economic system rewards the right mix of insight, skill, and persistence. Sometimes it rewards risk, but only in the context of these other things. And, occasionally, you're rewarded just for being lucky.

Anthony, I feel like a big old chocolate chip cookie...

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