Comment by RyEgswuCsn
3 years ago
Except that is not exactly "productive", isn't it? After all, risk was not eliminated, only redistributed. Productive output, e.g., would be something that reduces the chance of your house catching fire.
3 years ago
Except that is not exactly "productive", isn't it? After all, risk was not eliminated, only redistributed. Productive output, e.g., would be something that reduces the chance of your house catching fire.
The redistribution is productive, because by redistributing risk (not just among people, but also across time), some ventures that were otherwise not feasible become feasible. For example, you want to build a house - but you don’t have the cash. A bank gives you a loan. They take the risk that you won’t pay them back, you get a house, and return they get a premium. This benefits many stakeholders (you, the bank, the builders, etc). If the bank has too much risk, they can off board it to someone with deeper pockets and a more diversified portfolio.
> If the bank has too much risk, they can off board it to someone with deeper pockets and a more diversified portfolio
... or especially to somebody who happens to bear the reverse risk.
For example, a wheat farmer doesn't want the risk that wheat prices might collapse by harvest time due to windfall harvests somewhere else in the world; and the spaghetti maker doesn't want the risk that wheat prices might be soaring due to crop failures somewhere else-else. They make a deal now so they don't need to worry about the future, but they don't need to make the deal directly, they can each buy or sell wheat futures.
I am not saying that the redistribution of risk is not useful —— it certainly is, and I agree with what you said. But let us suppose we would like to reverse climate change at a global scale in a short time without further damaging the environment, right now; I don’t see how it would be possible with our current technologies, even if every possible risk redistribution options are exhausted.
This is exactly the why and how of "travel broadens the mind". You only have to visit countries and socities that do not have well-developed financial markets to directly see and appreciate the value financial markets bring to your own society.
Visit a part of the world where most people do not have access to home loans, health insurance etc. and you will not have to ask how mere redistribution of risk and capital adds to productivity ever again. (I happen to have been born one such part of the world.)
> socities that do not have well-developed financial markets to directly see and appreciate the value financial markets
Which is true, but there's another angle that needs discussing - that of a high-trust society vs low-trust society.
In all places where there are well functioning financial markets, there exists a high trust society. This trust is the foundation on which the financial markets exist.
So in poorer countries where such financial markets don't exist (or don't serve the people), it's not because they've chose not to have it, but that individual actors cannot trust that the system is fair and is rules based. So the problem isn't the lack of financial markets (which is a symptom), but that of a lack of good governance (bad or non-existant laws, corruption etc).
Rural India (unlike urban India) is relatively high trust environment. Everybody knows each other and there are lots of shared ethical values. But they still have to build their houses one brick wall at a time (lack of access to home loans) and be at the risk of financial ruin due to unpredictable life events (lack of access to insurance).
Urban India is a very low trust environment, but people still have access to things like home loans, insurance and capital markets (equity and loans).
> lack of good governance (bad or non-existant laws, corruption etc)
I agree that good governance is a necessity for development of financial markets, but not sure what it has to do with being a high trust or low trust society.
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> (I happen to have been born one such part of the world.)
Care to elaborate for those of us who never made it out of middle-america?
Many businesses would behave much more conservatively -- making much smaller bets, conserving cash instead of investing it -- if they could not offload certain risks. So that ability does increase overall productivity IMO.
People can be more productive by engaging in ventures they would otherwise not have due to prohibitive risk.
(Likewise with credit allowing people to finance ventures that they would otherwise be unable to)
Sure, but without insurance, everyone would have to have enough cash available to build a second home in case the first burns down (ie, provision for the worst case loss). With insurance, just need to have extra cash corresponding to the expected loss (ie, worst case loss times probability it happens) plus some cost for administering the insurance.
So, effectively [1], with insurance everyone can build a house nearly twice as big as without. That strikes me as productive.
[1] if the probability of a fire is sufficiently small
People would just live with the risk, if their house burns down they're just homeless
How terribly unproductive
Risk, for many things, will never be eliminated. They can only be reduced and/or redistributed.
For example, having fire sprinklers greatly reduces the risks from fire. However even the reduced risks are still too great for your typical homeowner, so therefore those risks are distributed (and the reduced risks are reflected in lower premiums for the homeowner).
Maybe ‘productive’ is mot the best word on which to focus. Insurance doesn’t eliminate risk but it can still be very useful.