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SRW - Wealth as Insurance

by Metatone Tue Aug 7th, 2012 at 05:24:47 PM EST

Over at his blog, Interfluidity, Steve Randy Waldman has a really interesting post on Wealth as Insurance which operates in a zero-sum game. He proposes that this propels certain patterns of wealth accumulation and employment.

interfluidity » Trade-offs between inequality, productivity, and employment

I think there is a tradeoff between inequality and full employment that becomes exacerbated as technological productivity improves. This is driven by the fact that the marginal benefit humans gain from current consumption declines much more rapidly than the benefit we get from retaining claims against an uncertain future.

Wealth is about insurance much more than it is about consumption. As consumers, our requirements are limited. But the curve balls the universe might throw at us are infinite. If you are very wealthy, there is real value in purchasing yet another apartment in yet another country through yet another hopefully-but-not-certainly-trustworthy native intermediary. There is value in squirreling funds away in yet another undocumented account, and not just from avoiding taxes. Revolutions, expropriations, pogroms, these things do happen. These are real risks. Even putting aside such dramatic events, the greater the level of consumption to which you have grown accustomed, the greater the threat of reversion to the mean, unless you plan and squirrel very carefully. Extreme levels of consumption are either the tip of an iceberg or a transient condition. Most of what it means to be wealthy is having insured yourself well.

An important but sad reason why our requirement for wealth-as-insurance is insatiable is because insurance is often a zero-sum game. Consider a libertarian Titanic, whose insufficient number of lifeboat seats will be auctioned to the highest bidder in the event of a catastrophe. On such a boat, a passenger's material needs might easily be satisfied -- how many fancy meals and full-body spa massages can one endure in a day? But despite that, one could never be "rich enough". Even if one's wealth is millions of times more than would be required to satisfy every material whim for a lifetime of cruising, when the iceberg cometh, you must either be in a top wealth quantile or die a cold, salty death. The marginal consumption value of passenger wealth declines rapidly, but the marginal insurance value of an extra dollar remains high, because it represents a material advantage in a fierce zero-sum competition. It is not enough to be wealthy, you must be much wealthier than most of your shipmates in order to rest easy. Some individuals may achieve a safe lead, but, in aggregate, demand for wealth will remain high even if every passenger is so rich their consumption desires are fully sated forever.

Our lives are much more like this cruise ship than most of us care to admit. No, we don't face the risk of drowning in the North Atlantic. But our habits and expectations are constantly under threat because the prerequisites to satisfying them may at any time become rationed by price. Just living in America you (or at least I) feel this palpably. So many of us are fighting for the right to live the kind of life we always thought was "normal". When there is a drought, the ability to eat what you want becomes rationed by price. If there is drought terrible so terrible that there simply isn't enough for everyone, the right to live at all may be rationed by price, survival of the wealthiest. Whenever there is risk of overall scarcity, of systemic rather than idiosyncratic catastrophe, there is no possibility of positive-sum mutual-gain insurance. There is only a zero-sum competition for the right to be insured. The very rich live on the very same cruise ship as the very poor, and they understandably want to keep their lifeboat tickets.


Now, as suggested in the comments, I think it's probably incomplete. It's not just about insurance against risks, some of it is about status, which is also a zero-sum game. And in some cases it's sociopathic thinking too.

However, it does feel like he's on to something here. One of the great myths of "Econ 101" is that money cannot be "economically dormant," but we can empirically see that is not the case. SRW touches on how this starts to happen as inequality rises...

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I don not doubt that Waldman accurately summarizes the thoughts of a large portion of the very wealthy, but that does not stop the whole approach from being basically sociopathic. It is highly likely that, using a social approach, better insurance could be had that would provide for the whole society. This sort of thinking largely precludes such an approach.

And the idea that money cannot be economically dormant is absurd. Once again an ought is asserted as a fact - one of the mainstream's favorite bits of rhetoric.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 7th, 2012 at 11:04:02 PM EST
Full employment and more generally a secure society are social insurance. Wealth accumulation is asocial.

But when social organisation itself fosters crises and abandons security and employment as goals, then some personal wealth accumulation is necessary.

And the poor accumulate as well - some marginal subcultures are as obsessed with gold as the very wealthy. And for the same reasons, security in dire straits, and status.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Wed Aug 8th, 2012 at 02:02:26 AM EST
[ Parent ]
But when social organisation itself fosters crises and abandons security and employment as goals, then some personal wealth accumulation is necessary.

This is a self-reinforcing system and a significant part of why the problems we face seem so intractable. A few relatively wealthy individuals who use their wealth to leverage even further wealth force the rest, at least those of the rest who have any sense of their true situation, to play their game. And, to the extent that they have influence over lawmaking, effective challenges to incumbent wealth and the process by which it is accumulated, become illegal.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 8th, 2012 at 09:40:40 AM EST
[ Parent ]
It's an interesting point that a lot of people don't really realize about supply and demand - it's a way of making sure that in real times of scarcity, the rich get theirs.

When the source and nature of the scarcity or threat is known, it's possible to collectively devise rationing schemes that divide available goods based on need, provided that collective will is available.  But in these situations, the wealthy still can buy their way around the limits through the black market.  

I agree that he's on to something, but along with the marginal insurance value of being in the very uppermost percentile of wealth, I'd also argue that another key driver of elite behavior is the desire to desire to dominate and control others, and avoid being dominated by anyone else.

And, perhaps, a key feature of a well-functioning government is its ability to stop these two elite drives from destroying society.

by Zwackus on Wed Aug 8th, 2012 at 12:22:13 AM EST
I agree that he's on to something, but along with the marginal insurance value of being in the very uppermost percentile of wealth, I'd also argue that another key driver of elite behavior is the desire to desire to dominate and control others, and avoid being dominated by anyone else.

I don't know if the super rich support deflationary policies because of insurance value of wealth but many people who own a fews tens of thousands euros certainly do so.

by Jute on Thu Aug 9th, 2012 at 08:57:19 AM EST
[ Parent ]
It's not just about insurance against risks, some of it is about status,....

This type of insurance is status, and the more you have of it, the more status you have.  Further, they may be on the same ship as us, but they have private lifeboats, and it doesn't matter one bit to them that those lifeboats are being made from the hull of the ship.  The ship breaks apart and takes all of us with it while they float off to their brave, new world.

by rifek on Wed Aug 8th, 2012 at 12:32:01 AM EST
Hence the obsession with "real" wealth and inflation.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa
by Migeru (migeru at eurotrib dot com) on Wed Aug 8th, 2012 at 01:59:24 AM EST
This is a perfect example of narrative logic. Superficially it looks attractive and reasonable, and I don't doubt this is how the rich really think.

The problem is that wealth and safety come from mutuality. Life is more peaceful and secure with mutual good will, intelligent strategic planning, and cooperation.

So thinking of wealth as insurance in a Hobbesian way actually generates problems and instability.

It's a 'solution' that creates the problems it claims to solve.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Aug 8th, 2012 at 07:16:39 AM EST
This reminds me of something a person with Russian connections once told me. I am not sure of when exatcly, but Putin was "good" president, ie he had not restored the power of the state yet.

But first some context: Around year 2000 there was a number of Swedish action movies featuring as the bad guys russian maffia establishing themselves in Sweden. Bringing the Russian chaos and corruption to Sweden. Rysskräck and all that. As usual with Swedish action movies, they were not particularly good.

Anyway, what I was told was that the scenario was ridiculous. First because the Russian maffian was well established in Sweden, and second because they valued the well-functioning and safe Swedish society for vacation homes, sending kids abroad and so on. Their main interest was keeping it that way so that they could enjoy their ill-gotten gains.

Yes, it is just what some guy told me but as long as we are trading narratives...

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Aug 9th, 2012 at 03:59:00 AM EST
[ Parent ]


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