Recent stock market crashes have been a disaster for
American investors. In the Crash of '87, they saw the aggregate value of
their investments fall by $1 trillion in less than a month; and in the
Friday the 13th crash of last October, their investments sustained a
$200 billion loss in a single hour.
How did investors respond to these crises? For the most
part, with silence. What is striking about this reaction is what
investors did not do. They did not ask the government to return the
money they had lost. They did not complain that the system had treated
them unfairly. They did not ask that the markets be closed to prevent
similar disasters in the future. What they did (in all but a few cases)
was accept their losses as part of the price of risk-taking.
This attitude used to be common among Americans: If you
take risks, you have to take an occasional loss. Although this attitude
still predominates among American investors, they are unusual in this
respect. More and more, Americans are willing to accept the rewards of
risk-taking but not the costs. Consider some illustrations.
When several state-insured thrifts collapsed in Ohio a
few years back, savers-who for years had been happy to accept the
above-average interest payments of these institutions - were confronted
with the downside of their risk-taking. How did they respond to their
losses? They petitioned the State of Ohio to bail them out. The state
was glad to comply with their request. It not only made good their
losses, but let them keep the rewards (i.e., the above--average interest
payments) that their years of risk-taking had earned them.
North of Los Angeles one finds a rather special breed
of risk-takers: people who own million-dollar homes on Malibu Beach.
There is strong evidence that Mother Nature does not want houses built
on Malibu Beach. In one season she sends down boulders and mud slides to
crush the houses, and in another she sends massive waves to wash them
away. The residents of Malibu Beach are content to accept the rewards of
their risk-taking, but no sooner are they asked to pay a price for it
than they request various forms of government assistance-funded, one
should note, by people who cannot afford million-dollar homes.
Farming is by its very nature a risky business, and one
would assume that farmers realize as much. In this century, though,
farmers have shown themselves to be far more adept at banking the
profits of good years than they are at absorbing the losses of bad
years. As a group, farmers are notorious for their willingness to turn
to the government for subsidies in times of adversity and for their
unwillingness to relinquish these subsidies when adversity is conquered.
A point of interest: Five decades later, farmers are still benefiting
from programs created to deal with the drought conditions of the 1930s.
Businessmen, too, have a tendency to run to the
government when they gamble and lose. For years bankers have been trying
to palm off their bad Third World loans onto America's taxpayers. The
bankers would have resented it if, in the 1970s, a government official
had advised against these loans or taken steps to block them; now that
the loans have gone bad, these same bankers are happy to turn to
government officials for advice - and, more important, for financial
help.
This list could go on, but I think the point is clear.
In years gone by, Americans who took risks expected to pay for their
losses-and were expected to do so by the rest of us. These days, though,
Americans who take risks all too often view Uncle Sam as a form of
disaster insurance: When times are good, premiums cost nothing; when
times are bad, claims can be filed with the media and various elected
officials.
This attitude is unfortunate in two respects. First, it
reveals what many would take to be a serious character flaw. If you
expect freedom to do as you choose, it is only right that you should be
willing to take responsibility for your actions. Likewise, those who
accept praise for what they do should be also willing to accept blame.
The desire to accept the rewards of risk-taking but not its costs is at
best a sign of immaturity and at worst a sign of amorality.
Second, when the government has a policy-stated or
unstated-of bailing out risk-takers, the economic consequences can be
disastrous. If we tell risk-takers that they will have to pay the price
for their miscalculations, we give them an incentive to think long and
hard before taking risks and thus improve the chance that they will take
only "rational" risks. If, on the other hand, we adopt policies that let
them pocket their winnings and walk away from their losses, we encourage
recklessness in their risk-taking. Worse still, we force taxpayers to
pay for the damage caused by this recklessness.
This brings us back to the investors who were sent
reeling on Black Monday in 1987, and on Friday the 13th in 1989. Taken
as a group, America's 40 to 50 million investors took their losses in a
matter-of-fact way. In doing so, they showed us the stuff they are made
of. The silence of America's investors was not, as some might suggest, a
sign of their inherent fatalism or masochism. Instead, it marks them as
responsible risk-takers, a breed whose numbers have declined
substantially in recent decades.
America's investors may not have emerged from the
recent crashes with their nest eggs intact, but at least they emerged
with their dignity intact. Not every American risk-taker can say as
much.
At the time of the original publication, Professor
Irvine taught philosophy at Wright State University in Dayton,
Ohio.
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
January 1990, Vol. 40, No. 1.
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