There's No Tradeoff Between Dynamism and Safety

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Raghuram Rajan tells the WSJ’s Mark Whitehouse that when it comes to capitalism, there’s a natural tradeoff between security, on the one hand, and dynamism, on the other. Justin Fox adds some necessary skepticism:

The greatest run of economic growth this nation has ever experienced took place from the 1940s through the 1960s, a period during which the welfare state grew and grew. And the financial innovation and dynamism of the past few decades has brought only modest rewards for most American families (measured by median household incomes).

I’m not saying there’s no tradeoff at all. Just that it’s complicated, and that there are probably some methods of providing economic security (a well-run universal health care or pension system, say) that could lead to increased economic dynamism because they encourage people to make riskier job choices.

I’d actually go further than that, and say that the dynamism of capitalism is largely a function of safety nets, dispersed risk, and limited downside. The limited-liability joint-stock company run by professional managers is a both a driver of dynamism and an exercise in maximizing the safety of as many principals as possible.

What’s more, a large reason for the excesses of the financial-services industry over the past decade is the insane level of bankers’ pay — the men in charge were so rich that they ran no real quality-of-life risk when taking enormous gambles with other people’s money. Even the biggest losers — the likes of Dick Fuld and Jimmy Cayne — are extremely wealthy men to this day.

If we want to increase the dynamism of the real economy — technology, manufacturing, services, all that kind of non-FIRE stuff — then making the finance industry smaller and less volatile is quite likely to help. After all, making it larger and more volatile did no visible good at all.

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