'Who Bears Risk?'

Chris Dillow:

Who bears risk?: There's one aspect of the collapse of City Link that deserves more attention than it gets - that it undermines the conventional idea that firms' owners are risk-takers.

Better Capital's stake in the firm took the firm of a secured loan, which means they'll get first dibs on its residual value. Thanks to this, Jon Moulton, Better Capital's manager claims to stand to lose only £2m - which is a tiny fraction of his £170m wealth.

By contrast, many of City Link's drivers had to supply capital to the firm in the form of paying for uniforms and van livery, and are unsecured creditors who might not get back what they are owed. Many thus face a bigger loss as a share of their wealth than Mr Moulton. In this sense, it is workers rather than capitalists who are risk-takers. This point is not, of course, specific to City Link. ...

There are two implications of all this. First, it means that the idea that capitalists are brave entrepreneurs who deserve big rewards for taking risk is just rubbish. ... Secondly, it suggests that ownership might in some cases lie in the wrong hands. ... This is yet another case for worker ownership.

This in turn reminds us of a cost of inequality; sometimes, ownership is in the wrong hands simply because the most efficient owners can't afford to buy the firm.

All this poses the question: are there policy measures, other than worker ownership, which could ensure a more equitable bearing of risk? One answer would be policies to achieve serious full employment. Full employment would allow workers to reject job offers which expose them to excessive risk....

Secondly, we need a more redistributive welfare state. The welfare state is not a scheme whereby "we" pay for "scroungers". It is instead an insurance mechanism. It is a means of pooling human capital risk... The fact that many workers suffer a massive drop in income when they lose their jobs suggests the welfare state isn't providing enough insurance.

Of course, all these ways of improving risk-bearing fall outside the Overton window.