The comment someone made regarding Marxists and Marxism:
(A long paragraph explaining that workers take risk all the time, between risks they’ll lose their job to bodily risk in dangerous professions such as logging or fire fighting.)
So i would argue that risk shouldn’t be explaining anything special about the owner/worker difference. Lots capital owners are not engaging in much risk at all, and lots of workers are engaging in low paid risky work. I think you can’t get away from a core discussion over power.
My point was never that risk was special.
My point is that risk *has value* in an economic transaction, and that value is seldom taken into account in most Marxist analysis. It’s why we pay loggers (who put their body at risk) more (in general) than other occupations which lack the same degree of risk. It’s why most places pay hazard pay for certain types of jobs–such as for police officers and fire fighters, who can sometimes make far more than their bosses because they’re in the field.
And when it comes to investments, risk has value here as well–and we can even calculate the value of that risk (to first order) by using Bayes’ Theorem.
For example, suppose you passively invest $100 in a business that has a 10% of failing each year. Suppose you have a choice of investing in that business, or investing in 10 year U.S. treasury bills, which are considered effectively “risk free.”. At present, 10 year U.S. treasury bills are returning around 2.5% per year.
So Bayes’ theorem would say that the value of each investment is the same if your $100 plus 2.5% in the first year was the same as $100 * (1 + R) * 90% for the at-risk investment.
$100 * (1.025) = $100 * (1 + R) * 0.9.
Solving for R we get R = 13.9%.
Meaning (and this is important) *if you get a passive return on your investment of less than 13.9% on this investment, you are a fucking idiot.*
That’s because if you were (say) getting a 10% return on your investment, and you kept doing this with multiple similar businesses over and over again, *you would have less money in the long run than if you simply bought 10 year U.S. treasuries.*
Bayes’ Theorem is fantastic because it allows one to calculate the value of risk in an easy way. It’s a shame most people don’t seem to grok that–including some Vulture Capitalists I’ve run into during my life.
Now investors often get a greater return on their investments, but that’s because they are “active investors”–meaning they do work managing the business they have part ownership on. (You can see examples of this with the TV show The Profit, where Marcus Lemonis invests his own money in businesses–then spends a lot of time trying to fix basic management problems. Frankly, if you watch his show enough times as he helps small businesses, the value of his advise and his efforts fixing management is worth *far more* than the money he invests.)
But then, when you invest in a business you then work at–you’ve basically bought yourself a job. That happens, for example, when someone buys rental properties to rent out: sure, you can hire contractors and managers and never deal with your tenants–but you lose money that way. The only way you make money buying rentals is if you deal with the tenants yourself, and if you make minor repairs yourself: if you’re willing to unclog a tenant’s toilet at 3am.
The thing is, it’s very easy to look on to an investor from the outside, see the money he has invested, and think “what a greedy fuck asking for a 13.9% ROI on that business; he should be happy to get 5%. And shut the fuck up about risk; we all take risks in our life.”
If you don’t look at the math–at a math principle first developed in the 18th century–it’s easy to think that it’s unfair. But if you do look at the math, it’s easy to realize how quickly that investor may just say “fuck it, it’s not worth the risk”, buy a bunch of treasury bills, and kick back in Hawaii with a mai-tai.
If you get nothing out of my post but one thing, it should be this: if you find yourself working for a startup and are told “sure, you’re paid less now but there’s a big reward later when we go public or sell our company”–you now have the tools to evaluate the value of the risk they are assuming. That is, you can work the equation above backwards to figure out if, over 5 years taking a $50k haircut is worth the payoff they think they will see at the end of the day. And you can look at other similar companies, the numbers that failed–and see exactly how big a shaft the VCs are trying to ram up your ass assuming you are mathematically illiterate.
Because remember: the biggest enemies of capitalism are often the capitalists themselves.