"The most significant threat to our national security is our debt," Admiral Michael Mullen, Chairman, Joint Chiefs of Staff, August 27,2010


Thursday, October 20, 2011

Capitalism: RISK and REWARD

If you were asked to define capitalism in two words, TheFundamentals would suggest these two:  RISK and REWARD.  What do you call it when you base your economic actions on the meaning or the definition of these two words, RISK and REWARD?  We, at TheFundamentals, call it capitalism.

What is the concept behind the process by which RISK and REWARD operate?  Well, that question may cause confusion.  So let us explain what we mean by the question. The interplay between these two words, RISK and RETURN, defines a process by which the old adage, “nothing ventured; nothing gained,” is actually put into real life, living action.  This is the process of placing something in jeopardy (something ventured) in order to create the possibility of receiving something (something gained.)  The act of placing something in jeopardy or exposing something to the possibility of loss is taking a RISK.  If that something works out, you may receive a REWARD.  The REWARD is usually wealth; that age old measurement stick of success.  But, behind this process is a concept.  What is that concept? 

The concept is called discipline.  First comes discipline; then comes RISK and REWARD.  Capitalism depends on discipline for its existence so we can really say that wealth creation depends on discipline for its existence and the process for attainment is RISK and REWARD.  (Aside:  there is a bit more to capitalism, particularly predictable return opportunity and hard work, but the discipline of risk and reward is genetically wired in most species.)

These pages have previously documented the abandonment of RISK and REWARD as a governing process in the United States.  The abandonment of RISK and REWARD is now rampant throughout the country.  Losing RISK and REWARD as a controlling process is not workable beyond the immediate which explains why the long term rules and fundamentals of the past have now been replaced with short term satisfactions and remedies.  But behind the abandonment of RISK and REWARD in the United States is the gradual but consistent abandonment of discipline.  Everywhere you look, discipline is gone.  Nothing is more discouraging to the future of America than the loss of discipline by its leadership and believers.

Predictable?  Perhaps so.  Today even those Americans defined as “poor” have more comforts; more belongings; more freedoms to state expectations and claim entitlements than 90+% of the human beings on the face of the earth.  And the middle group, the widely heralded middle class, has wealth, possessions and leisure time that would place even the royalty of just a few generations ago into fits of jealous rage.  The well to do travel in private jet airplanes unencumbered by contact with the hoi polloi and their annoying rules and ways.  They even suggest that they would willingly throw a few more of their devalued dollars to the hoi polloi if only they would just leave them alone.  “Just don’t bother us if you please.”   What they are really saying is, “We’d like to keep our heads attached to our necks.”

And what does all this mean?  This caterwauling about paying your fair share and doing your part and spread the wealth around and down with business and Wall Street and bailouts for the rich?  What can one make of it?

RISK and REWARD are gone. Left the station.  Caught the last train to the coast to snitch a phrase from a classic song.  When RISK and REWARD depart the scene; you know one thing for sure.   Discipline left earlier.  Without discipline there is no fairness.  There are no standards.  Up becomes down; expectation becomes entitlement; measurement becomes mythology.  It is now a free for all.  Who can grab the most while there is still something left to grab? 

Without discipline there is nothing.  Without limits there is nothing.  Discipline and limits are both the master and the servant of progress.  Democracy is meaningless without discipline and limits.  As is capitalism.

Today the worker who takes no risk still receives great reward.  Why take risk if you can get great reward without it?  This simple new fundamental is the discipline of SEIU, AFSCME, AFL – CIO, NEA and AFT.  It dominates professional sports cum entertainment; dominates Wall Street, politics, government, education, health care and large business.  (See:  http://www.bloomberg.com/news/2011-10-19/beltway-earnings-make-u-s-capital-richer-than-silicon-valley.html   Washington DC has more people earning more than anywhere in the country.)  If you glance back at the words of previous essays you will find numerous examples on these pages of reward with no risk.  If you look around you, you will identify even more examples of reward without risk.  More than likely you could write your own essay with your own examples.

Much of today’s caterwauling is coming from folk who like their attainments under this new idea of reward without risk.  But don’t be surprised if you find a growing awareness among the hoi polloi, particularly the younger hoi polloi, who know something is amiss.  Something is wrong.  Something doesn’t make sense.  They will not see it for what it is right away but they will come around to seeing it clearly, we think. 

What the young will see is an undisciplined, no-limits culture around them that discarded RISK and REWARD and replaced it with expectation and entitlement.  And they can see that the train has left the station for them.  They can see that they cannot become part of the largesse of reward without risk because all they get are the scraps and the due bill.

They are not going to like what they get.  They don’t grasp now that a reward without risk culture is not their friend.  And few teach them that hard work is still a key fundamental basis of any wealth creation system.




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