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Safety Nets And Economic Growth.

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I don't think it's unfair to say that a central meme of the prevailing Neo Liberal world view is that social safety nets are- from an entrepreneurial point of view- a bad thing- even if there are moral arguments for their preservation. The claim is that any kind of social protection from the forces of raw capitalism lead to an inherently less innovative and dynamic society.

But there is an anomaly here.

Imagine yourself for some reason forced to take part in a high wire act- with the bare minimum of training- how do you react? Well it's likely that you shuffle across that wire with utmost care and the absolute minimum of creative flair- your entire focus being to avoid falling to your death.

Now replay that same scenario with one difference- below that high wire you see a safety net. Is it not fair to say that in this case you are more likely to attempt some degree of creativity and innovation during your walk across that wire?

So we can derive the following lesson from this thought experiment- if you wish to encourage innovation and creativity in the performance of difficult tasks it helps if the consequences of failure can be mitigated to some degree.

Yet the neo liberals- who claim to be in the business of creating a more innovative and entrepreneurial society- are deeply hostile to almost all forms of social protection-(with the exception of bailouts for the rich)- arguing that these 'safety nets' will stifle risk taking and innovation. So they are intent on creating a society where-if you fall- your fall will be deep and perhaps irrecoverable.

In reality then instead of a creating a society where the individual might be tempted to take a risk on a new venture or business idea the Neo Liberal creed seems intent on creating a situation in which for most people the consequences of taking that risk may be so catastrophic that they dare not take it.

The irony then is that even as they call out for a more entrepreneurial society they are busily pulling away the basic social protections that might encourage people to take the risk of responding to that call- instead of a society of innovators and risk takers they are creating a society of such binary outcomes that-like our inexperienced high wire walker- the entire focus is on mere survival and any kind of innovation or creativity are simply too potentially costly to contemplate.

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I don't think it's unfair to say that a central meme of the prevailing Neo Liberal world view is that social safety nets are- from an entrepreneurial point of view- a bad thing- even if there are moral arguments for their preservation. The claim is that any kind of social protection from the forces of raw capitalism lead to an inherently less innovative and dynamic society.

But there is an anomaly here.

Imagine yourself for some reason forced to take part in a high wire act- with the bare minimum of training- how do you react? Well it's likely that you shuffle across that wire with utmost care and the absolute minimum of creative flair- your entire focus being to avoid falling to your death.

Now replay that same scenario with one difference- below that high wire you see a safety net. Is it not fair to say that in this case you are more likely to attempt some degree of creativity and innovation during your walk across that wire?

So we can derive the following lesson from this thought experiment- if you wish to encourage innovation and creativity in the performance of difficult tasks it helps if the consequences of failure can be mitigated to some degree.

Yet the neo liberals- who claim to be in the business of creating a more innovative and entrepreneurial society- are deeply hostile to almost all forms of social protection-(with the exception of bailouts for the rich)- arguing that these 'safety nets' will stifle risk taking and innovation. So they are intent on creating a society where-if you fall- your fall will be deep and perhaps irrecoverable.

In reality then instead of a creating a society where the individual might be tempted to take a risk on a new venture or business idea the Neo Liberal creed seems intent on creating a situation in which for most people the consequences of taking that risk may be so catastrophic that they dare not take it.

The irony then is that even as they call out for a more entrepreneurial society they are busily pulling away the basic social protections that might encourage people to take the risk of responding to that call- instead of a society of innovators and risk takers they are creating a society of such binary outcomes that-like our inexperienced high wire walker- the entire focus is on mere survival and any kind of innovation or creativity are simply too potentially costly to contemplate.

Unless you're well-off to begin with of course.

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I don't think it's unfair to say that a central meme of the prevailing Neo Liberal world view is that social safety nets are- from an entrepreneurial point of view- a bad thing- even if there are moral arguments for their preservation. The claim is that any kind of social protection from the forces of raw capitalism lead to an inherently less innovative and dynamic society.

But there is an anomaly here.

Imagine yourself for some reason forced to take part in a high wire act- with the bare minimum of training- how do you react? Well it's likely that you shuffle across that wire with utmost care and the absolute minimum of creative flair- your entire focus being to avoid falling to your death.

Now replay that same scenario with one difference- below that high wire you see a safety net. Is it not fair to say that in this case you are more likely to attempt some degree of creativity and innovation during your walk across that wire?

So we can derive the following lesson from this thought experiment- if you wish to encourage innovation and creativity in the performance of difficult tasks it helps if the consequences of failure can be mitigated to some degree.

Yet the neo liberals- who claim to be in the business of creating a more innovative and entrepreneurial society- are deeply hostile to almost all forms of social protection-(with the exception of bailouts for the rich)- arguing that these 'safety nets' will stifle risk taking and innovation. So they are intent on creating a society where-if you fall- your fall will be deep and perhaps irrecoverable.

In reality then instead of a creating a society where the individual might be tempted to take a risk on a new venture or business idea the Neo Liberal creed seems intent on creating a situation in which for most people the consequences of taking that risk may be so catastrophic that they dare not take it.

The irony then is that even as they call out for a more entrepreneurial society they are busily pulling away the basic social protections that might encourage people to take the risk of responding to that call- instead of a society of innovators and risk takers they are creating a society of such binary outcomes that-like our inexperienced high wire walker- the entire focus is on mere survival and any kind of innovation or creativity are simply too potentially costly to contemplate.

You see that in the US, where the fear of sliding down the scale if you lose your job and income means people never rock the boat......which means less innovation and more groupthink.

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I don't think it's unfair to say that a central meme of the prevailing Neo Liberal world view is that social safety nets are- from an entrepreneurial point of view- a bad thing- even if there are moral arguments for their preservation. The claim is that any kind of social protection from the forces of raw capitalism lead to an inherently less innovative and dynamic society.

But there is an anomaly here.

Imagine yourself for some reason forced to take part in a high wire act- with the bare minimum of training- how do you react? Well it's likely that you shuffle across that wire with utmost care and the absolute minimum of creative flair- your entire focus being to avoid falling to your death.

Now replay that same scenario with one difference- below that high wire you see a safety net. Is it not fair to say that in this case you are more likely to attempt some degree of creativity and innovation during your walk across that wire?

So we can derive the following lesson from this thought experiment- if you wish to encourage innovation and creativity in the performance of difficult tasks it helps if the consequences of failure can be mitigated to some degree.

Yet the neo liberals- who claim to be in the business of creating a more innovative and entrepreneurial society- are deeply hostile to almost all forms of social protection-(with the exception of bailouts for the rich)- arguing that these 'safety nets' will stifle risk taking and innovation. So they are intent on creating a society where-if you fall- your fall will be deep and perhaps irrecoverable.

In reality then instead of a creating a society where the individual might be tempted to take a risk on a new venture or business idea the Neo Liberal creed seems intent on creating a situation in which for most people the consequences of taking that risk may be so catastrophic that they dare not take it.

The irony then is that even as they call out for a more entrepreneurial society they are busily pulling away the basic social protections that might encourage people to take the risk of responding to that call- instead of a society of innovators and risk takers they are creating a society of such binary outcomes that-like our inexperienced high wire walker- the entire focus is on mere survival and any kind of innovation or creativity are simply too potentially costly to contemplate.

There are safety nets and there are safety nets.

Consider several forms of safety net:

  • On losing your job you get 6 months full pay (whatever your pay), 6 months 2/3rd pay (with a minimum), 6 months 1/3rd pay (with a minimum), then nothing . Then it takes 18 months working to reset back to full benefits again.
  • On losing your job you immediately get a minimum benefit (much less than your old pay), but forever.
  • On losing your job you get a minimum benefit forever, unless you've got savings in which case you get nothing until you've spent your savings.
  • On losing your job you get a minimum benefit forever, unless you've got savings in which case you get noting until you've spent your savings, and also unless you're a small business really struggling to get by in which case you also get nothing until the business actually folds completely
  • Similar to above but with a complex set of rules which makes it unclear whether you can get it at all, but which after spending many, many hours studying the rules, and after many, many discussions with 'subject matter experts' about different behaviours (children, hours worked, etc) you might actually understand how to get the best benefit for you.

Which type of system would encourage entrepreneurial risk taking? Which type of system is closest to what we have now?

[note that there is also a society safety net, which kicks in if you suffer a devastating injury/condition/disability in which case society looks after you - but this is unrelated to the the entrepreneurial safety net]

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You often read puff pieces in the Sunday Times or Telegraph about some "incredibly clever chaps" who have a start-up turning over millions selling Mexican-Chinese fusion food in Shoreditch.

When you read the details it turns out they've received a six figure loan from "friends and family" and saved their allowance for 6 months before starting the venture.

You'll then get an article saying the poor are to blame for their lack of entrepreneurial spirit.

In a real world example the richest person I know is a partner in a law firm. However to get his position he had to invest in himself to the tune of several hundred thousand. But he managed to do this because he had the safety net of family wealth. He could give up his £100k a year law job to earn £20k a year whilst retraining and studying because he had a free house in London and a family trust. To be fair he does accept this and says it himself but sometimes he does say things that make me think he has no idea about what the average family earns.

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When many people choose to lounge around on the safety net however rather than face the challenge of the tightrope walk the game becomes disfunctional.

That isn't the entrepreneurial safety net - that is society's safety net.

I know people who choose to take risks, start a company, take training in a new job, whateer. When they lose their income they tend to be out of work for a good few months and then get a job before doing something entrepreneurial again, or sometimes go straight into the next project. Typically they don't take any benefits at all during the unemployed phase, I think because of a mix of having too much in savings, the low benefit compared with what their lifestyle costs anyway, other family income (spouse works usually) and the fact that they're often working on their next project and so ineligible for unemployment benefit anyway (even if it hasn't actually got to an income stage yet).

the original post was about the cuts to the benefits system discouraging risk taking - I don't think the risk takers / entrepreneurs in our economy are close to the benefits economy at all, possibly for their entire lives (apart from the state pension, which IMO is usually a small fraction of their other pensions).

[i don't necessarily disagree with having a decent benefits system, albeit with some rigorous controls. And I'm open to the suggestion of using citizen's income to support people, particularly in this current climate where there may no may not be enough jobs for everyone - I'm just pointing out that IMO the current/past benefits system does absolutely nothing to encourage risk taking / entrepreneurship. ]

[That's also not to say that the government doesn't do stuff to encourage entrepreneurship - it just has nothing to do with benefits.]

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In a real world example the richest person I know is a partner in a law firm. However to get his position he had to invest in himself to the tune of several hundred thousand. But he managed to do this because he had the safety net of family wealth. He could give up his £100k a year law job to earn £20k a year whilst retraining and studying because he had a free house in London and a family trust. To be fair he does accept this and says it himself but sometimes he does say things that make me think he has no idea about what the average family earns.

That is a fair point. I'm more aware than I used to be of how people who come from a position of no risk actually do the entrepreneurship, and then make lots of money. It isn't being clever or skillfull or anything, it is just having the backing to do it. In fact, they often make many mistakes that a more rounded person might not make (well, someone who understands the real cost of doing something and doesn't just splash out on a new office and macs for everyone before having their first customer) - but they have the capital to survive. This is possibly depressing, but it is best to ignore it and just carry on trying to be productive as you can't do anything about it.

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How many entrepreneurs can one country have ?

Quite healthy for there to be quite a few - remember, it mainly isn't the big successes we hear from over and over again. With these entrepreneurs comes a shake-up of the established players, it keeps everyone on their toes, stops margins getting too big, etc*.

*Except where the 'entrepreneurship' is all about government largess (such as the UK solar industry, some NHS support contracts) where they will just reap whatever they can and then moan when the taps are cut off.

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US murder rates are rocketing again for the first time in a generation. The socioeconomic parallels with late 70s and early 80s seem obvious, when cities like Chicago and New York were bankrupt and falling to pieces.

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Quite healthy for there to be quite a few - remember, it mainly isn't the big successes we hear from over and over again. With these entrepreneurs comes a shake-up of the established players, it keeps everyone on their toes, stops margins getting too big, etc*.

*Except where the 'entrepreneurship' is all about government largess (such as the UK solar industry, some NHS support contracts) where they will just reap whatever they can and then moan when the taps are cut off.

I agree its good to have them - but this great desire for so many - does it actually make sense ?

To take it to extremes - and I always find that useful - what if everyone in the UK was one ? Who are they going to sell their stuff to ? Each other ? Fair enough up to a point - but there must be a limit.

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Imagine yourself for some reason forced to take part in a high wire act- with the bare minimum of training- how do you react? Well it's likely that you shuffle across that wire with utmost care and the absolute minimum of creative flair- your entire focus being to avoid falling to your death.

Now replay that same scenario with one difference- below that high wire you see a safety net. Is it not fair to say that in this case you are more likely to attempt some degree of creativity and innovation during your walk across that wire?

So we can derive the following lesson from this thought experiment- if you wish to encourage innovation and creativity in the performance of difficult tasks it helps if the consequences of failure can be mitigated to some degree.

To me, it sounds like your safety net is encouraging people to take on more risk (maybe even reckless) not innovative or creative, because they think they will be bailed out if it all goes wrong! What your example is missing is some sort of carrot to encourage the wire walker to take some calculated risk whilst traversing the drop!

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I don't think it's unfair to say that a central meme of the prevailing Neo Liberal world view is that social safety nets are- from an entrepreneurial point of view- a bad thing- even if there are moral arguments for their preservation. The claim is that any kind of social protection from the forces of raw capitalism lead to an inherently less innovative and dynamic society.

But there is an anomaly here.

Imagine yourself for some reason forced to take part in a high wire act- with the bare minimum of training- how do you react? Well it's likely that you shuffle across that wire with utmost care and the absolute minimum of creative flair- your entire focus being to avoid falling to your death.

Now replay that same scenario with one difference- below that high wire you see a safety net. Is it not fair to say that in this case you are more likely to attempt some degree of creativity and innovation during your walk across that wire?

So we can derive the following lesson from this thought experiment- if you wish to encourage innovation and creativity in the performance of difficult tasks it helps if the consequences of failure can be mitigated to some degree.

Yet the neo liberals- who claim to be in the business of creating a more innovative and entrepreneurial society- are deeply hostile to almost all forms of social protection-(with the exception of bailouts for the rich)- arguing that these 'safety nets' will stifle risk taking and innovation. So they are intent on creating a society where-if you fall- your fall will be deep and perhaps irrecoverable.

In reality then instead of a creating a society where the individual might be tempted to take a risk on a new venture or business idea the Neo Liberal creed seems intent on creating a situation in which for most people the consequences of taking that risk may be so catastrophic that they dare not take it.

The irony then is that even as they call out for a more entrepreneurial society they are busily pulling away the basic social protections that might encourage people to take the risk of responding to that call- instead of a society of innovators and risk takers they are creating a society of such binary outcomes that-like our inexperienced high wire walker- the entire focus is on mere survival and any kind of innovation or creativity are simply too potentially costly to contemplate.

It's very difficult to start a business while working a 40, 50, 60 hour week. The people who start businesses are generally people who don't have to work and have that safety net and the time and breathing space to develop a business idea. One thing I notice again and again are the amount of entrepreneurs who have a great maternity/paternity leave package and say that they started their business while on maternity leave. In Sweden especially where I work people get about a year off (male and female) and they often use the time to start a business of their own.

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It's very difficult to start a business while working a 40, 50, 60 hour week. The people who start businesses are generally people who don't have to work and have that safety net and the time and breathing space to develop a business idea. One thing I notice again and again are the amount of entrepreneurs who have a great maternity/paternity leave package and say that they started their business while on maternity leave. In Sweden especially where I work people get about a year off (male and female) and they often use the time to start a business of their own.

I think this is a fair point. The government could do stuff to help (reduce red tape, give some funding), but they don't do that much. I'd add that it is much more difficult to get government to give you a £10k gift to start your business, than it is to get £10k from government to keep you in a low income job.

[i set up my first business using using redundancy money. In the first 6 months I made just over minimum wage. No benefits as I was working, had savings (the redundancy + savings) and wife works. 2nd 6 months much better, but still less than benefits cap at that time, obviously still no benefits to be had. From that point it was fairly secure. But I had to have the funds to keep me going in the early stages]

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You might want people not playing it safe but you don't want sheer, utter recklessness. If your safety net is too secure you risk a lot being wasted on schemes that shouldn't have ever got onto the drawing board let along off it.

Labour competes with capital in the world of work. The accountant's skill is in trying to decide which is best for any given task or process. In the inevitable march of technology, surely the end point of the future is that people will only ever employ machines and will no longer employ other people. We're a very long way off I know but trends are important.

That seems to be the way it's heading and I question what it's actually getting us. Not having to work as much, not having to do boring, dangerous, or unpleasant jobs, good, but when it starts impinging on jobs that people don't mind or enjoy doing and are perfectly capable of doing then I can't help think that we're not heading in the most sensible direction.

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What you describe is akin to insurance - the spreading of the risk burden amongst many participants to reduce the individual chance of a very large loss. Insurance is a great invention - it allowed individuals to build up the merchant navy without facing individual ruin in the case of storms, etc.

Insurance works best when [a] there is no correlation between individual misfortunes (a counter example, a recession can cause many people to lose their jobs - the misfortune is correlated, so the burden is magnified and an insurance scheme may fail to cope), and where people cannot affect the risk exposure (a counter example is moral hazard - for example, "I've got car insurance so I can drive like an idiot").

So, in general, if 1000 tight-rope walkers got together and bought a shared safety net*, then we succeed on condition [a] (it's unlikely that some macro event can make all 1000 of them more likely to fall), but potentially we fail on condition (because it's possible that the safety net will make some of them more reckless). If you ignore the latter effect then your safety net fund is going to end up bust!

[*the analogy works best if you imagine the safety net can only be used once before needing replacement - otherwise the amortised cost is zero!]

So, yes, some "safety nets" can be used to encourage innovation and risk-taking, via careful use of condition (I would argue that "limited liability" via companies is one such mechanism). However, it's a matter of using the right tool for a given job, and being careful to understand all the consequences!

Edited by norseraider

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To me, it sounds like your safety net is encouraging people to take on more risk (maybe even reckless) not innovative or creative, because they think they will be bailed out if it all goes wrong! What your example is missing is some sort of carrot to encourage the wire walker to take some calculated risk whilst traversing the drop!

It's true that 'too big to fail' creates a perverse incentive to take more risk in order to grow big enough to qualify for this kind of protection.

And it's also true- as other posters have pointed out- that any form of safety net will lead to some people taking advantage of it.

But my point was that even viewed through the lens of Neo Liberal thinking the idea of creating a ruthlessly binary system in which failure is catastrophic is a poor strategy. If you really want a society in which the average person might be prepared take a risk on starting a small business then having some degree of social welfare provision is not a hindrance to this but may in fact be an important facilitator of it.

The more binary a system you create between the winners who take all and the losers who are utterly destroyed the less risk taking you will see.

The problem is that- like so much Neo Liberal argument- the claim that welfare is inherently antithetical to entrepreneurship is less grounded in fact and more a product of the class bias of those whose money funds the 'research' that supports this conclusion.

There ought to be a word to describe the congruence between the published opinions of a 'think tank' and the opinions of those providing the funding- a congruence that is far too prevalent to be the result of mere coincidence.

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There ought to be a word to describe the congruence between the published opinions of a 'think tank' and the opinions of those providing the funding- a congruence that is far too prevalent to be the result of mere coincidence.

Well "He who pays the piper, calls the tune" isn't a word, exactly. But it could be, if you can pronounce hwptpctt.

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The FT had a link to a piece on citizen's income today - here. It is an interesting piece, and put forward some arguments for a 'UBI'.

A couple of points:

  • (relevant to this thread) - the whole thing about a UBI providing support to entrepreneurs is relevant - the no questions asked part makes it very compatible with early stage business
  • There are negative aspects of conventional benefits that UBI would overcome (eg, high marginal effective tax rates when you start employment)
  • UBI effectively improves the bargaining power of workers
  • UBI would almost certainly increase inflation - but that is what is required at the moment (says the central bank)
  • UBI is a flexible way to solve a secular stagnation problem - ie, you can rapidly adjust the UBI according to the needs of the economy

Anyway, the actual outcome of a UBI is possibly hidden in the middle of the piece:

This obviously won’t work when serious market failures are present: [...] Monopoly power in the face of inelastic demand +For example in San Francisco, much of the benefit of a UBI might be captured by property owners as recipients use their augmented incomes to even further bid-up rents

!!! - for San Francisco read 'the UK'

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Nope - a CI in the UK would lead to rents falling. Rents are baslined here on the level of housing benefit. WIth a CI - this would cease to exist and the amount non workers could pay - would fall.

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Nope - a CI in the UK would lead to rents falling. Rents are baslined here on the level of housing benefit. WIth a CI - this would cease to exist and the amount non workers could pay - would fall.

This ^^,rents (and house prices) would fall heavily with a CI.It would be set much lower than Income Support+Housing Benefit levels.The housing problem though is the main thing standing in the way of a CI.How do you get from A to B when so many people would see huge cuts? (in the short term).You could keep HB though and set it at a lower level and means test it away at say 50% from the first £ of earnings.(a CI removes the need to have earnings disregards).

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This ^^,rents (and house prices) would fall heavily with a CI.It would be set much lower than Income Support+Housing Benefit levels.The housing problem though is the main thing standing in the way of a CI.How do you get from A to B when so many people would see huge cuts? (in the short term).You could keep HB though and set it at a lower level and means test it away at say 50% from the first £ of earnings.(a CI removes the need to have earnings disregards).

And hence the main reason - why the PTB are dead against the idea. Most of them have at least one finger in the property pie.

Turkeys dont vote for Christmas comes to mind.

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