Friday, December 17, 2010

Security and Risk-Taking

Matt Yglesias cited David Leonhardt yesterday, arguing that safety net programs encourage risk taking, and that what he calls "this country's two economic traditions" (risk-taking and security) are in this sense not in conflict at all.

I think it's a quite reasonable point, and it reminds me of this classic paper by Lee Alston and Joseph Ferrie on paternalism and agricultural labor contracts in the South, and the relationship of that paternalism to the development of the welfare state. This is the abstract:

"The authors examine paternalism as an implicit contract in which workers trade faithful service for nonmarket goods. Paternalism reduced monitoring and turnover costs in cotton cultivation in the U.S. South until the mechanization of the cotton harvest in the 1950s. Until then, the effectiveness of paternalism was threatened by government programs that could have substituted for paternalism; but large Southern landowners had the political power to prevent the appearance of such programs in the South. With mechanization, the economic incentive to provide paternalism disappeared and Southern congressmen allowed welfare programs to expand in ways consistent with their interests."

The argument is somewhat different, of course. Alston and Ferrie did not present the welfare state as the catalyst. But the point was that a modicum of security was demanded by laborers, which Southern landowners provided. The problem was that that security came at the price of a stifling social hierarchy. Changing institutional and technological arrangements allowed for a less costly form of security to emerge.

The risk-taking that Leonhardt and Yglesias talk about isn't featured here, but their discussion of the demand for security and the role of the welfare system in providing a potentially more free safety net reminded me of this.

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