Risk and reward

Upside and down

One of these days I will retire. And when I do I will have to make a choice regarding a pension fund I have been contributing to. I can leave the money in the fund and withdraw from it as needed. Or I can purchase an annuity, which will pay me a fixed amount per year for the rest of my life. There is an obvious gamble involved in the choice. If I leave the money in the fund, and I live a long time, I might outlive my savings. I would have been better off purchasing the annuity. If I opt for the annuity, and I die two years later, I and my heirs will come out short.

The decision will not be made in isolation. Like most American workers, I’ve been required to contribute to an annuity fund run by the federal government. It's called Social Security. It will pay me a fixed amount, adjusted for inflation, no matter how long I live. Unless, that is, there is a serious crisis in federal finance and the government can't make good on its promises. But that’s a separate issue.

So which will I choose? Play it safe or take a gamble? And which is the safe bet, and which the gamble?

This question, in a different but related form, is one every nation faces when it chooses its economic model. Should the nation maximize its upside growth opportunities, at the risk of downside danger? Or should it minimize the downside, and possibly lose out on an upside boom? The former characterizes capitalism, the latter socialism. The latter have strong protections for workers and robust social safety nets; the former favor lower taxes and fewer regulations.

Individuals within nations make choices when they take jobs. Should they look for safe jobs with predictable futures, or jobs that pay more but have less security? In the United States, some 22 million people work for government: about 3 million for the federal government and 19 million for state and local governments. Many of these jobs, especially at the federal level, come with considerable protection against termination. They also pay less, typically, than comparable jobs in the private sector, where job protection is much less.

I have one of the most secure jobs around. I’m a tenured professor at a thriving public university. The Texas economy would have to suffer a full meltdown before my job would disappear. This is a great perk. But everything comes at a cost. The cost here is that I get paid less than I probably would were the job market for history professors more flexible. I didn’t seek the job because it had tenure; I wanted to teach at the college level, and tenure was part of the package. I don’t think the world would end if tenure disappeared. But professors would have to be paid more to attract them to a then less secure occupation.

I’ve often thought it would be an interesting experiment if some high-profile university offered term contracts, without tenure, to faculty, renegotiable every five years, say. Which professors would take the offer? It would be most attractive to professors who thought their value to the university—or to another university—would be greater in five years. Presumably these would be the professors the university most wanted to attract and keep.

The experiment would work best if several or many universities took part. A thin job market for academic free agents wouldn’t be very competitive. And competition would be necessary to make the system work. If I didn’t like my current university’s job offer, I’d need to have a viable alternative.

The competitive system would attract entrepreneurial types. This suggests a side effect that would appeal to critics who think academia is infested by socialists. This impression is overblown, but it’s not wholly divorced from reality. For many professors, tenure is a big part of the appeal of the job. This doesn’t make them socialists, but it puts them on the less-entrepreneurial side of the psychological spectrum. We’ll call it the left side. People on the left aren’t as impressed with entrepreneurs as people on the right are, and as impressed as critics of academia think they should be.

Again, everything comes at a cost. The downside is that professors would be tempted to pursue what’s popular. There’s nothing wrong with this, but a principal justification for tenure is to permit the investigation of topics that aren’t popular at the moment but might be important in the future. In basic science, no one knows what will pay off twenty years hence. Even in the humanities good things can take time: the Oxford English Dictionary required seventy years to compile and publish.

Unpopularity per se is one argument for tenure. Who will tell the emperor he has no clothes if the teller serves at the whim of the emperor? This argument would be stronger if unpopularity within the academy itself were encouraged more. But guilds have their own expectations. What assistant professor is going to tell the dean she has no clothes when that professor is up for tenure?

Austrian economist Joseph Schumpeter famously characterized capitalism as a system based on “creative destruction.” Which side of the decisions described above different people take depends in no small part on whether they see themselves on the creative or the destructive side of Schumpter’s formula.

It would be nice if we could accomplish the creation without the destruction. But nobody’s figured out how to do that.