Daniel Hannan is Director-General of the Institute of Economic Affairs.
Would you rather have £50,000 in your pocket now, or a 50-50 chance of getting £1m?
If you are a typical British adult, you will take the first option. And that, I am sorry to say, is why we are in such a mess. Britain, which pioneered the market economy and gave the world the Industrial Revolution, has sunk into safetyism.
According to YouGov, 73 per cent of Britons would take the 50 grand, and only 21 per cent the shot at the million. Which, in a nutshell, is why we are not growing. It is not as simple as saying that a 50-50 chance of £1m is equivalent to £500,000, and is therefore 10 times more valuable. The rational choice is in part determined by your circumstances. If you already have £5m, the riskier option is more attractive than if you have just £5,000. Economists call it “logarithmic utility”, meaning, roughly, that the richer you already are, the less any fixed sum will improve your happiness.
There is even a formula to work out the point at which it becomes rational to take the 50-50 risk rather than the certain £50,000. That point, in this case, is when you have assets of £2,778. Anything above that and it makes mathematical sense to hold out for the larger sum.
It is true that human beings are irrationally risk-averse. Still, £2,778? That is a level of average assets found only in the poorest parts of Africa. We are thinking like a Third World country – and, if we carry on like this, we will turn into one.
The readiness to take calculated risks is a defining feature of a dynamic economy. To launch a business takes courage. You are forgoing a regular salary, job security and pension contributions. You are risking your own assets, and are probably also on the hook for what you have borrowed.
You have responsibilities to your employees and your customers, but little control over external factors such as the state of the economy, the tax rate or the quality of the competition. You are the last to get paid, getting your share only after you have met your obligations to your staff and your suppliers.
A healthy society recognises that people will take these risks only if there are commensurate rewards. It acknowledges that we all benefit from the success of wealth-creators. In short, a prosperous country understands the value of taking the calculated bet on the £1m rather than settling for the smaller sum.
We were once such a country. Not now. One encounters Britain’s obsessive risk aversion in a thousand small daily encounters. The way, for example, that restaurants now ask us whether we have allergies. Not so long ago, it was up to us to say what foods we couldn’t eat. The change may seem trivial, but it is symptomatic of a society that takes the worst-case scenario and builds it into a rule for everyone.
We see the same thing when trains stop and wait for the police when a drunk passenger insults a member of staff, rather than simply bunging the drunk off at the next station.
We see it in how state schools teach to the slowest rather than the median member of the class. We see it in our readiness to tolerate a thousand cases of welfare fraud rather than risk a single deserving recipient losing out. We see it in the obsession, on campuses and in public-sector institutions, with protecting people from the imagined harm caused by hearing disturbing opinions.
Never was our risk aversion more calamitous than in March 2020. Whatever we now tell ourselves, lockdown was not imposed on an unwilling nation. Many of those now complaining about its economic effects were demanding stricter controls at the time.
The couple of dozen of us who pointed out at the start that the costs were disproportionate were screamed at for “putting the economy before lives” – as if the economy were some separate entity that sat alongside human beings rather than being the name we give to the voluntary transactions through which people pursue happiness.
Is our cowardice permanent, cultural? No. Culture proceeds from incentives. There was a widespread view in the 1970s that the British were work-shy. In fact, all that was needed was a tweak in the rules for the same people, in the 1980s, to become model entrepreneurs.
Scrapping our most disproportionately safetyist laws, from financial services to the Online Safety Act, would itself alter our behaviour. It would restore something of the buccaneering culture that our restless ancestors took for granted.
Stop teaching young children that any kind of action they dislike is bullying. Stop teaching older kids that bad behaviour is really a mental health issue requiring reasonable adjustments. Stop teaching university students that being exposed to disagreeable opinions is traumatic. Stop teaching graduates that a life in the public sector is desirable because it offers security; or police recruits that stopping crime is secondary to DEI.
Normalise risk-taking, applaud boldness, recognise courage. We’ll start growing again soon enough.
In part, it comes from our comprehensive adoption of the EU principle of an extreme type of Precautionary Principle. It's why the EU will not embrace AI and why we should not import their rules on GM and so on. Also, the continental systems based on the Napolenic Code, as opposed to the English common law, which culturally regards anything that isn't regulated by the State as deeply suspect. Whenever a freak, 1 in a 1,000 accident occurs - up goes the cry - we need a law to stop this ever happening again. And then there is the arrant nonsense of "you can't put a monetary value on a human life".
The odds that you mention (£50k for a 50% chance at £1M) were pretty much the same when buying a share of a company to run almost 20 years ago. It took 5 years but the risk paid off.
I’m seventy now; how many would do it today?