The Investor as Hero; W. Irvine

How did investors respond to these crises? For the most part, with silence. What is striking about this reaction is what investors did not do. They did not ask the government to return the money they had lost. They did not complain that the sys tem had treated them unfairly. They did not ask that the markets be closed to prevent similar dis asters in the future. What they did (in all but a few cases) was accept their losses as part of the price of risk-taking. This attitude used to be common among Americans: If you take risks, you have to take an occasional loss. Although this attitude still pre dominates among American investors, they are unusual in this respect. More and more, Ameri cans are willing to accept the rewards of risk taking but not the costs. Consider some illustra tions. When several state-insured thrifts collapsed in Ohio a few years back, savers-who for years had been happy to accept the above-average in terest payments of these institutions-were con fronted with the downside of their risk-taking.

How did they respond to their losses? They peti tioned the State of Ohio to bail them out. The state was glad to comply with their request. It not Professor Irvine teaches philosophy at Wright State University in Dayton, Ohio. only made good their losses, but let them keep the rewards (i.e., the above-average interest pay ments) that their years of risk-taking had earned them. North of Los Angeles one finds a rather special breed of risk-takers: people who own million-dol lar homes on Malibu Beach. There is strong evi dence that Mother Nature does not want houses built on Malibu Beach. In one season she sends down boulders and mud slides to crush the hous es, and in another she sends massive waves to wash them away. The residents of Malibu Beach are content to accept the rewards of their risk-tak ing, but no sooner are they asked to pay a price for it than they request various forms of govern ment assistance-funded, one should note, by people who cannot afford million-dollar homes.

Farming is by its very nature a risky business, and one would assume that farmers realize as much. In this century, though, farmers have shown themselves to be far more adept at bank ing the profits of good years than they are at ab sorbing the losses of bad years. As a group, farm ers are notorious for their willingness to tum to the government for subsidies in times of adversity and for their unwillingness to relinquish these subsidies when adversity is conquered. A point of interest: Five decades later, farmers are still bene fiting from programs created to deal with the drought conditions of the 1930s. Businessmen, too, have a tendency to run to the government when they gamble and lose. For years bankers have been trying to palm off their bad Third World loans onto America's taxpayers. The bankers would have resented it if, in the 1970s, a government official had advised against 13 Afturry ofactivity:Fridaythe 13th.

these loans or taken steps to block them; now that the loans have gone bad, these same bankers are happy to turn to government officialsfor ad vice-and, more important, for financial help. This list could go on, but I think the point is clear. In years gone by, Americans who took risks expected to pay for their losses-and were ex pected to do so by the rest of us. These days, though, Americans who take risks all too often view Uncle Sam as a form of disaster insurance: When times are good, premiums cost nothing; when times are bad, claims can be filed with the media and various elected officials. This attitude is unfortunate in two respects. First, it reveals what many would take to be a se rious character flaw. If you expect freedom to do as you choose, it is only right that you should be willing to take responsibility for your actions. Likewise, those who accept praise for what they do should be also willing to accept blame. The desire to accept the rewards of risk-taking but not its costs is at best a sign of immaturity and at worst a sign of amorality.

Second, when the government has a policy-stated or unstated~of bailing out risk takers, the economic consequences can be disastrous. If we tell risk-takers that they will have to pay the price for their miscalculations, we give them an incentive to think long and hard before taking risks and thus improve the chance that they will take only "rational" risks. If, on the oth er hand, we adopt policies that let them pocket their winnings and walk away from their losses, we encourage recklessness in their risk-taking. Worse still, we force taxpayers to pay for the damage caused by this recklessness. This brings us back to the investors who were sent reeling on Black Monday in 1987, and on Friday the 13th in 1989.Taken as a group, Ameri ca's 40 to 50 million investors took their losses in a matter-of-fact way. In doing so, they showed us the stuff they are made of. The silence of Ameri ca's investors was not, as some might suggest, a sign of their inherent fatalism or masochism. In stead, it marks them as responsible risk-takers, a breed whose numbers have declined substantially in recent decades.

America's investors may not have emerged from the recent crashes with their nest eggs in tact, but at least they emerged with their dignity intact. Not every American risk-taker can say as much. D 14 The Folly of Rent Control by James A. Maccaro R ent control was established in New York City during World War II as an emergency measure to combat feared wartime profiteering. More than two generations later, rent control is still in place, and has inflicted more damage on the city than the war itself. As Swedish socialist economist Assar Lindbeck has written, "... rent control appears to be the most efficient technique presently known to destroy a city-except for bombing."1 Anyone who seeks confirmation of this statement needs merely to tour the urban blight which sadly covers much of New York City. The destructive effects of rent control are pre dicted by the laws of supply and demand. The law of supply states that the supply of a product, such as housing, will increase as the price rises; while the law of demand states that demand for a product will decrease as its price rises. These propositions would appear to be intuitive, and are illustrated countless times in the marketplace.