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Posted Apr 30, 2012, 6:45 PM
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Join Date: Dec 2003
Location: Stockholm
Posts: 12,805
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British Columbia needs to take more risks for a better economic future
Interesting article...sums up what I've been thinking for awhile:
http://www.vancouversun.com/business...424/story.html
Harvey Enchin: Want a better life? Then take risks
There would be no human progress, innovation, or medical breakthroughs without taking a gamble once in a while
By Harvey Enchin, Vancouver Sun April 27, 2012
Quote:
.....The message is clear. No risk is an acceptable risk.
Is this a tenable position? We do not live in a risk-free world. There would be no human progress without risk, no wealth creation, no innovation, no medical breakthroughs, no athletic achievements — nothing to advance our well-being, freedom and prosperity.
American economist Frank Knight defined risk as a situation where outcomes are unknown but are governed by the logic of probability. In other words, risk can be quantified and, as such, can be managed, mitigated and insured. Uncertainty, on the other hand, confronts us with “unknown unknowns” that cannot be analyzed in this way.
Too often, risk is seen as having only negative connotations; that any outcome will carry catastrophic consequences. In finance, however, risk is associated with variability, such that the greater the risk, the higher the return.
Risk that includes upside as well as downside is what drives entrepreneurs to start businesses. They know the odds: Half of business start-ups fail within the first five years, and only 29 per cent are still alive after 10 years. But the rewards of success, which are enthusiastically spelled out in every business plan, make taking that risk worthwhile. Medieval philosopher Thomas Aquinas was among the first to recognize that the capitalist who takes the risk “rightly receives the gain coming thence.”
As start-ups mature, they grow, invest and create jobs and in so doing, generate economic growth while providing incomes for families and tax revenue for governments.
In the absence of risk, there would be no Facebook, Google, Microsoft or Apple — or, for that matter, TD Canada Trust, Teck Resources or Telus.
In equities markets, investors use fundamental and technical analysis to weigh the risk of purchasing a stock. The adventurous may opt for speculative issues that offer superior growth potential; more conservative investors may choose blue chips that promise regular dividends and stability. Prudent speculation is key to free economies because it ensures liquidity. Economic vitality is enhanced when buyers and sellers can manage risk by quickly entering or exiting the market.
Too often, risk is misunderstood and some seek the impossible goal of reducing it to zero. They implore governments to regulate, or even ban, activities that they deem “too risky”, whether it’s bodychecking in hockey, chlorine in drinking water, new road construction, oil and gas drilling, military interventions, hydroelectric projects or pioneering medical treatments, to name a few.
But regulation carries the risk of stifling innovation, reducing economic growth and inviting unintended consequences. Regulations can induce the phenomenon of moral hazard, elucidated in 1975 by economist Sam Peltzman at the University of Chicago who noted a law requiring seatbelt use led to an increase in speeding. “The greater protection,” he wrote, “had reduced the price of risky driving?...?by reducing the consequences you could expect if you got into an accident.”
What’s more, estimates of the cost of compliance for federal, provincial and local regulations stood at $85.7 billion in 1994 and have certainly climbed since then (there are no reliable up-to-date figures available). The cost of tax compliance and administration alone ranges from $18.9 billion to $30.8 billion (Compliance and Administrative Costs of Taxation in Canada, Francois Vaillancourt and Jason Clemens, 2007).
Spending billions on regulation intended to limit often minor risks diverts resources from productive wealth-generating, job-creating activities, which actually increases the risk of poverty, the leader in estimated loss of life expectancy (at 3,500 days, it’s higher than smoking and heart disease). It can be argued, then, that introducing regulations that reduce job creation increases poverty, which raises the risk of death.
“People will not take entrepreneurial or speculative risks if their endeavours are not protected from arbitrary interference, if they are not guaranteed stable ownership of the capital put at risk, or if the bulk of the proceeds are sequestered from them,” wrote Samuel Gregg, an author who marries moral philosophy with political economy and is research director at the Action Institute in Grand Rapids, Mich.
As of September 2011, the capital cost of major projects under construction in British Columbia was $67.6 billion, including retail, office and condo building, mine expansions, highway improvements, school upgrades and resort development. Including proposed projects boosts the cost to $121 billion.
There’s more to come if the B.C. government realizes its goal of opening eight new mines by 2015 and building a liquefied natural gas plant near Kitimat. If it proceeds, there will be substantial economic spinoffs from the Enbridge Northern Gateway pipeline project between the Alberta oilsands and Kitimat.
None of these projects is without risk. There is no such thing as risk-free. British Columbians who fear to embrace risk will scare themselves into economic stagnation. Risk is not just a four-letter word; it is the catalyst for every human endeavour. It is the essential ingredient of progress.
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