Most organizations or societies function appropriately when everyone has skin in the game. Mutual dependence is what makes the world go around. In tribal societies, the rule is very simple: pitch in and help or we will ban you and you can go hunt on your own. NFL quarterbacks don’t usually trash their offensive linemen in the media no matter how many times they got sacked on Sunday. Mutual dependence: one of those scorned linemen might miss a block accidentally on purpose in a later game. Prior to 1970, investment banks were required to be private partnerships. Capital was handled carefully because the capital belonged to the partners. When it is OPM (other people’s money) far less care may be exercised. Anyone remember 2008? Even in investment management, Morningstar wants to know how much portfolio managers have invested in their own funds. Hedge fund managers are often required by prospective investors to have significant investments in their own funds. The whole point is to discourage abusive behavior on the part of a few members of the organization or society.
The United States is perhaps close to a tipping point in this regard. According to the latest tax data, 47% of Americans pay no federal income tax. Those of us who do are effectively subsidizing most of the nation’s spending. If you have no stake in the system, it’s much easier to feel good about taking advantage of it. Wouldn’t everyone be in favor of massive federal bailouts that benefited them if they weren’t paying for any of it? Doesn’t it make sense to make everyone have some kind of stake in the system, no matter how small? After all, as Margaret Thacher famously quipped, “The problem with socialism is that eventually you run out of other people’s money.”
