Separation Anxiety

Friendly Society

If given the choice to live in a world dominated by risk or uncertainty, I would choose risk every time. Risk is manageable. Risk can be hedged. Risk can even bring people together.

Take the Friendly Societies of the 18th and 19th century. These predecessors of the modern insurance cooperative helped to distribute financial risks among their members. But in addition to providing access to doctor care or income in tough times, members could literally count on a shoulder to cry on. The prerogative of a decentralized social safety net had the by-product of strengthening the all around community, in the form civic engagement, social events and close knit relationships.

Friendly and mutual aid societies flourished for over 300 years in places like England thanks to the challenge of measuring risk accurately, especially on an individual level. For the most part, insurance schemes, both formal and friendly, brush over the immense heterogeneity of risk types to come up with a flat rate or membership premium — an average cost — which in our fundamental ignorance we agree to pay.


In fact, when individual risk is well known (usually by the individual him or herself) our ability to manage risk with insurance or mutual aid tends to break down. For instance, a person seeking health insurance may choose to conceal their heightened risk of cancer by not sharing their family history. In their famous 1976 paper, Stiglitz and Rothschild showed how this kind of asymmetry of information makes insurance hard, if not impossible. In contrast, consider that a young man cannot easily conceal the salient fact that he is young and male. Since this correlates with worse driving, auto insurance is able to separate into several pools, or to charge several prices, without worry of members misrepresenting their risk type.

In the jargon of game theory, this is the difference between a pooling and separating equilibrium, and it’s not limited to insurance. In any scenario where the type of person or good is not directly observed, you instead observe a signal — a piece of communication — which may or may not be informative. But when different types put off different signals, even if they’re not wholly accurate, types can be discerned, separated and priced accordingly.

In the case of England, Friendly Societies tended to be grouped around industry, skill level, and other imperfect “types”. As a whole, then, the Friendlies weren’t totally unsophisticated. But relative to modern insurance, the mechanisms available for making members reveal their riskiness were first order approximations at best.

History’s Card Sharks

This wasn’t necessarily a bad thing. In the limit, if every person has an idiosyncratic and public risk profile, insurance would be like trying to bet a round of poker with the cards face up. Rather than spreading the cost of car accidents, or health care, or unemployment across large groups, we would be much closer to paying our own way in full. While this could be considered efficient in a narrow sense (each consensually pays his or her marginal cost), in practice it could also be disastrous. Rather than having the congenitally lucky occasionally support the unlucky, the unlucky would lose by predestination. There’s no point in bluffing — you’re simply dealt the hand you’re dealt.

Now imagine Friendly Societies as represented by a group of casual poker players that meet regularly. The play is sloppy and heuristic based, and no one really knows how to calculate pot odds. Sometimes you’re up, sometimes you’re down, but in long run everyone tends to break even. Then one day a new player is invited, a player who happens to be a poker tournament champion and retired statistician. Sometimes he’s up, sometimes he’s down, but in the long run the rest of the table ends up consistently going bust. A friendly game among friendly society suddenly isn’t that friendly anymore, and the group disbands. This is more less the story of how Friendly Societies went from flourishing to sudden decline around the turn of the 20th century.

Innovations in the science of actuarial analysis (the statistical study of risk) had been diffusing through society since at least 1693, when Edmond Halley constructed the first “life table” allowing him to calculate annuities based on age. Not long after in 1738, Abraham de Moivre published “The Doctrine of Chances,” credited as discovering the normal distribution that was greatly expounded on by Gauss in the 1800s. Then in 1762, The Equitable Life Assurance Society was founded, with the first modern usage of the term “actuary” (the company exists to this day as Equitable Life, the world’s old mutual insurer). However, as a profession, insurance was truly born much later in 1848, with the founding of the Institute of Actuaries in London, thanks to breakthroughs in measurement and accounting techniques (such as commutation functions) that brought the doctrine of chances from theory to practice.

Scientific actuaries were history’s card sharks. In order to compete, Friendly Societies were forced to adapt — to learn to better calculate the odds — and ultimately they converged on many of the same administrative, procedural, and “scientific” insurance-like structures. The growing (and widely misused) economic surplus this generated fueled an insurance boom peaking in the later part of the 19th century. For efficiency advantages, societies began deepening national networks well beyond the scope of brotherly love, and strove to expand risk classifications and reduce exposure to high risk types.


By better classifying risk, the “flat rate” pooling equilibrium of the 18th century and earlier rapidly became untenable. Across Europe, the market became increasingly separated, with many differentiated premia and some high-risk types pushed out altogether. This fueled a growing industrial unrest that culminated with the consolidation of private social insurance schemes into nationally run systems.

Commercial insurance, by generating a burst of competition and transitory political instability, was in a sense a victim of its own success. But as many economists have noted, while decidedly non-voluntarist, national schemes (like the one instituted in the UK by the National Insurance Act of 1911) were able to discover large efficiencies of scale through less administrative intensity, tax-based collections, and a comprehensive risk pool. This transaction-cost advantage — and the centuries of social capital it crowded out — guarantees that the days of the close knit mutualists are gone for good, save for some religious congregations. In their stead stands L’Etat Providence — The Welfare State — via a historical process that (as I’ve described) was most rigorously identified by French legal scholar Francois Ewald in a book by the same name.


The point of this essay (if you’ve made it this far) is to suggest that we are in the midst of a measurement and statistical revolution of equal or greater scale as the 19th century diffusion of actuarial science, with potentially many of the same social and political implications.

With a $99 genotype and sub-$1000 whole genome sequence, in the near future the idea of an insurer asking for your family history of cancer will seem quaint. The immense and inevitable promise of genomics and personalized medicine also portends the inevitable collapse of large, relatively heterogeneous insurance pools, in favour of equally “personalized” healthcare costs schedules.

As I hinted at earlier, this phenomena of moving from pooling to separating equilibria following  advances in measurement technology is by no means limited to risk or health care. Any qualitative distribution can be theoretically mapped to a price distribution, but wind up collapsing into a single price given practical measurement constraints. For example, in the past mediocre restaurants were partially supported by the churn of ignorant consumers, since reliable ratings and reviews were hard to come by. Today, rating platforms like mean that restaurants of different quality have more room to raise or reduce prices accordingly, to separate based on credible signals. It’s the end of asymmetric information.

In the corporate setting, pooling equilibria are represented by relatively flat salary structures given a particular seniority, department or education level. Sometimes there is a commission or performance bonus, but day to day productivity is rarely if ever tracked. This opacity is what permits the possibility of zero marginal product (ZMP) workers — workers who literally contribute nothing to a firm’s output.

For any given kitchen, at some point an additional cook does not actually produce more food. While it can be misleading to say that any particular cook is non-productive (maybe there are simply too many cooks in the kitchen), in deciding on which cook to dismiss it matters a great deal that the cooks aren’t all equally productive. On the contrary, the individual contribution of every kind of worker to a firm’s output is often extremely heterogeneous, with the top 20% of workers contributing as much as the lower 80%.

With automation and artificial intelligence reducing the demand for human inputs, the kitchen, so to speak, is shrinking.  It has therefore become paramount for firms to identify the 20 and eject the 80. The contemporary increase in country level inequality is widely recognized as technology driven, but few have put their finger on the micro-foundations that explain why. Part of the story is surely “human-machine substitutability,” but in addition firms have simply started monitoring and classifying worker productivity better than in the past. This leads to a separating equilibrium that shows up in the data as job market polarization, rising premia on the central “signals” like college degrees, and (to the extent that signals are sticky) reduced social mobility. Unsurprisingly, a class based society is first and foremost a society which classifies. The silver lining in this case is that, rather than classes based on pedigree, nobility or race, the future promises to be highly — if not brutally — meritocratic.


In one future scenario, just as actuaries identified groups that were uninsurable, perhaps large sections of society will discover they are unhirable. Supposing they have too many “one-star” ratings, as it were, on their HR record, their only hope will be in working for fellow one-stars, and to build a matching-economy around their mediocrity. This is essentially the “Average is Over” scenario imagined by Tyler Cowen, who foresees the return of shanty-towns across the United States. But I wouldn’t bet on it. In many ways, the recent calls for a “universal basic income” exactly parallel the early 20th century’s push towards nationalized social insurance. Only here it is labour-income itself that would be nationalized, as part of the inescapable political economy of separation anxiety.

My own anxiety stems from that fundamental uncertainty of the future, as if the social order is dancing along a knife edge dividing two radically different steady states. In either state — from hyper-meritocracy to a New New Deal — the case of the Friendly Societies demonstrates that the only thing for certain will be the loss of our sacred intangibles: the unmeasured qualities that united distinct types under one roof, from the fraternal lodge to the corporate office.

How Public Welfare Enhances Social Capital

Lamenting the atomism of modern society, the decline of community, associations and other forms of “social capital,” is such a common refrain on both the left and right that one wonders why they haven’t put aside their differences to form a club! I hear there are some vacancies down at the YMCA, and I bet you rates have never been so good. Call it… the Enemies of Anomie & Toastmasters Society.

Yet theorists of social capital spend more time writing about it (in itself a highly autonomous practice) than they do actually forming new co-valent social bonds. Perhaps it’s because, for both camps, the decline is seen to have been caused by such deep and hard to resist forces that they are equally resigned to pontification.

On the right, the deep source of creeping atomism is the all-encompassing, bureaucratized welfare state. Redistribution in this view is inherently trust-reducing due to its zero-sumness (Mary robbing Peter to pay Paul). For example, its argued that universal social programs crowd-out private safety-nets, like religious organizations or the family, destroying unseen pro-social externalities. In some accounts this merely accelerates a feedback loop of eroding social norms that was initiated the second Western Civilization embraced value pluralism.

Surprisingly, many on the left have come to similar conclusions, if only in a different vocabulary. Habermas, for example, has argued that state welfare systems “colonize” more natural forms of solidarity, contributing to their “reification” — an objectifying process by which implicit social relations are made explicit and impersonal, sapping them of their moral character. Readers of Sweet Talk might know this as a re-balancing from the sacred to the profane, the inherent transcendental and instrumental duality of all social relations.

Heady stuff. But is any of it accurate? Is it an inexorable law of late capitalism that we become individuated narcissists? Is there some theorem in Public Choice that says more welfare = less social capital? The answer to both is a big fat no.

In fact, the inverse relationship between social capital and the modern welfare state has been greatly exaggerated. There are three main reasons for this tendency, which I explore below: Continue reading “How Public Welfare Enhances Social Capital”

Someone ought to decide

The problem with compasses is that people with compasses think they know where they’re going.

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Sam W. make the observation (supported by good evidence) that an Unconditional Basic Income reduces the amount of time people spend working in the formal job sector, or looking for work in the formal job sector. And that’s bad, because policies that marginally discourage people from spending more time in the formal job sector are bad policies.

Policies that don’t pay people to stay at home at care for young children or elderly and sick parents or spouses are bad polices.

Policies that don’t pay people to stay up late at night writing a novel or coding or painting or experimenting in their privately-owned lab are bad policies.

Policies that cause people to spend 10% more time during the week on charitable causes are bad policies.

Policies that produce 5% more home-cooked meals, rather than the more efficiently produced pizza deliveries, are bad polices.

We want policies that produce jobs, and encourage people to spend more time at those jobs. And we know what jobs are. They’re at corporations and government agencies. They’re formalized, and have Tax ID numbers, and are incorporated under statute. They produce reams and reams of useful Board minutes and HR compliance policies. Those are real jobs. Not like some goofballs spitballing in the park about a better way to keep the neighborhood clean – they don’t even have an LLC agreement.

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Of course I don’t believe any of that. I believe the opposite. I think the Unconditional Basic Income is awesome, and I support it – unconditionally. Because I don’t trust the government or any other agency to know what a real job is.

I don’t want the IRS auditing our lives to determine whether a home office is a “real job”. Or whether my collaboration with a neighbor rises to the level of officialness that it warrants government subsidy. I don’t want to file paperwork that proves to some bureaucrat or politician that it was time well spent.

I think people can be trusted to know what their lives need. Maybe they need more money, but maybe they need to spend more time with their kids – kids that can’t afford to pay them for that parenting service. Maybe they have enough to live on and would gain more happiness by participating more in the Church and at the homeless shelter, giving to those who cannot provide them with anything in exchange but gratitude.

And this is a generalizeable principle. I’m not a fan of having the government decide what people ought to do. We know the government shouldn’t decide how to allocate resources (Communism = bad), so why give them the power to determine (or at least marginally encourage) what categories of activity resources should be allocated to? Why adopt a policy that officially discourages tinkering and trying new things with the minimal amount of regulatory overhead? That doesn’t seem wise to me.

Of course this is where someone jumps in and says people are rationally selfish and won’t do hard and ugly things that need doing without payment. That’s somewhat true. No one wakes up at 3 AM to collect garbage as a hobby. But let me state three priors that cause me to believe this won’t be a harmful policy: (1) I believe that people have a strong innate desire to be seen as productive and useful members of society, so no one is going to stay at home playing video games forever. Eventually the desire for respect will drive them out. (2) Most proposals of UBI provide a very low level of income. You’d only agree to live off that alone if you’re really passionate about what you’re doing with your unpaid time. My hunch is that that kind of passion only comes from things that are driving value to someone, somewhere, eventually, even if it’s not getting compensated at that moment. And (3) My Adamtopia has minimal barriers to new entry in all sectors, so the high levels of unemployment you see in socialist countries that ban competition should never occur. I think that sort of apocalyptic level of resource-wasting is more associated with banning industriousness than subsidizing sloth.

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Unconditional Basic Income. Because someone ought to decide where your efforts are best lent at a given time, and that someone is you.

Voluntary Workfare

The 1996 TANF reforms turned the legacy welfare payment system from chronic support into something closer to an income-smoothing program. Recipients are eligible only temporarily, and subject to certain restrictions. Unconditional Basic Income proposals aim to reverse that idea, to deliver cash to everyone to do with as they please.

Contrast that with wage subsidies, or conditional income, where you’re eligible for transfer payments tied to good-faith efforts to stay employed.

I ask myself what the purpose of transfer payments are. Are they chiefly to help ease liquidity problems for people who find themselves intermittently employed, or are they chiefly to support people who, for reasons of accident or injury utterly unable to support themselves with the fruits of their labor?

Unconditional Basic Income may produce unintended, unwanted consequences. Workfare addresses some of these worries, but can it not carry with it the risk of heaving out the most vulnerable on their backsides? 

I’m afraid I see no good way for an omnibus repeal of the crazy ad hoc patchwork of transfer systems to stick given what I know of public opinion from my time spent questing in the realm of the General Social Survey. Workfare is a tradeoff, not a solution.