Shares in people

Arian Foster, a running back for the Houston Texans, wants to sell shares in himself so investors can buy a portion of his future earnings. This prompts the question: why isn't there more of a market in shares in people? (No, Bowie bonds aren't quite the same thing.)

In theory, this is a trade which should benefit both parties. It would allow young people to raise money to see them through university or give them a deposit for a house. And older people could buy a stake in future income growth; the stock market, remember, does not give us this. Shares in people would also help protect equity investors from distribution risk - the danger of a shift in incomes from profits to wages.

So, why do these potentially mutually benefical trades not happen? Several answers seem to me inadequate:

"The young person would just take the money and run, or at least have less incentive to work hard."  But it must be possible to contract for this problem. The Saul Goodmans surely have the wit to write a contract which steers the middle course between letting the young person leg it and committing them to slavery.

"Individuals' incomes are too risky to value accurately." In truth, though, the same is true (pdf) of corporate earnings. And the intelligent solution in both cases should be the same: to pool such idiosyncratic risk by diversifying across individuals. Such bundles of securities would give us the macro securities, for example in occupational incomes, proposed by Robert Shiller.

"All markets are prone to bubbles." But so what? If oldsters pay too much for a stake in youngsters' future incomes, this would help correct the intergenerational injustice which many believe exists in other areas. 

In truth, though, there is one big investor who has for years held shares in people - the state. You can think of a big chunk of the welfare state as taking an equity stake in people; yes,libertarians have a point in claiming it violates self-ownership. It invests in us as start-ups - by spending on our health and education - and in exchange we hand over dividends (taxes) when we're earning. You can interpret the Help to Buy scheme as an extention of this; the government is making a risky investment to help young people acquire an asset.

It's often said - sometimes by me! - that the state is less innovative than markets and the private sector. However, in this context of facilitating some mutually beneficial intergenerational transfers, perhaps the state does better than the market.

Comments

[Anonymous]

"You can think of a big chunk of the welfare state as taking an equity stake in people; yes,libertarians have a point in claiming it violates self-ownership."

Perhaps the welfare state does violate "self-ownership" but there is little doubt that the state's equity stake in people enhances self-determination. Self-ownership and self-determination are not the same things, it seems, a point that is seldom addressed.

I suspect most people would happily forgo the right of self-ownership, which is quite abstract, in favour of the more concrete ability to self-determine.

Thank God most people are sensible and not obsessed with daft and abstract notions of self-ownership!

[Jonathon Hazell]

Surely the problem here is adverse selection and a conventional lemons problem? Simply that old people won't be able to value young people correctly, so all but lemons will drop out.

[chris]

@ Jonathan - not sure:
1. There's surely a big set of young people with genuinely good prospects but who are temporarily cash-poor.
2. Why is this a bigger problem for shares in people than in other markets - eg peer-to-peer lending or just ordinary shares? The IPO underperformance literature suggests new issues are lemons - but there's a market in them.
3. The odd thing about markets for lemons is that they exist - people buy cars off ebay.

[charlieman]

Novice racing driver Jenson Button sold 35% of future earnings to two investors in 1998 to fund his first two seasons in cars. The cost was £100,000s and Button started to pay back in year three. Button is not the only successful driver to have used such a deal.

One of the earliest offers of this kind was between Jackie Stewart and Ken Tyrrell in 1964 (10% of future earnings for £10,000). Stewart declined.

[patrick]

charlieman got there first, but motorsport is one field where buying shares in young peoples' future earnings is commonplace. Kimi Raikkonen and Fernando Alonso were both kids from very modest backgrounds in need of six figure sums to compete in junior motorsport. Raikkonen's investors, in particular, did very well out of it.

Ten years or so back, one driver, Justin Wilson, actually sold shares in his future earnings directly to the public (http://www.justinwilsonplc.com/1_about.htm) though I suspect they didn't do so well.

[Alex]

Two words: Kia Joorabchian.

[FromArseToElbow]

Clearly sportspeople are attractive investments because of the massive upside in potential earnings. They are perhaps best seen as growth stocks (trading young footballers is common in S America), while yer average yoot is (in aggregate) a yield stock.

[Bialik]

http://en.wikipedia.org/wiki/The_Big_Clock

Fearing's The Big Clock (1946) is a great thriller but lots and lots of pages are devoted to an idea for investing in people. That issue goes nowhere and isn't really related to the rest of the book, so much so that I wonder if I didn't read it somewhere else... Can anybody confirm this? (I borrowed the book from the library so don't own it.)

[Bialik]

Clarification. When I say 'investing in people' I don't mean it the way mangers use it, but as in putting money behind individual young people identified (by the investors) as having lots of potential.

[Blissex]

«You can think of a big chunk of the welfare state as taking an equity stake in people; yes, libertarians have a point in claiming it violates self-ownership»

That's the usual misrepresentation of "libertarians" who are really reactionaries.

Libertarianism is about freedom of contract, and that does not include the *effective* right to be offered a deal one likes; it only includes the *legal* right to refuse any deal one dislikes.

The libertarian answer to someone complaining that their job does not pay them a living wage is "if you don't like that, resign, nobody is forcing you to work for a wage you don't feel adequate;
if nobody is offering you a wage that you find adequate, tough luck sunshine".

In a similar way, as long as a state does not forbid leaving it, staying means accepting a freely entered into bargain, whatever the terms are. Self ownership includes the right to do a deal with the state that includes giving it an equity stake in it.

If you don't like a state offering you a deal involving an equity position in your self-ownership, "leave it and find a better deal, and if no state offers you a better deal, tough luck sunshine" is the only possible libertarian answer.

Membership in a state, as long as leaving it is allowed, is a voluntary bargain of mutual advantage.

[Blissex]

BTW, from a previous blog:

«But if you're opposed to free migration, you are not - by definition - a libertarian.»

This too displays a big misunderstanding of the "libertarian" position, as being for free migration is "liberal" (in the old, english, sense) not "libertarian".

Indeed freedom of migration can be a gross violation of liberty, because it implies the ability to force a deal on an unwilling party, in the case of an immigrant that wants a deal to live in a particular state.

Libertarianism is about the right to refuse deals, not the right to impose them on others.

So libertarianism includes the freedom to refuse an offer of membership of a state by an individual, but also the freedom of a state's members to refuse an offer of membership by any other individual.

So libertarians can't coherently oppose the right to *emigrate* (once all existing membership dues are paid, of course), but they must oppose coercing existing members of a state to accept new members, as under libertarian principles nobody has the right to force others to offer them a bargain, any bargain or a specific bargain.