Jonathan Levy’s [amazon_link id=”B00AFS6LXW” target=”_blank” ]Freaks of Fortune: The Emerging World of Capitalism and Risk in America [/amazon_link]is a fascinating book. It is a history of the commodification of risk, the development of life insurance and, in time, the growth of wider markets for risk. Professor Levy, a Princeton historian, portrays the modern risk-based finance industry as the counterpart of the freedom of individuals in a capitalist society to manage their own lives. That responsibility of individuals for their own destiny meant the growth of institutions offering them the tools to do so, and the translation of highly individual risks into standard types of policy or financial instrument.
The early chapters start with the origins of risk management in marine insurance, and how those specific origins shaped early legal precedent in considering whether insurance policies should pay out. A cargo of slaves was considered insurable property whereas a working man who had taken out a policy could not successfully claim against his employer after being badly injured in an accident, because he had voluntarily taken the job, which paid a premium because of the dangers. The book’s descriptions of the historical examples are the best thing about it, revealing as they do patterns of thought so different from our own. It is particularly interesting about the link made between emancipation and the assumption of personal responsibility for risk – including by slave owners making the opposite argument, that slaves need never worry about their future as owners bore all the risks! – although I’m sure there is room for different interpretations of the historical record. (I’m a long way out of my areas of expertise here.)
There is also an interesting section on the early opposition to a secondary market in life assurance policies in the US – one existed then in the UK – and for the same kind of moral arguments that Michael Sandel raises in [amazon_link id=”184614471X” target=”_blank” ]What Money Can’t Buy[/amazon_link]. The need for policy holders to be able to gain some value from their policies (otherwise, why would they not just save money?) led to the early application of actuarial science to calculate surrender values. Indeed, early on most life policies taken out by farmers would benefit their creditors – they were used to raise working capital.The book goes on to trace the shift from a mass of small insurance companies starting up in the 19th century to the machinations of the big trusts at the turn of the century.
The underlying theme of the book is that, if we don’t put our faith in Providence, or rely on a master (whether a Feudal lord, or a slave owner, or indeed a husband), then we will of course seek other means of mitigating life’s risks. Some of these are a constant, such as storms or illness, and financial services have replaced a combination of fatalism and community support. Other risks are inherent to capitalism – “an economic system that thrives of radical uncertainty”, as the author describes it. Mitigating these means capitalism is inherently financial. However, individual responsibility for risks arising from personal choices will always have to be supplemented by collective responsibility, at a minimum by regulation of the financial services industry.
The epilogue points out that there was an era when risk seemed to have been tamed, in the 1960s, and the previously common phrase ‘freaks of fortune’, meaning the unexpected events that cause upheaval in every life, dropped out of use. The phrase lies dormant still, but that moment of stability in capitalism has passed. It is certainly obvious, post-crisis, that the state is the “risk manager of last resort”.
So it’s a fascinating story. I must say that the book was heavy-going despite the masses of terrific stories it tells – I think it’s because one has to chew quite a lot to extract the marrow of the argument, and my brief summary has no doubt not done it justice. Still, it’s worth perservering, with so much food for thought, and the stories are great. I would never have imagined finding a history of life insurance at all interesting, and it turns out to be very much so.
[amazon_image id=”B00AFS6LXW” link=”true” target=”_blank” size=”medium” ]Freaks of Fortune: The Emerging World of Capitalism and Risk in America[/amazon_image]