The Ascent of Money: A Financial History of the World, written by a Harvard professor Niall Ferguson, provides a detailed historical overview of money as a means of trade and other related phenomena such as finance, credit, and risk. In particular, Chapter 4 The Return of Risk tracks the origins and development of private insurance and welfare state and examines the limitations of different risk management practices.
Since risk, in one form or another, has always been present in human life, people attempted to insure themselves against it since as early as the Middle Ages (Ferguson 185). One way to do so is the insurance model where people provide voluntary contributions to a fund from which they can receive compensation, should the insured event occur (Ferguson 195). However, private insurance remained limited in scope until one realization came to light: while calamities are uncertain, they are nevertheless not random (Ferguson 183). Modern insurance is thus based on six statistical measures that allow to estimate the insurance risk and, consequently, the coverage with enhanced precision.
These factors are probability, life expectancy, certainty, normal distribution, utility, and inference (Ferguson 188-190). As payouts became more predictable, the insurance business grew into a large industry (Ferguson 196). However, since private companies do not cover certain groups of people or events, state insurance, an alternative risk management model, is the second major element of Ferguson’s analysis.
The welfare state, based on the redistributionist model of taxation, was designed to provide universal coverage for the state’s citizens, including those who cannot afford private insurance (Ferguson 199). The rationale behind a mandatory state insurance is based on both social (achievement of social equity) and economic arguments: a large actor such as the government can take advantage of the economies of scale and provide relief for calamities that private companies refuse to deal with (Ferguson 204). The system enjoyed an unprecedented success in the 20th century Japan, significantly reducing the citizens’ vulnerability to risk.
However, it did not prove to be a universal solution as cultural and social differences made the model unsuitable for Britain (Ferguson 209-210). The changing demographics and consequently increasing costs of state insurance present a new challenge to the welfare state as the model becomes unsustainable in the 21st century (Ferguson 220-221).
Ferguson’s examination of risk management practices is particularly valuable because of his detailed coverage of historical events, supported with empirical evidence and analysis of cases from around the world. His comparative approach allows the readers to assess the advantages and the drawbacks of the models in different cultural, social, political, and historical contexts. By focusing on a few selected cases (namely, Japan and Britain), Ferguson can explain how historical developments in these countries impacted the success of private and state insurance practices.
This historical approach also allows the author to incorporate an analysis of the current state of affairs, characterized by such challenges as the increased threat of terrorism and the yet to be known impact of climate change (Ferguson 223-224).
This chapter thus serves as a valuable source of information for anyone interested in learning about different methods of organizing financial security in the society. The main message conveyed to the audience is that there is no universal answer as to which risk management model is preferable, as history has proved on several occasions.
Works Cited
Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York: Penguin Press, 2008. Print.