Nassim Taleb - The TRUTH About Employment [w/ Russ Roberts]

Let's talk a little bit about employment. We may have talked about this in the last episode, but it's so interesting, I just love it. Talk about the example of, um, flying to, um, Germany for October Fest and with I've contracted out my private plane and I've got a pilot coming and he informs me the day before that he's gotten a better offering; he could do something else.

Exactly the reason we have employees and that, again, I credit, uh, conversation, you know, with you is the reason is not because an employee has, uh, you know, you, it's cheaper, delivers things better. No, it's because an employee has a lot more to lose; he has skin in the game. In other words, he has something to lose more than that specific job.

So for so if if and and they've also have signaled to us employees by being employees, someone had was an employee for 35 years or for 25 years in a large corporation, they signal to us that they're not free. And it's great, sort of like you're, you're so you have an employee; it's inefficient but it's a good risk management tool because, you know, that they're not going to, um, let you, uh, down when you need the most. The reason we have, uh, corporations is to avoid having legal contracts, but that version that the person—the employee—is not someone who escapes that notion of contract is, to me, quite Central.

And why do we have, uh, uh, employees? Because you want to own some people and be, just like we have a lot of people have country houses and that they don't use is much more efficient to stay in a nice hotel is because they want to know that that place they can go to whenever they want to. If they woke up at midnight and decide to drive to their country house, they can do that. They won't do it but they would like to know they can do it, so they don't want to share. And that's quite Central in s have skin in the game.

And that was also a risk management tool that the Romans—like, the Romans practically have discovered so many things, uh, uh, PR—I mean I would say almost everything in one way or another. So the Romans figured it out because they never let a, a free person be a steward in a big, in a big state; they wanted a slave. And what's the reason? Because you can punish a slave—you own a slave, you can punish a slave. So if the person is caught cheating, the, the, the, the punishment is much harsher for a slave. So the steward was typically a slave.

Yeah, that was very deep. I thought about Joseph in the Book of Genesis, uh, when, uh, he's, he's the steward of Piper's house and you're thinking, "Why is this lowly person given this control?" Well, he's really smart was one answer, but it's not enough—it's that ability to punish downside. And of course, as a result of it, Joseph ends up in prison, really in it what appears to be a life sentence, but, um, manages to to get get out.

But the point about having a slave versus a, um, employee is a, is a really interesting one and it, it highlights something and we talked about this in, in another one of our conversations and it's so trivial but it's so deep because it's so easily misunderstood. And the way you phrase it is: probabilities aren't the same as expectation. The odds of something being remote is not enough to mean you don't have to worry about it because it depends on the consequences of that remote thing happening, not just the probability.

So being, uh, wiped out by your slave or having being able to, uh, punish your slave is really very powerful because it's the magnitude, not just the probability, that matters. And I think that's just an incredibly—it's incredibly obvious—but it's very deep because people forget it all the time. They say, "Oh, just that's not, that's, that's a low probability event." Well, but if you die when it happens it's more important than if you don't die, it exactly. And here you can look at it that that it's, it's, uh, um, you, you, you need a slave because you need someone that who can be punished by a mistake.

And an employee is gonna never going to be able to come back if, um, he's, you know, developed reputation, bad reputation—nobody would hire him or her—but a free person can always manage because you can fire an employee, but you can torture a slave. I mean, it's not a very attractive thought.

Still, an employee—by firing an employee you're actually, they have more to lose than just the job. As a contractor, when you fire a contractor, you know you can find another client. Firing employee has more downside, agree, and, and typically these, These are people who want to stay in the job for a long run; they trade the freedom for real liability.

Uh, no, it's the, uh, it's the same argument I make; the hierarchy suggest is contractor, employee, slave and issue employe is getting close to slave because they have more at stake than contractor but not as much as a slave. But it reminds me of this argument I sometimes make about football coaches or general managers and sports—they are very risk averse and yet they're in this highly competitive business and it's hard to understand why they're so risk averse. But the answer is there's a decent chance that if they mess up they'll never get that job again. They're only 30 of them, say, or 32 depending on the sport, and as a result they act very cautiously.

You could say, "Well, but what's the worst thing that can happen?" That doesn't work out the strategy or the trade or the draft pick. But it matters because the outcome isn't just unlikely—it's unlikely with effectively a death sentence. You may not come as, as an employment—you may not be able to get that job ever again.

Yeah, yeah, that's, that's, uh, no, I mean, but in fact I, I made, I've observed somewhere that we have, um, many more slaves today than we did in Roman times because in Roman times slaves were actually sometimes Freer. And why are we so slave burdened today? Because you, because we have a more complex system that need more reliable people and an employee is practically a slave. I mean, you think about it in these terms, right? He can't say what he thinks; he get fired; he can go on Twitter and curse at someone else—there's a lot of things they can't do, but, but, but it's not there that that there because they have to show up and give you their time 9 to5 or 9 to 6 or sometimes 8 to 10 10 night.

Okay, so they have to give you so much, um, and, and they're, they're scared with, with a slave and in Roman times of course they have downside—they could be beaten, they could be crucified; I mean, the owner could do whatever—those are two negative things he wanted. Yeah, but, but, but a Slave at a, at a time you know if you damage a slave you can't sell so you lose market value and, and, and with an employee it's not the same. So it's quite, I mean, I, I look, I mean I haven't written much about it in Skin in the Game of course so many other topics, but, um, but I'm certain that that we have, uh, more people who are dependent today than we did, uh, Roman times. It's an interesting argument. You do bear some cost: if you fire your employees all the time, people are mess less excited to work for you.

True, but, but, but there, uh, an employee is okay—someone who sold you his work unconditionally, see, saying, "Okay, you got to report 9:00 a.m. and come back." So why, or sometime if there's nothing to do they still have to show up. Or, or, I mean, may you may have employees of course who are Freer, but that's, that's a typical, uh, standard.

Why is that so? What, because you want people who are not free and this is why we have a school system to basically teach people to not be free between, you know, between 8 and 400 p.m.—that's how it works. Yeah, it's practice. Yes, they, they so, so they're broken and young and, and they learn and, and so you have employees.

Reflections, there's a story in a Sims book Skin in the Game which I think captures perfectly the essence of this idea. So I will now leave you with this story in the famous tale of Aikar later pick up by Esub and then again by La Fontan. The dog boasts to the wolf all the Contraptions of comfort and luxury he has almost prompting the wolf to enlist until the wolf asks the dog about his color and is terrified when he understands its use of all your meals. I want nothing; he ran away and is still running.

Another aspect of the dog versus wolf dilemma—the feeling of false stability. A dog's life may appear smooth and secure, but in the, the absence of an owner a dog does not survive. Most people prefer to adopt puppies, not grownup dogs; in many countries unwanted dogs are uiz a wolf is trained to survive. So the question is, what would you like to be: a dog or a wolf?

Thanks for watching and if you want to expand on these ideas I highly recommend you checking out Nasim's book Skinning the Game as well as the guide on SH Form which compiles all the key nuggets I've been using SH Form for the past 2 years and it has boosted my learning with its vast library of over 1,000 book guides. They're not sponsoring this video but there's an affiliate Link in the video description and you can get a 5-day free trial and a 20% discount.