Is greed good?

Our free market system is supposed to be a way to reconcile self-interest with the public interest.  As Adam Smith wrote in The Wealth of Nations –

It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.

Smith patronized the butcher, the brewer and the baker that gave him the best meat, beer and bread for the best price.  So it was in their interest to give him the best product for the best price that was compatible with making a profit.  You didn’t need some mastermind, according to his theory, trying to figure out what was a just price.

Most human beings act in their own self-interest.  Certainly I do.  As a newspaper reporter, I was fortunate in being able to do work that I liked, and that I thought at the time served a public purpose, but I expected to be paid, and I would not have worked if I had not been paid. Nor did I ever turn down a pay raise because of the possibility I was being overpaid compared to some more-deserving fellow reporter.

At the same time, there are things I would not have done for money.  As a newspaper reporter, I would not have written something I thought untrue to keep in the good graces of an editor or publisher.  I felt a certain loyalty to my employer and to professional standards that was over and above my paycheck.

People who create value deserve to be rewarded.  People who create things of great value deserve to be richly rewarded.  At the same time our capitalistic free-enterprise system doesn’t have a good way to distinguish between people who create value and people who milk the system.

The success of the BP oil company was based on the willingness of its managers to take chances and cut corners.  They must have known that sooner or later this would backfire, but the managers had everything to gain and nothing to lose.  Whatever happened to the company, the worst that could happen to them personally was that they would have to use their golden parachutes sooner than they planned on.

The banking crisis was brought on by bankers issuing mortgages to people they knew were poor credit risks, then selling those mortgages to people who didn’t know what they were getting.  Goldman Sachs has been charged by the Securities and Exchange Commission with selling a package of bad mortgage investments, then taking a “short” position (a bet that the value of the investment would fall).  This is the equivalent of a used-car dealer selling a car with bad brakes, and then taking out a life insurance policy on the owner.  Even Federal Reserve chairman Alan Greenspan had to admit that the free market wasn’t self-correcting in cases like this.

Health insurance companies are rated according to their “loss ratio,” which is the percentage of premiums paid out in benefits.  The higher the payout, the lower the companies are rated in the market. The system rewards the companies who deliver the least value to their clients.

I once dealt with a plumber who ripped me off for years before I finally figured out what he was doing.  It is very possible he does as well financially as the honest plumber I deal with now.

The marketplace doesn’t automatically reward productive behavior. Sometimes it does and sometimes it doesn’t.  The challenge is to set up the incentives so that it does – or at least so that it does not reward grossly anti-social behavior.  No economic system can substitute for a sense of ethics, but it should be possible to organize the system so that the crooks don’t crowd out the honest people.

Adam Smith wasn’t really endorsing greed, and still less big corporations.  He was writing about the right of individuals to live their own lives on their own way.  He was just saying that people were better able to make their own decisions than others could do it for them.

Every man is, no doubt, by nature, first and principally recommended to his own case, and as he is fitter to take care of himself than of any other person, it is right and fit that it be so.

And a final word from Adam Smith

Every man, as long as he not not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and his capital into competition with those of any other man or order of men. [my bold-face]

Some links

Explaining Capitalism at Gunther’s Garage by Joe Bageant, author of Deer Hunting With Jesus, is about how differently our economic system operates for a garage owner in Appalachian Virginia, than for the “too big to fail” Wall Street banks.  I’m not as ready to give up on the free-market capitalist system as Bageant is, but his entertaining rants sound more plausible to me now than they would have 10 or 15 years ago.

Does Money Make You Mean? is about a study of how thinking about money affects human behavior.

Moral Misunderstanding and the Justification of Markets is an argument by an economist that even if the Golden Rule is impractical in a capitalist free-market society, since we can’t know what is best for others, we can at least observe the Silver Rule (“Do not do to others if you would consider it unfair or unjust if they did it to you.”)

What’s LeBron Supposed to Have Done Wrong? is a defense of the decision of basketball star LeBron James to transfer to a higher-paying team.  My own view is that there is nothing wrong with richly rewarding sports stars for playing well; there is something very wrong with rewarding them for playing dirty in order to win. (That is a general statement; I am not accusing LeBron James of doing anything wrong.)  In other words, I feel the same about sports as I do about business.

In BP’s Record, a History of Boldness and Costly Blunders is a New York Times review of that company’s high-risk business strategy, with corporate executives enjoying the rewards without bearing the risks.  You have to register to read the article, but it’s free.

Years of Internal BP Probes Warned That Neglect Could Lead to Accidents is a report on how BP disregarded results of its own internal investigations.  BP’s financial incentives encouraged managers to disregard those results. Or, as Upton Sinclair put it, “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

The Great American Bubble Machine is Matt Taibbi’s famous Rolling Stone article on Goldman Sachs. He has been criticized for his choice of language – that Goldman Sachs is “a great vampire squid” – but nobody has found any serious factual flaw in the article.

Goldman Sachs Fraud Explained is a lay person’s explanation of what the recent Securities and Exchange Commission charges are all about.

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