With the opening last fall of Money Never Sleeps, the sequel to Wall Street, Americans were again subjected to Hollywood’s version of how the economic system works: big business is evil, and greed is at the heart of our economic problems. The original Wall Street movie was released during the Reagan administration — aperiod that initiated significant economic expansion.Nonetheless, the movie offered a stern warning about what to expect from greed run rampant. The villain of the story was Gordon Gekko (Michael Douglas), the powerful head of a mergers and acquisitions firm. Toward the end of the movie Gekko makes a now-well-known speech about why “greed is good,” a speech that is meant to highlight the pro-capitalistarguments often made by businesses and free market advocates. Gekko tells a group of shareholders of a company he is trying to acquire that,
“Greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, [for] knowledge has marked the upward surge of mankind.”
Of course, true to Hollywood form, in the end Gekko winds up implicated in a major fraud, thus revealing the true moral of the story, which is of course, that “greed is bad!”
Ironically, the current economic crisis has been an opportune time for Hollywood to make money by highlighting the immorality of greed (as in Money Never Sleeps). For many observers it was greed by the managers of financial institutions that led to easy loans with little to no down payments; greed by homeowners that led to purchases of houses they couldn’t afford; greed on Wall Street that led to the creation of such clever new financial instruments as mortgage-backed securities and credit default swaps; greed by CEOs that led to corporate extravagances and ridiculously high executive compensation packages; and greed by consumers that led to excessive use of credit cards to buy things now, rather than waiting till they earned the money to pay for it.
Tom D’Antoni in the Huffington Post declared that “the concept that ‘Greed is Good,’ is dead. It rose to its despicable zenith in tandem with the rise of Reagan, and has been the guiding principle of industry, finance and government ever since. . . . Greed brought us to this place . . . unregulated, untrammeled, vicious greed. Greed has no morals or ethics. Greed has no regard for others. Greed feeds only the greedy and feeds on every thing and everyone within grasping distance.” John Steele Gordon, author of a book on financial history, wrote, “There is no doubt at all about how we got into this mess. … Greed, as it periodically does when traders and bankers forget the lessons of the past, clouded judgments.”
Religion and greed
The world’s religions almost unanimously contend that greed is wrong. Although not explicitly proscribed in the Ten Commandments, greed is implicated in their command not to covet one’s neighbor’s property or spouse. The Bible contends that “the love of money is the root of all evil” (Timothy 6:10). In the year 590, Pope Gregory declared greed to be one of the seven deadly sins, along with lust, pride, gluttony, sloth, envy, and wrath. Among the seven, greed is often considered one of the worst, if not the worst, mostly because greed can inspire many of the other sins.
In almost every major religious tradition, greed is condemned unequivocally. The Qu’ran states, “Anyone who is protected from his own stinginess, these are the successful ones.” (64:16) The Tao Te Ching states, “When there is no desire, all things are at peace” (Chapter 37). In the Bhagavad Gita, Lord Krishna declares, “There are three gates leading to this hell — lust, anger and greed. Every sane man should give these up, for they lead to the degradation of the soul” (16:21). Sulak Sivaraksa, a leading Buddhist writer, states that “Buddhism condemns greed, which can easily lead to aggression and hatred.”
We do not appeal to other peoples’ humanity when we seek our sustenance, but rather to their self-interest, or in this case their greed.
Reacting to the recent economic crisis, Dr. John Sentamu, Archbishop of York, attacked exploitative moneylenders who pursued "ruthless gain"; he urged banks not to "enrich themselves at their poor neighbours' expense." Pope Benedict, in his 2008 Christmas message, said, “If people look only to their own interests, our world will certainly fall apart.” The Dalai Lama asked, “What is the real cause of this sort of economic crisis?” His answer: “Too much speculation and ultimately greed.”
Greed as a necessity
Greed is an easy target. It is not hard to convince most people that greed is the primary source of many of our economic woes. But is it really?
Stephen Pearlstein points out what many economists believe. He writes, “In a capitalist economy like ours, the basic premise is that everyone is motivated by a healthy dose of economic self-interest. . . . Without some measure of greed and the tension it brings to most economic transactions, capitalism wouldn't be as good as it is in allocating resources and spurring innovation.”
This is the central idea behind Adam Smith’s oft-quoted line about the butcher, the brewer, and the baker 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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” (Wealth of Nations, Book 1, Chapter 2)
Smith is arguing that the economic system provides for our wants and needs because, first and foremost, people are trying to help themselves, and they do so by producing and selling meat, beer, and bread to others. These market outcomes are not achieved because of charity. We do not appeal to other peoples’ humanity when we seek our sustenance, but rather to their self-interest, or in this case their greed.Nonetheless the modern economist’s acceptance of greed as a positive force in society has not been readily accepted, given centuries of moral teachings to the contrary.
Seeking a middle way
Is there a resolution to the greed paradox? Is greed evil? Is it a necessary evil? Is greed something that humankind should seek to eliminate, perhaps replacing it with altruism? Or is greed something so ingrained in the human psyche that there is no hope of eliminating it?
Perhaps we simply need to learn how to live with greed. Perhaps there is a middle way, a method of channeling greed in good rather than bad ways.
Aristotle argued that “virtue is concerned with passions and actions, in which excess is a form of failure, and so is defect, while the intermediate is praised and is a form of success” (Nicomachean Ethics, Book 2, Chapter 6). It is the middle way that is the goal. Indeed, dictionary definitions of greed highlight not only self-interest but an “intense, selfish desire” (New Oxford American) or “an excessive desire to acquire or possess more than one needs or deserves” (American Heritage). Greed is usually not implicated if someone’s desires are average or if one achieves a moderate standard of living.
Religious writings sometimes take account of this. Thus, one hadith, or saying of the prophet Muhammad, states, "Eat what you want and dress up as you desire, as long as extravagance and pride do not mislead you” (Hadith as reported by Abd’allah ibn Abbas, 1:645). In Judaism too, one Midrashic interpretation asserts, “Were it not for the yetzer hara [the evil urge], a man would not build a house, take a wife, beget children, or engage in commerce” (Bereishis Rabbah 9:7).
There is no community or society in the world that fails to benefit from the voluntary exchanges and market activities that occur in abundance in everyday life.
Returning to the issue of our current financial crisis, some observers recognize that greed cannot be eliminated. Michael Lewis and David Einhorn of the New York Times write, “ ‘Greed’ doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character, as we are lust and envy.” Robert Sidelsky writes that John Maynard Keynes “believed that material well being is a necessary condition of the good life, but that beyond a certain standard of comfort, its pursuit can produce corruption, both for the individual and for society.”
Steven Pearlstein suggests a different perspective, that greed may not be about the degree of desire, or how much one acquires, but about how one acquires wealth: “Even before they decided to give away most of their money, nobody seemed to begrudge Bill Gates or Warren Buffett their billions or criticize them for their ‘unbridled’ greed. That seems to have a lot to do with the fact that Gates and Buffett made their money on the basis of their own ingenuity, skill and hard work.”
Methods of satisfying greed
The American economist Henry George (1839–1897) is mostly famous for his theory of the Single Tax, but in his book Protection or Free Trade there is a passage that can help resolve some of the tension about greed and profit seeking: “Is it not true, as has been said, that the three great orders of society are ‘working-men, beggar-men, and thieves’?” (pp. 21–22).
Prima facie this passage may seem unremarkable, or at worst confusing: after all, what exactly is an “order of society?” But if we think about it carefully in light of the current discussion, it actually provides the seeds, or kernels, for understanding “greed.”
First, let’s recognize that what George has in mind are three primary ways in which people obtain benefits for themselves, or in other words “profit.” As I’ll argue, how a person ultimately judges profit-seeking activities and whether he views greed as good or bad will depend largely on which one of George’s “great orders” he believes to be most prominent in society. But first let’s discuss each of these profit acquisition methods, beginning with the last one, “thief.”
Thieves: involuntary transfers
One of the simplest methods a person can use to satisfy his greed for food, clothing, automobiles, cameras, computers, or the money to acquire these things is simply to take them away from someone else. Theft has been a part of life since the beginning of society, and it is likely to remain a part of society for a long time to come.
When the rightful owner of something has it stolen by another, the thief clearly benefits. He is now in possession of the valued item. The victim suffers a loss, since he does not possess and can no longer receive benefits from the product. The victim will surely feel that an injustice has occurred and will demand the return of the stolen property and the punishment of the perpetrator, if those responses are at all possible. But regardless of what happens afterward, theft involves a transfer of an item from a legitimate possessor to an illegitimate possessor, and the transfer always occurs involuntarily. Thus the term “involuntary transfer” offers a better moniker, especially because in many situations the transfers may technically not be considered theft, but will have similar characteristics.
Around the world societies evaluate outrighttheft in similar ways. It is generally considered bad, or wrong, or perhaps evil, with perhaps only a few exceptions tolerated. These exceptions are rare, and societies have put into place an elaborate system of laws that prohibit theft in a variety of situations while providing penalties for those found guilty of having violated these laws. Suffice to say that the acquisition of benefits by means of theft is unacceptable in all societies around the world. Although this is a seemingly obvious point, it forms the basis for most of the cry-outs about injustices around the world. In brief, people claim an injustice whenever they perceive that someone is getting “ripped off” in some way.
Beggar-men: voluntary transfers
The second of George’s orders of society — that is, another major way in which people acquire the goods and services that their greed desire — consists of those who are given the items voluntarily by someone else. A beggar stands on the street corner and solicits money from passersby. The money they give him represents a transfer of goods and services from the giver to the recipient. Although the giver loses, the money obtained by the beggar is not ill-gotten, in a traditional legal sense, because it has been given to him willingly; it is a voluntary transfer.
From the giver’s perspective this action is called charity and the action is held in high esteem in most societies in the world. Charity is not self-serving; it is in the service of others. It is not consideredharmful, but helpful. Charity is encouraged and promoted in all of the major religions. Some people, such as Mother Teresa, who have spent their lives giving to needy people, are respected or even beatified by their religious groups.
Working-men: voluntary exchange
The third order of society that George mentions is “working-men.” This is another method an individual can use to acquire the goods and services that his greed may inspire. Work generates an income that can be used to purchase consumption goods, but it is important to recognize the underlying process. Work in a commercial societyis an activity devoted to producing a good or service that someone else will wish to purchase; a product that is desirable. Through the free voluntary exchange of the product for money in the marketplace, a business generates the revenue that is used to pay its workers. That money, or income, is then used by the workers to purchase other goods and services produced by other workers. In the end, when you strip away the money part of the transactions, what is really taking place in market activity is the voluntary exchange of one good for another. And since both parties to a trade exchange their goods voluntarily, it must be that both benefit from the transaction, for if not, why trade?
Voluntary exchange is the cornerstone of the world’s economic prosperity. The very first lesson in Smith’s Wealth of Nations is the principle of the division of labor: productivity can increase as the production process becomes more specialized; that is, as labor or workers are divided into more specialized tasks. But the only way to take advantage of these benefits afterwards is through exchange. If you cannot exchange, there is no incentive for specialization.
We should never portray greed in general as good or bad, right or wrong, but as something that can be satisfied in either acceptable or unacceptable ways.
Based in part on this fundamental principle, economists have long supported the free market, which essentially means allowing free and voluntary exchanges, without social or governmental impediments. Indeed, societies everywhere generally accept and promote trade both within and beyond their borders. There is no community or society in the world that fails to benefit from the voluntary exchanges and market activities that occur in abundance in everyday life. To summarize: if greed inspires work that in turn inspires voluntary exchanges in the marketplace, then the outcome is mostly good for everyone involved.
Distinguishing “good” greed from “bad” greed
Greed can generate either good or bad outcomes, depending on which great order of society, or in other words which method, is involved in its satisfaction. If greed inspires a person to work long hours in a business providing valuable goods and services to others in order to satisfy the needs of himself and his family, then greed should be perfectly acceptable on pragmatic grounds. If greed inspires a person to innovate and create new products that others will desire in the market, then greed is good. In each of these cases greed is satisfied through voluntary exchange. However, if greed inspires a person to acquire what he desires by taking the rightful possessions of another person without that person’s consent, then greed is not good. In this case greed does not encourage useful behavior in the marketplace, but rather fear that one’s marketable goods will be appropriated by others. For similar reasons, greed is also wrong when it inspires someone to put roadblocks in the way of others who are trying to sell their products in the marketplace. In both these cases greed is satisfied by means of involuntary transfers and is rightly condemned. Yet if greed urges one to beg for food and clothing, or to seek the charitable contributions of others, and if those items are given voluntarily, then greed is satisfied in an acceptable manner; that is, a manner that has no deleterious effects on other people’s ability to benefit themselves by means of free exchange. The compassion of charitable people, helping those less fortunate, engaging in voluntary transfers, is clearly unobjectionable.
We should never portray greed in general as good or bad, right or wrong, but as something that can be satisfied in either acceptable or unacceptable ways. The distinguishing feature isn’t the presence of greed itself or even the intensity of the greed, but the way in which greed is satisfied. Following the suggestion of George’s great orders, the greed satisfied by a working man is commendable, the greed of a beggar-man is unfortunate but acceptable when necessary, and the greed satisfied by thievery is the primary source of injustice in the world.
Greed and the economic crisis
Many criticisms about greed’s role in the current economic crisis are really complaints about involuntary transfers. Hollywood and liberal Democrats look at the crisis and see injustice in the high salaries of CEOs, the comparativelylow wages paid to average workers, the excessive loans made to people who could not afford the homes they were buying, and the political clout of business insiders who got rules written on their behalf. But the reason people see injustice is mostly because they believe that someone is getting ripped off. It may be the consumer or the taxpayer or the low-paid worker at the company, but in any case, the perception is that one group is receiving less because someone else is receiving more.
Frequently these complaints are correct. Big business does sometimes engage in fraud. Consider the recent scandal involving Bernie Madoff. Madoff offered investors better than average returns largely by fabricating them in financial statements and by using the principal deposited by new investors to pay the returns of investors lucky enough to get out early. His setup was a classic Ponzi scheme that inevitably collapsed when too many people demanded their money back at the same time. Clearly Madoff was greedy — as were the investors who were looking for better returns than they had any reason to expect from an honest investment scheme. However, this case is a clear example of greed fueling involuntary transfers rather than valuable production and trade. The investors were led to believe that their money was wisely invested in companies making above average profit when in reality new investor money was transferred to exiting investors as needed. As long as deposits exceeded withdrawals the Ponzi scheme could continue.
Many other prominent examples of insider trading, accounting scams, and other shady dealings have been uncovered over the years and have resulted in prosecution and jail sentences. Yes, businesses may be exploitative. Cries of injustice by the general public rang out when huge bonuses were announced for executives at the financial firms that were bailed out by the government. After the billions of TARP dollars were transferred to these failing institutions, many of the banks were quickly out of trouble and the systemic crisis was averted. However, announcements that these same companies would pay millions of dollars in overdue bonuses to executives touched off a wave of indignation.
Many companies profit both by selling desirable goods and by taking advantage of involuntary transfers.
The source of the anger is obvious. In the midst of the crisis these institutions laid off a large portion of their work forces. Meanwhile, their overextended positions on loans, with effects multiplied by their own enormous size, contributed to the crisis. Since bonuses are typically made to reward good behavior, it seemed inappropriate for executives who were implicated in the crisis and were “saved” by a taxpayer-financed bailout to be able to walk away a few months later with hefty bonuses. Reward appeared to be disconnected from achievement. Most observers would contend that these companies were restored to profitability, not by the skill and hard work of executives producing a superior product for their customers, but by involuntary transfers from taxpayers. So again, there is a sense that involuntary transfers helped to satisfy the greed of a few individuals.
The key for high salaries to be viewed as equitable, or just, is that they are deserved. As mentioned earlier, relatively few people seem to begrudge the high salaries and enormous wealth of Bill Gates, or popular figures in sport. Their earnings are generally recognized as a result of the voluntary exchange process. These people earn money by providing valuable goods and services to others around the world.
Basketball stars seldom lobby to advance their interests, but big business often does, and this is a large source of complaints about greed. Robert Reich goes so far as to describe lobbying as political corruption:
“If we define political corruption as actions causing the public to lose confidence that politicians make decisions in the public's interest rather than in the special interest of those who give them financial support, the biggest corruption of our political process is entirely legal. It comes in the form of campaign contributions that would not be made were it not for implicit quid pro quos by politicians, bestowing favors of one sort or another on the contributors.”
But what sort of favors does he mean? He continues:
“The fights that actually preoccupy Congress day by day, which consume weeks or months of congressional staffers' time and which are often the most hotly contested by squadrons of Washington lobbyists and public-relations professionals, are typically contests between competing companies or competing sectors of an industry or, occasionally, competing industries. . . . Many of these battles (e.g. over health care reform) continue but have moved into the regulatory process, where different companies, sectors, and industries are seeking rules that advantage them and disadvantage their competitors.”
Reich is arguing that the business of government has become the provision of rules and regulations that favor some over others. In other words, he is describing a completely legal, but involuntary, transfer process promulgated by government. The winners are those who have the most clout among legislators. Often they are the ones (big business and big labor) who can offer the most in campaign contributions. The losers are either the less influential competitors, or the taxpayers who must provide funding for the subsidies provided, or the consumers who pay higher prices produced by taxes or regulations.
The same process of involuntary transfer appears in connection with financial sector reform. Again, greed is said to be the source of corruption, but it is just a smokescreen. People demand that something be done; they demand that government prevent financial crises, such as occurred in 2008. Unfortunately, no one quite knows how to do that. Nevertheless, lack of knowledge won’t prevent changes from being made. That’s because there are plenty of influential organizations standing in the wings with suggestions. While all of these suggestions will be presented as important to the national interest, the changes will be particularly helpful to the organizations themselves.
Even more likely is that good ideas for regulatory reform will be paired with ideas that serve particular corporate interests. This is one of the reasons that so many pieces of legislation are thousands of pages long these days: to buy political support, commonsensical reforms must be combined with favors for powerful interests. It is no wonder that, after decades of rule writing like this, our regulatory system is a twisted web that requires companies to hire huge teams of experts and consultants simply to untangle.
So is greed the problem with capitalism?
Liberal Democrats and conservative Republicans ought to find these examples of involuntary transfers equally objectionable. Confusion arises because of the focus on greed as the culprit. Critics of business and free markets see the greed that is satisfied through fraud and other involuntary transfers, and therefore condemn all efficientprofitseeking activities. But what about businesses that are making money and paying high salaries to their executives because of the desirable goods and services they are selling to their customers — doesn’t greed inspire their activities? And if we could stamp out greed from our psyches, wouldn’t we also be eliminating a motive that makes the modern economy work? Of course the answer is yes to those questions, which is why supporters of free markets are quick to condemn the “greed” arguments made by the Left.
One apparent problem is that many companies profit both by selling desirable goods and by taking advantage of involuntary transfers. The two activities are often confounded within the same business. For instance, executives at Enron perpetrated an accounting scam that prevented shareholders from knowing that the company was sinking deeply into the red, but at the same time the company provided valuable energy services to its customers. Although some portion of the riches made by Enron executives were fraudulent, some other portion was not. Similarly, some companies that use political influence to gain favorable regulatory treatment — treatment that effectively transfers money in their direction — simultaneously produce and sell legitimate products in the marketplace. Their high salaries and profits, no doubt sought and achieved by greed, are partly due to acceptable voluntary exchanges and partly due to objectionable involuntary transfers.
This confounding effect leads to many problems of interpretation. For example, high CEO salaries are often explained by using marginal productivity theory, according to which competition in the CEO market drives the prices for those positions to the levels observed. Under this interpretation, CEO salaries are the deserved share of production in a voluntary exchange market system and thus are acceptable. On the other hand, one could interpret high CEO salaries as the consequence of an exploitative process, in which CEOs are rewarded in the competitive market because they have effectively increased their companies’ shares of wealth by means of involuntary transfers from taxpayers or consumers. Since it is very difficult to measure which portion of a large company’s income is attributable to which kind of process, different interpretations are possible. However, here the disagreement is not about principle but about the interpretation of data.
Unfortunately, the right lessons about greed and capitalism are unlikely to be found either in recent Hollywood productions (which indiscriminately condemn all products of greed) or in recent economic theory. For theory, it may be best to revert to the old classics: read Smith’s Wealth of Nations and Theory of Moral Sentiments; read Frédéric Bastiat’s The Law; read Friedrich Hayek’s The Road to Serfdom; read Henry George’s Protection or Free Trade.
In movies, the classics are also best. I mean, for example, a movie from 1954 entitled Executive Suite (starring William Holden and Frederic March). The film explores two different approaches to business; one based on reverence for the bottom line no matter what methods are used to achieve it; the other based on hard work, innovation, and the production of superior goods that the workers themselves can be proud of. By the end of the movie, the moral superiority of one over the other is obvious. The greed that inspires work, innovation, and pride (voluntary exchange) wins out over the greed that inspires fraud, blackmail, and accounting tricks (involuntary transfers).
We need to resurrect this understanding of business. We need to remember how aspiration, inspiration, and greed, appropriately directed, can create a workplace filled with well-treated, well-motivated workers striving to produce a superior product for their customers. Indeed, Hollywood can show us a way out of the current economic crisis; only it is not today’s Hollywood.
D’Antoni, Tom, “Finally the Death of Greed,” online at The Huffington Post, Dec. 11, 2008.
George, Henry (1949), Protection or Free Trade, Robert Schalkenbach Foundation, New York.
Gordon, John Steele, “Greed, Stupidity, Delusion — and Some More Greed,” online at the New York Times, Sept. 22, 2008.
Lewis, Michael, and David Einhorn, “The End of the Financial World as We Know It,” New York Times, Jan. 3, 2009.
Pearlstein, Steven, “Greed Is Fine. It's Stupidity That Hurts,” Washington Post, Oct. 2, 2008.
Reich, Robert, “Everyday Corruption,” The American Prospect, June 21, 2010.
Sivaraksa, Sulak, “Buddhism Nationalism and Ethnic Conflict,” an interview conducted in July 1993, published in the Tamil Times. Online at http://federalidea.com/focus/archives/112.