Thursday, January 8, 2015
Greed Is Not Good (Part 1)
In September 2008, shortly after the meltdown on Wall Street began in earnest, I was speaking with a friend who is a professor of economics. I mentioned to him that greed appeared to be at the heart of this crisis at every level, from home buyers who tried to get into more home than they could afford to investors who wanted to reap high returns without shouldering the risk. He responded that this is actually the way people are supposed to behave. His comment reminded me of conversations I have had over the years with another economist friend, who maintains that every human act is motivated primarily by self-interest.
Of course these friends were not saying anything shocking or even surprising. They were merely referring to a basic, underlying principle of modern capitalism. This idea goes all the way back, supposedly, to Adam Smith and his metaphor of the invisible hand. But is it accurate? And what did Smith actually intend? I would agree that every individual possesses a healthy portion of self-interest, but I cannot accept the notion that self-interest is the primary impulse behind every human interaction. I’ve seen too much of life to believe this. For starters, I’ve watched my wife for thirty years now, and she is often motivated by something other than self-interested thoughts.
I also found it fascinating that on September 26, 2008, while Congress was trying to cook up a $700 billion bailout plan to rescue Wall Street from its own excesses, the other headline story in the media was the death of Paul Newman. The juxtaposition of these two stories was highly ironic. Here was a man who gained fame in the movies but who was also an unusual and successful businessman. His business philosophy combined three goals: (1) fair labor practices, (2) quality products, and (3) giving all the profits away. And at the time of Paul Newman’s death, his company, Newman’s Own, had given over $250 million to charity. Two years later, in the middle of horrible economic times, that figure reached $300 million.
I couldn’t help thinking, as I watched the frightening consequences of the Wall Street greedfest unfold, how different our economy would be if every business operated on Newman’s philosophy, which certainly did not revolve around greed, or even self-interest. With Newman’s example in mind, let us look more closely at the central question of economics.
Why We Need a Guiding Philosophy
In his classic, The Worldly Philosophers, Robert Heilbroner explains in some detail why we have had political, moral, and social philosophers for millennia, but economists (or worldly philosophers) for only a few hundred years.1 Actually, Heilbroner argues that we may not even have worldly philosophers any more in our modern capitalist society. Our economists today are technicians and statisticians and financial engineers rather than philosophers who deal with grand theories and questions of moral relevance. But for several centuries, from Adam Smith through the early years of the twentieth century, some of the world’s greatest thinkers debated and theorized about the pressing question of how to best satisfy the physical needs and desires of human society.
In short, Heilbroner claims there are three basic approaches to ensuring the survival of the human race: tradition, governmental authority, and the market. Under the first approach, people serve particular functions in society because their fathers did, or because they are limited by their class or caste to certain types of labor. Under the second approach, authoritarian government ensures that tasks are accomplished by assigning people to do them. Neither of these approaches requires any sort of economic philosophy. Only when the third alternative gained prominence was an accompanying rationale required, because this third approach, the market mechanism, was “an astonishing arrangement in which society assured its own continuance by allowing each individual to do exactly as he saw fit—provided he followed a central guiding rule. . . . And the rule was deceptively simple: each should do what was to his best monetary advantage.”2 Or at least this is how we came to understand the magic of the market.
The market system was never unrelated to the political and social philosophies of classical liberalism, which suggested that individuals were more important than the traditionally authoritarian institutions to which they belonged. Liberty, self-rule, justice, equality, private property, happiness—all these ideas added momentum to the great change from traditional or command systems to a free-market economy. But the market was complex and mystifying and terrifically difficult to understand. How on earth did this system work? Theories abounded. Starting with Adam Smith and continuing on until at least the early decades of the twentieth century, great and not so great thinkers put forward their ideas on how to best order and justify this new system. “Out of the mêlée of contradictory rationalizations one thing alone stood clear: man insisted on some sort of intellectual ordering to help him understand the world in which he lived. The harsh and disconcerting economic world loomed ever more important.”3
And so over time a guiding economic philosophy gradually emerged. Unfortunately, it emerged from a fatal misunderstanding of Adam Smith’s writings. Over time the belief came into vogue that Smith had actually promoted self-interest as the central guiding principle of the nascent market system. His invisible-hand metaphor gained great momentum at the expense of higher ideas he had taught as a context for economic endeavor. And soon it was simply common knowledge that self-interest, by some mysterious and magical force, would create the best of all worlds. And this is where capitalism took a disastrous turn.
Why the Invisible Hand Is Paralyzed
Here I will rely upon the work of a friend and former colleague at the Marriott School of Management, David K. “Kirk” Hart. In “The Sympathetic Organization,” a chapter in the compilation Papers on the Ethics of Administration, Kirk argues that Adam Smith has been “ill-used” by the very people who claim him, “for they have perverted his economic analysis into a moral justification of the acquisitive egoism he detested.”4
Hart suggests that we have given too much attention to Smith’s The Wealth of Nations and have neglected his earlier book, The Theory of Moral Sentiments. “Smith intended that his economic and political arguments would be interpreted in the light of the moral philosophy he developed in his first book.”5 Why is this important? Because our misreading of Adam Smith has resulted in an economy that enthrones self-interest without the moral framework that was intended to bridle it. And unbridled self-interest has helped create the economic mess we enjoy today.
Kirk Hart explains that Smith made a distinction between an “optimal society” and a suboptimal one. The optimal society “was the result of the conduct of all affairs—social, economic, and political—with the love of others in mind,” a sentiment Smith referred to as “sympathy.” When people fail to act on their innate sympathy, a suboptimal society results. The difference between these two societies, I would suggest, can be seen in the difference between Paul Newman and Wall Street.
A suboptimal society, Smith maintained, is “upheld by a mercenary exchange” of goods and services “according to an agreed valuation.”6 In this mercenary society, all goods, services, and even most people are treated as commodities, things to be bought and sold. And this is the context for Smith’s invisible-hand mechanism that creates some sort of community benefit even when all members of the community are thinking of themselves first.
The invisible hand, in other words, operates in the suboptimal or mercenary society, not in the optimal society Smith desired. The optimal society needs no such mechanism because people are motivated primarily by sympathy, concern for others, and not self-interest.
For centuries now, we have divorced Adam Smith’s moral philosophy from his economic theory. We have preached and practiced unbridled self-interest and have expected that it would produce some semblance of equality and prosperity for everyone. But Smith’s invisible hand does not produce the anticipated results in our economy. Why? Because of a development Smith didn’t anticipate: the rise of the limited-liability corporation. When corporations have as much power as they do today, the invisible hand is effectively paralyzed.
Thus we have allowed an economy to unfold that is inferior to even Smith’s suboptimal society. Corporate capitalism, as we know it today, is two steps below the optimal society we should be striving to achieve. But Paul Newman’s example proves that it is possible to choose sympathy over self-interest even in our modern corporate circumstances.
In future posts, I will explore the rise of the modern corporation. Before that, however, I will discuss republican disinterest, the purpose of business, benevolence, and restrained competition.
1. Robert L. Heilbroner, The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers, 6th ed. (New York: Simon & Schuster, 1986), 17, 323.
2. Heilbroner, Worldly Philosophers, 20–21.
3. Heilbroner, Worldly Philosophers, 41.
4. David K. Hart, “The Sympathetic Organization,” in Papers on the Ethics of Administration, N. Dale Wright ed. (Provo, Utah: Brigham Young University, 1988), 69.
5. Hart, “The Sympathetic Organization,” 69.
6. Adam Smith, The Theory of Moral Sentiments, ed. D. D. Raphaela and A. L. Mafie, 6th ed. (1790; reprint, Indianapolis: Liberty Classics, 1982), 85–86.