I spent several instructive days with Branko Milanovic at the Santa Fe Institute, but we did not discuss this interesting issue (see The Iron Logic of Gordon Gekko). It is worthwhile discussing it in this forum.
What is ‘greed’ in the context of competitive markets? One plausible definition (Greed I) is that greed is the motivation to maximize profit using all legal means and without regard to any side-effects of one’s decisions. A second (Greed II) drops the condition that one’s means be legal. Instead Greed II involves maximizing profits by any means, taking into account the probability of being caught violating the law and the expected penalty (financial, reputational, loss of freedom) if caught.
It is useful to define the term ‘good’ in Greed is Good. It can mean begin greedy is morally acceptable or, alternatively, having lots of greedy people is good for the economy.
I take it from Branko’s letter that he means Greed I is good for the economy because being successful on competitive markets requires Greed I, and Greed I is morally acceptable because it follows logically from the conditions of capitalist competition. I think this view is partially defensible (more on this below), but Branko goes much further than this, and defends Greed II as good. He writes, “even when I consciously do not play by the rules… I do not have to feel bad about it. It is the job of the referee to catch me and punish me. In other words, there is no internal ethical mechanism to stop me.”
It is standard neoclassical economic theory, of course, to claim that the material incentives are sufficient to induce economic actors to behave appropriately, so there is no necessity for moral strictures. But there is no empirical evidence for this notion, and theory on which it is based is quite implausible. The interested reader can refer to my book, The Bounds of Reason (Princeton University Press, 2009) for details. There is no set of rules that would induce individuals in a society of self-regarding agents to behave prosocially. Indeed, our species is evolutionarily successful precisely because there is a strong moral dimension to human social cooperation and collaboration. This holds as much in the economy as in other spheres of social life. See my book with Samuel Bowles, A Cooperative Species (Princeton University Press, 2011), and my forthcoming book Individuality and Entanglement (Princeton University Press, in press).
Despite Branko’s words, it would be hard to make the case that Greed II is good either morally or for the economy. Burning down a competitor’s factory, or writing nasty reviews of a competitor on Hotels.com, on the grounds that the probability of getting caught is low, are obviously not morally acceptable and clearly are not good for the economy. Fortunately, there are strong ethical mechanism that inhibit most people from behaving in this antisocial manner.
An economy is which Greed II is rare is already a moral economy. Greed II causes moral outrage virtually universally. When Big Pharma hides embarrassing side-effects of a drug, or Volkswagen subverts environmental regulations, or Chrysler refuses to acknowledge life-threatening problems with ignition switches, that is Greed II, and it is not good. The people who engage in these activities are behaving immorally.
When people say that the financial crises of 2008 was caused by greedy bankers, they mean Greed II. But as Branko says, “I also find all moral outrage about the behavior of Wall Street in the run-up to the crisis wrong-headed or hypocritical. The system is built in such a way that the only thing you need to worry about is law, and not being caught (if you fail to observe the law). Since these guys generally behaved within the law (as it was then, or as they helped, by funding it, define it), there is nothing to complain.” I agree with Branko on this very important point. Blaming the financial crisis on greed is like blaming an airplane crash on gravity (a point made by Judge Richard Posner some years ago). The financial crisis was not cause be either Greed I or Greed II, but by complex social dynamics outlined years ago by Hyman Minsky (Google it!), involving imperfect financial regulation.
But is Greed I good? If it were necessary to run the economy, I would judge that it is good. I would not want to run my life according to Greed I, but I would be pleased that others were willing and able to do so. Even here, however, I think that Branko is seriously overstating the case for greed. Why? Because most people are not single-mindedly oriented towards maximizing financial gain. Even heads of companies may have multiple goals guiding their behavior, including a commitment to clients and staff as well a shareholders and their personal financial gain. Honesty, commitment, and loyalty are values cherished by many individuals, certainly enough that most positions of power in the economy can be staffed by ethically-motivated personnel.
By contrast, Branko believes the adage “nice guys finish last.” But there is an equally, of not more compelling adage “they came to do good and did well.” Indeed, there is considerable empirical support for the notion that ethically motivated individuals in the business world are happier and more successful that unidimensional profit maximizers.
Boards of directors of firms would do better to choose leaders who are committed to a broad set of moral and material concerns rather than Greed I types. This is because a Greed I individual will do what is best for himself, not the firm, stakeholders, or shareholders. There is just no way to present a CEO with material incentives sufficient to line his concerns up with shareholder profit maximization.
Societies whose business leaders have moral integrity are successful societies. Of course, it is always good to have some Greed I types around, and it is at any rate impossible to eliminate them. But they are part of a moral mix.
Santa Fe Institute