Herbert Gintis: Societies whose business leaders have moral integrity are successful societies (a guest blog)

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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.

Herbert Gintis
Santa Fe Institute

hgintis@comcast.net

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edward

“When people say that the financial crises of 2008 was caused by greedy bankers, they mean Greed II.”

Is there any empirical support for that claim? When I say that the financial crisis was caused by greedy bankers I most of the time mean both Greed I and Greed II.

“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”

The analogy is misleading because gravity is a given physical process while the behaviour of persons is not. Or if we do regard persons as physical constants in one part of our analysis then we must do so across the board (determinism full stop) and say that blaming a person who in disgust kills a dozen wall street bankers is like blaming an airplane crash on gravity. In a social setting where rules are set up such that if everyone follows those rules (which I do not believe was the case, but suppose so for sake of argument) there will be a financial crash each participant still has moral responsibility for participating. No one was forced at gun point to be in the financial sector.

Furthermore, we can distinguish the literal veracity from the practical function of statements like “the financial crisis was caused by greedy bankers”. Literally, as I’ve argued above, it is partly true, since the financial crisis was caused by the combination of greedy bankers and bad rules. I think the practical function of the statement is to more fuzzily express that one has negative attitudes against the fact that financial crisis occur and cause harm and against those responsible, including the greedy bankers. If person A says “the financial crisis was caused by greedy bankers” and person B to this replies “that is like blaming an airplane crash on gravity” the practical function (and effect) of person B’s snarky remark is in many contexts to curb the force of the negative attitudes in A. But those attitudes should instead be strongly fomented and directed, not curbed!

Juan Alfonso

I am copy/pasting my comment on last post because I think that it resonates with this post. Skip it if you already saw it and sorry about the length.

“I am afraid I agree with the previous commenters. I have also read about Economy students becoming more selfish and less cooperative during economic games than average population…

First: rules and laws are nothing if they are not based on values and traditions that are meaningful to the people. That is: prosocial moral values which have undergone cultural and biological multilevel selection. “Legal” is not equivalent to “socially acceptable”, as seems to be assumed in the article.

One thing is playing by the rules in a morally unacceptable way (and even violating the rules from time to time if you think that you are not getting caught). That might be cheating all right but not such a bad thing. The problem arises when someone manages to modify the rules for his own advantage (or the elite advantage) and/or can control the regulation, enforcement and implementation of the rules. That is extremely destructive. This is what Geckos try first… This is a kind of meta-cheating: not breaking the rules (and regulation) but shaping them so that you can make more profit.

In the soccer analogy, one thing is scoring with the hand if the referee isn´t watching and other thing is bribing the referee. The first thing is tolerated cheating. The second is plain CORRUPTION. Nothing erodes more an economy, whether free-market or planified, than corruption. Even hardcore economists should agree on this.

Second: even economists say that economies are complex things based on TRUST. Trust in the rule of law. Trust in the value of the pieces of paper that we call “money”. Trust in that money will keep part of its value the next year. etc, etc. I miss this key concept in the above argumentation.

Trust have to be earned. Gordon Geckos don´t give a damn about trust. They try to free-ride the trust climate created by others, but in the long run they can get punished by law enforcers or by stake-holders. Stake-holders are decider agents that can punish other agents simply by not choosing them. In a free-market economy companies can´t afford not being chosen by stake-holders, That is why companies invest a lot of money in earning a good public image and behaving pro-socially.

Reputation is important. Rational Choice Theory is a very enlightening theory about how agents behave in a complex economy, but it is only a useful model. If you BELIEVE that this is how the world really works, then you are fooling yourself.”

Gene Anderson

Related to this is the question of whether you get rich by producing more stuff people want (positive-sum game) or by ripping other people off–at worst, hurting them in the process more than you add to the economic total product (negative-sum game). At present, much of the world economy is negative-sum, including, most obviously, the entire fossil fuel industry–burning all the fossil fuel would almost certainly eliminate all life on earth, and even now the benefits are clearly outweighed by the costs. The banking situation pushed the envelope in the early 2000s, leading to 2008. I would expect that Greed II generally leads to a negative-sum situation.

Andrei Nikitchyuk

A few comments/observations:
1. What you call “greed” is really “self-interest.” Everyone has it, only the degree might vary. Also, it is important who the individual includes in the scope of “self”: it could be exclusively him/herself, or they can include their family, friends, department, company, region, or nation. (I wonder if anyone did a study to find out what kind of distribution and standard deviation are across the society. It would be good to know.) Moreover, by definition, every business person needs to have a strong quality of self-interest, because, by free market standards, private businesses exist to make profits for their shareholders. If businesses don’t make profits, they get restructured until the do turn to profit, or get shut down if they can’t. Actually, I think anyone who wants to understand the ethics-profits dynamics in business has to read “The Stakeholder Theory: State of the Art” by Ed Freedman and others [ http://www.cambridge.org/catalogue/catalogue.asp?isbn=9780521137935&ss=exc ]
2. Introducing “types” of greed is interesting and opens a field for a more differentiated discussion, but are there only two types of greed? Also, how do you define “legality” to clearly differentiate between these types? When business entities or their stakeholders influence democratic political processes by obscurely founding and/or funding political organizations with the goal to pass profit-maximizing laws through local and national legislative bodies, it’s not illegal per se, but is it not as harmful for societies as Type II Greed?
2. Some examples to illustrate your points would make them more meaningful (e.g. the way Volkswagen got around the US car emission standards — Type II Greed?, the way US investment banks marketed mortgage-based securities — Type I or II?)

Swami

I agree with several of the other commenters (though I would argue fossil fuels has been one of the greatest positive breakthroughs for humanity of all time, contributing to the very lives of five or six billion people)

Greed is a negative word used to describe attending to the needs and desires of one’s self or loved ones. Implicit in the word is excess. It isn’t self interest it is excessive self interest. It is self interest with negative externalities or adverse side effects to the person in question or to others.

I fail to see how greed explains anything about the 2008 recession. Bad institutions explains it better. The blowup wasn’t caused by people violating the rules — that was incidental to the situation. The system was set up in such a way that it was prone to blow. Markets require regulation, and this market in perfect hindsight was extremely poorly regulated.

Bill Bud

Geez. All greed is self interest, but all self interest is not greed. “Greed” implies the pursuit of gain at the expense of others. Both type 1 and 2 fit this definition, type 1 does it within the rules, type 2 sees the rules but risk adjusts. They both damage society and are not necessary to progress. Good societies celebrate self interest with the understanding that real self interest must include moral behavior.

edward.

My comment didn’t get through so here is another attempt. I have great respect for Herbert Gintis and his research. But I want to counter a few things. I’ve tried to rephrase the comment in a way the moderator might find more suitable for this forum.

“When people say that the financial crises of 2008 was caused by greedy bankers, they mean Greed II.”

I wonder if there is any empirical support for that claim? It does not fit my intuitions on the matter at least. When I say that the financial crisis was caused by greedy bankers I most of the time mean both Greed I and Greed II.

“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”

I’ve long thought that that analogy is misleading because gravity is a given physical process while the behaviour of persons is not. There is no practical point with blaming gravity because gravity is irresponsive to blame expressions, but human beings are responsive to blame expressions. In a social setting where rules are set up such that if everyone follows those rules (which I do not believe was the case, but suppose so for sake of argument) there will be a financial crash each participant still has moral responsibility for participating. No one was forced at gun point to be in the financial sector. The analogy would then only be fitting if we assume that financial sector workers have no control over their behaviour nor are responsive to blame expression. If that is the assumption then it needs to be argued for and we also need an explanation for why that assumed non-control and nonresponsiveness doesn’t also apply to all behaviour everywhere (determinism full stop). For example if some people react to financial workers with disgust, perhaps even with violence, would it be fitting, when someone directs blame to those people, to react by saying that such blaming is, also in this case, like blaming an airplane crash on gravity?

An additional point I wish to make is that we can distinguish the literal veracity from the practical function of statements like “the financial crisis was caused by greedy bankers”. Literally, as I’ve argued above, it is partly true, since the financial crisis was caused by the combination of greedy bankers and bad rules. I think the practical function of the statement is to more fuzzily express that one has negative attitudes against the fact that financial crisis occur and cause harm and against those responsible, including the greedy bankers. If person A says “the financial crisis was caused by greedy bankers” and person B to this replies “that is like blaming an airplane crash on gravity” the practical function (and effect) of person B’s remark is in many contexts to curb the force of the negative attitudes in A. The point here is that in many practical contexts the person stating “the financial crisis was caused by greedy bankers” is performing better than the person who who in context denies that statement. Of course this is not to say that we are now in such a context, since this is a theoretical discussion. But the distinction here is important I think.

Best regards.

Ross Hartshorn

I think the question of “is greed necessary for a market economy to work” is usefully divided into two separate questions. “Is some non-zero amount of greed necessary for a market economy to work”, and “If greed is not the only motivator in people’s behavior, does it make a market economy work less well”. It’s pretty well understood how a bit of desire for more money can motivate people to do things that other people need done, but that doesn’t require that it be the only motivator, and not necessarily even the biggest. It just needs to be a significant one.

However, admitting multiple, competing motivations (e.g. greed and desire to be ethical) does create one problem: analysis of economics is harder. The idea that “greed is all you need”, relies more than anything on the desire of economists to make things simpler to analyze.

concomdynamics

Why so much attention to the greed alone?
After all, there are 6 other sins, the “good” part of which is perhaps even more important for the competitive economy.
Superbia I – is a cornerstone of any competition,
Envy I – is great motivator,
Wrath I – is altruistic punisher,
Sloth I – is creator of demand on most goods,
Gluttony I – is accelerator of demand,
Lust I – is excellent advertiser ::)

Mike Waller

Envisioning unfettered greed as essential to successful capitalism ought to be termed “the self-serving fallacy”. What such behaviour really equates to is “cheating” or “free-riding” which to evolutionary theorists are the bete noire of complex social organisation., In a TV programme dealing with Richard Dawkin’s work, John Krebs puts it very succinctly by first asking us to imagine a world in which altruistic individuals, genetically predisposed to share scarce resources with unrelated others, came into being. He then asked us to imagine revisiting this breeding group a comparatively few generations later. What he suggested we would find was that “all the goody-goodies have been replaced by selfish individuals who got all the food instead”. And a world in which only selfish individuals survived, forever locked into internecine warfare over available resources, would, almost literally, be Hell on Earth. That for the most part things do not turn out that way gives rise to evolutionary theory’s “problem of altruism”, finding solutions to which has pre-occupied practitioners for decades. Put in Kleb’s terms, how do types who are not pre-programmed as ruthlessly selfish manage to persist over evolutionary time-scales when faced with relentless competition from those who are? The answer to that is now thought to be encapsulated in the saying “Cheat me once, shame on you; cheat me twice, shame on me” i.e. bad reputations have negative consequences. It may be that a certain about of cheating is beneficial to non-cheaters as it keeps them on their toes, but they still need to contain it by bearing down heavily on those who do cheat. Somewhat tongue in cheek, I might add that in the modern world what the non-cheats needs to be particularly alert to is the ultimate sophistry of the cheat: the self-serving fallacy that cheating is generally beneficial!

Herbert Gintis

I have a few comments on the postings reacting to my comment,

Mike Waller writes: In a TV programme dealing with Richard Dawkin’s work, John Krebs puts it very succinctly by first asking us to imagine a world in which altruistic individuals, genetically predisposed to share scarce resources with unrelated others, came into being. He then asked us to imagine revisiting this breeding group a comparatively few generations later. What he suggested we would find was that “all the goody-goodies have been replaced by selfish individuals who got all the food instead”. And a world in which only selfish individuals survived, forever locked into internecine warfare over available resources, would, almost literally, be Hell on Earth.

The idea that evolution only supports selfishness was indeed supported by Dawkins at one time, but he has made statements more recently withdrawing from such statements. Krebs is just wrong. Human society has developed altruistic forms of share and collaborating, and there are many models of this in the evolutionary literature (see my website).

Edward. writes: “I’ve long thought that that analogy is misleading because gravity is a given physical process while the behaviour of persons is not. There is no practical point with blaming gravity because gravity is irresponsive to blame expressions, but human beings are responsive to blame expressions.” What Posner means is that there has always been greed but just now we had a financial crisis, just as there has always been gravity but just now we had an airplane crash.

Andrei Nikitchyuk writes:. What you call “greed” is really “self-interest.” I don’t believe this, any more than being a selfish a**hold is in one’ self-interest. There may be some for whom this is true, but most people are better off, personally, by acting morally to some extent.

Bill Bud made this point well: “Good societies celebrate self interest with the understanding that real self interest must include moral behavior.”

Greying Wanderer

Immorality creates imperfect markets so by definition inefficient.

The more immoral the more inefficient.

Paul Gowan

Maximizing profit by any means, legal or illegal, does not constitute greed until an ill-defined level of survival at a certain level of comfort is passed. In some respects, the economic definition of scarcity in terms of the problem of allocating physical resources based on infinite possible imaginary desires vs. physical need builds greed into the economic system so that it seemingly can’t exist. Greed involves placing a claim on resources above what an individual/family/group/species needs to survive at a reasonably comfortable level. Where to set the bar is not easy, but it is above mere physical survival. In terms of individual yearly income it might range from $50,000 – $500,000 per year. On the third dynamic(groups/businesses) it is even harder to define when a company is being greedy. It would involve looking at corporate use of resources and the distribution of profits. It would also involve looking at how the company is affecting the other 7 dynamics such as the environment.
1. an overt act is not just injuring someone or something; an overt act is an act of omission or
commission which does the least good for the least number of dynamics or the most harm to the
greatest number of dynamics.
In terms of survival on the first dynamic(individual), a millionaire contractor that gouges his new, inexperienced customers is greedy.

” Ignorance and greed are part of the evolutionary process, which is just to say that mistakes are part of learning. There is nothing bad about behaviors or perceptions that do not work; they simply have to be given up and replaced by behaviors or perceptions that do work.”
R. Buckminster Fuller

Read more at: http://www.azquotes.com/author/5231-R_Buckminster_Fuller/tag/mistake

The Eight Dynamics
http://www.scientology.ca/what-is-scientology/basic-principles-of-scientology/eight-dynamics.html

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