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Is Greed Really Good?

2012 August 19

“Greed…is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit.”  That was the ‘80’s Gecko mantra.

It was based on something high-flying financier Ivan Boesky said shortly before he was exposed as a fraud and sent to prison.  Nevertheless, we bought into it then and the sentiment resonates even now.  George Bush, after all, encouraged us to shop in the face of adversity.

But is greed really good?  Does it capture the “essence of the evolutionary spirit?  Is Geckoism a hardheaded, pragmatic approach or utter nonsense?  These were serious questions a generation ago, but they have long been answered.  The truth is that while greed might work in the movies, in the real world it’s simply naive.

The Best For Society as a Whole?

Few people ever thought that greed was an admirable personal quality, merely that it worked for society as a whole.  However, that notion was always somewhat disingenuous. The word greed has negative connotations because it implies taking more than your fair share.  The idea was that by doing something personally bad you can do a public good.

This type of utilitarian argument has been around for centuries and has long been discredited.  While some, most notably Nobel laurette Gary Becker, have tried to argue that you can completely divorce markets from morality, the reality is that you can’t. Markets are more than equations, they operate in the real world with real people.

Philosophers tend to use extreme examples like “if killing one child in a thousand would make everybody else better off…” but there’s no reason to go that far. We have an innate sense of fairness and tend to be repulsed when we feel someone is taking advantage.  We will storm out of the store, write nasty comments online and even organize boycotts.

We will even reject greed when it benefits us, just to spite the greedy.  As I’ve documented before, in the real world people will most likely reject a beneficial arrangement they regard as being unfair, even in a corporate setting when there are billions of dollars at stake.  It’s tough to see how greed can work when nobody seems to want it around.

In Defense of Liberty?

For some, greed isn’t really about economics, but freedom.  If someone wants to be greedy, they have a right to do so.  You can’t legislate morality and everybody should be able to do what they want as long as they don’t harm anybody else.  If someone wants to gorge themselves on chocolate cake or who are we to say no?  Doesn’t that apply to greed?

This type of libertarian philosophy has immediate intuitive appeal.  However, much like the utilitarian argument, it fails to pass the smell test.  Very few of us live in a log cabin somewhere in the wilderness, but in communities that are interconnected.  Being greedy is like being profane; when you practice it you expect a certain amount of censure.

It was no accident that Gordon Gecko’s speech invoked evolution.  The concept of “survival of the fittest” has long been invoked in arguments of this kind.  Shouldn’t societal norms reflect natural law?  Yes, but there is no evidence that the evolutionary concept applies to individuals and much that says otherwise.

As I’ve explained in detail before, evolution is largely a group phenomenon.  Clearly, one who is born in Somalia doesn’t have nearly as much of a chance to survive until adulthood as they would in the US or Europe, much less be financially successful.  Community norms matter.  Anyone who thinks otherwise simply doesn’t live in the real world.

Acceptance of Human Nature?

Some say that the real issue is with human nature.  We all have greedy impulses, so why not just be pragmatic, accept that fact and design society to push those impulses in positive ways?  In that sense, the concept of “greed is good” doesn’t necessarily advocate our baser natures, rather, it simply puts them to good use.

Again, the problem here is that the rhetoric doesn’t fit the fact pattern.  There is a large body of evidence that shows that money isn’t always an effective incentive because it devalues intrinsic motivations.  We are often more likely to do things for free out of consideration for others than we would if there is money involved.

In one highly cited case parents who were fined for picking kids up late from day care did so with greater frequency, not less.  In Predictably Irrational, behavioral economist Dan Ariely reports that lawyers are more willing to work pro bono than for a reduced fee.

A particularly telling case is an economic experiment called the ultimatum game, in which people from a variety of cultures reject bargains they see as unfair, even if they lose money in the process.

Daniel Pink’s bestselling book Drive cites a number of studies which show that, even in the workplace, intrinsic motivation is far more important than monetary incentives.  He argues that providing employees autonomy, mastery and purpose is far more effective than compensation schemes.  Having managed many companies myself, I would agree.

Aggregate Results

Some would say that I’m missing the point.  Sure, I can point to centuries old theories and even find some examples of market breakdowns, but what’s really important is that greed works in the aggregate.  In the end, it makes us all better off.

Of course, there are some problems, such as stagnating median incomes amid increasing inequality, but that’s mainly a function of structural changes in the economy and tax policies.  As long as there is a bigger pie, we can argue later about how it’s cut up.

However, as Frank Lysy shows very graphically on his blog, the evidence simply doesn’t support the assertion that greed makes the pie any bigger.  In fact, the opposite appears to be true.
 

 
As the above graph clearly shows, the American economy has done far worse since 1980, when we decided that greed was good.  Financial deregulation and the intense financial engineering that came with it has failed to provide any real evidence that it delivers any results.  The main effect seems to be an abrupt drop in the savings rate.
 

 
So other than 3 major market crashes, declining savings and investment (for the economy as a whole, savings equals investment), stagnating incomes, lower productivity and growing inequality, it’s tough to see what greed has done for us.  Tell me again, why was greed supposed to be good?

A Rawlsian Bargain

It should be clear by now that greed does not work.  It has been, in fact, a disaster. However, that leaves us with a conundrum.  Surely, we don’t want to trust in some kind of utopian socialist system nor should we expect people to work against their own self-interest.

However, self-interest is often a funny thing.  As I’ve written before, companies who seek only profit often lose money in that pursuit.  What good is greed if it doesn’t get you what you want?  If nothing else, the recent financial crisis has shown that unrestrained avarice has a serious downside.

So what to do?  I think we can find a big part of the answer in John Rawls’ concept of a veil of ignorance.  The essence of the idea is a thought experiment:  How would you organize things if you had no idea where you would end up?  Regardless of whether you were on top, bottom or somewhere in the middle, what would you consider fair?

In the end, putting our faith in absolute greed makes no more sense than putting our faith in absolute altruism or absolute equality.  Some people, through skill or luck or hard work will always end up better off than others.  That’s life.  However, without fairness, there can be no legitimacy and without legitimacy, order breaks down and little gets done.

The facts are clear.  Greed is not good.  Greed does not work.  It never did.

– Greg

8 Responses
  1. August 19, 2012

    Greg,

    This issue has been central to the success of every civilization and will be as long as humans roam the earth. Greed has and always will be good (more than good, excellent) for greedy people, and there will always be greedy people.

    You are great at statistics, but there probably are no studies on the percentage of greedy people in the population at any given point in time. But, I’d guess that their numbers remain at level proportions as well as those of people who are not self serving.

    What changes in different societies at different times are conditions that enable greedy people to present themselves as benign or even beneficial to others. Greed truly never benefits anyone but the greedy. Even those who benefit financially by serving greedy people only feel truly rewarded if they are greedy as well.

    Thanks for articulating the truth. Clearly the world of business is a fertile garden for the greedy and we all need to be constantly on guard against them.

    Unlike in the movies, they do not announce themselves as allegorical figures.

    Greg Reply:

    Thanks John! However, I’m not so sure that greediness even benefits the greedy. As I wrote in an earlier post, companies that seek only profits without purpose tend not to do so well. Being commercially minded and being gredy isn’t the same thing. There’s an increasing amount of literature on this.

    Here’s the post if you want to check it out: http://www.digitaltonto.com/2012/the-profit-paradox/

    – Greg

  2. August 20, 2012

    Greg,
    I was putting something together on gifting as a sales promotion vehicle last week and came across this which you might find interesting:
    http://blogs.scientificamerican.com/literally-psyched/2012/01/04/the-psychology-behind-gift-giving-and-generosity/

    Looking at this and the survival of the fittest, what Gecko forgets it’s survival of the fittest communities not individuals (unless they consistently try breeding with themselves and there is a derogative name for those types of people ;-)).

    Greg Reply:

    Yes. That’s very true! Thanks for the “gift of the Magi” link.

    – Greg

  3. Andy Murray permalink
    August 20, 2012

    Greg,
    Great topic, by the way, loved the movie.

    Greed is synonymous with winning, we all like winners but don’t like greedy people.
    What’s wrong with being greedy but also being generous?

    I think we all have certain (taught) instincts that we all gravitate to.
    The word “greed” came up with my wife when teaching our grand kids to share. Teaching them to share is taught, so greed came naturally to them.

    We are all from different backgrounds, raised by different people from different cultures. Who we are and what makes up our character is a combination from lessons taught, lessons learned, what we experienced and adjustments we made from them. Who we are (our character) or want to be, are ideas passed on to, invented or emulated to be like.
    It’s wonderful to hear a story of a really nice person. The one who “will give you the shirt right off his back”.
    Great guy, one you can aspire to be like, you just hope later on in life, he’s not the one running around without a shirt.
    I don’t think big business teaches their executives to be greedy. Big business rewards success, winners. Shareholders like winners, everyone likes winners. So what does it take to be a winner? A little bit of greed never hurts, just be generous.

    Greg Reply:

    Thanks for sharing your thoughts, but I’m not sure that the facts back you up.

    There many good examples where greed directly results in losing and I’ve cited them in the past (i.e. the ultimatum game, Ross Johnson and the RJR Nabisco deal, Doug Ivester at Coke, etc.).

    – Greg

  4. August 21, 2012

    Great article Greg, I’m happy to have found you. I’m working on a start up to push a social movement to fight greed in the world, one business at a time. I had a vision and may of very well found a solution. I would appreciate your support.

    Best,
    Matthew

    Greg Reply:

    Good luck with it Matthew!

    – Greg

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