Creed of greed not supported by Adam Smith

First, Gordon Ghekko here

And here is a article analysing Adam Smith's view of the Greed is Good mantra. The piece is taken from here.

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Ordinary Americans have a deepening mistrust of free-market capitalism as our nation has gone from Enron, WorldCom, Adelphia and Tyco to Bear Sterns, Freddie Mac, Fannie May and Lehman Brothers. Sadly, this mistrust is justified because too many corporate executives have adopted the creed of greed. This creed is based on the false view that Adam Smith believed that that personal greed generates the public virtue of economic growth. In fact, Smith would have been revolted by this misrepresentation of his views, as he actually wrote the following:

“Justice [the human virtue of not harming others]…is the main pillar that supports the whole building. If justice is removed, the great fabric of human society which seems to have been under the darling care of Nature must in a moment crumble into atoms….Men, though naturally sympathetic, feel so little for others with whom they have no particular connection in comparison to what they feel for themselves. The misery of one who is merely their fellow creature is of so little importance to them in comparison to even a small convenience of their own. They have it so much in their power to hurt him and may have so many temptations to do so that if the principle of justice did not stand up within them in his defense and overawe them into a respect for his innocence, they would like wild beasts be ready to fly upon him at all times. Under such circumstances a man would enter an assembly of others as he enters a den of lions.”

Smith is most famous for The Wealth of Nations (1776) but he discussed the ethical foundations for a free-market system in his first book, Theory of Moral Sentiments (1759). The quote found above is drawn from The Wealth of Nation states that unbridled greed destroys a free market system.

The pernicious view that “economic man” is selfish and rational and that Smith’s invisible hand will clean up the mess has been perpetuated by the Chicago School of Economics. Milton Friedman (Nobel Price 1976) argued that corporate managers should be economic men who should maximize profits without engaging in socialist activities like caring for workers or the environment. What he failed to recognize us that corporate managers may and often do try to maximize their own wealth at the expense of stockholders as well as customer.

Economist Gary S. Becker (Nobel Prize 1992) in his analysis of the legal system stated that his approach:

“…follows the economists’ usual analysis of choice and assumes that a person commits an offense if the expected utility to him exceeds the utility he could get by using his time and other resources in other activities. Some persons become ‘criminals,’ therefore, not because their basic motivation differs from that of other persons, but because their benefits and costs differ.”

If Friedman and Becker are right and the typical business person is an “economic man” who is selfish, rational, and amoral, then free-markets have no chance. The U.S. tried free markets in the nineteenth century and unbridled greed ruined it for the rest of the people. Ronald Reagan provided a second chance and the unbridled greed ruined it for us again. Will we ever get another chance?

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The point is Adam Smith pointed out that self interest in the economic sphere has socially beneficial collateral effects. He did not say there was a need to take the existing level of greed and "kick it up a notch." To the contrary, Smith thought the level of greed among capitalists was so high they could not be trusted. These are the last two sentences of Book I of Wealth of Nations:

"The proposal of any new law or regulation of commerce which comes from this order [profit takers], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it."

And this quotation from Book I, chapter VIII, at 83 suggests he had a more communitarian outlook than that of many of his modern self-proclaimed acolytes:

"No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged."

There is also an interesting article by Robert Frank from The New York Times available here. And you can find the Drudge Report's take on it here.