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“Greed is good,” said Gordon Geko played by Michael Douglas in his academy award-winning performance in the Oliver Stone movie Wall Street. “Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”
“Not so!” say the hodgepodge of individuals occupying Wall Street. Indeed, if there is one single issue they agree upon it is that greed is responsible for our current economic morass. And they are right. Greed led Wall Street traders to mislead their customers about the risk of the assets they sold them and that in turn led to the 2008 market crash and the worse economic crisis since the Great Depression.
Nevertheless, the view that greed is good continues to resonate with many because it is consistent with Adam Smith’s observation in the Wealth of Nationsthat in a market economy individuals are “led by an invisible hand” to promote the interests of society. The baker, for instance, doesn’t bake bread to mitigate hunger. She bakes bread in order to exchange it for money she needs to purchase other goods. Yet hunger is eliminated just the same.
But because their goal like Smith’s before them is to make the case for fewer government regulations what Gordon Geko and other miracles of the market mythmakers fail to point out is that the invisible hand is also responsible for the kind of malfeasance that led to the Great Recession. And to further their case they have a mantra that along with the invisible hand includes the myth of consumer sovereignty, the myth that an individual’s income is a measure of her contribution to society, the myth that market economies breed democracy, and the myth that markets when left to themselves lead, in the words of one economic textbook, to “the particular mix of goods and services most highly valued by society.”
Consumer sovereignty is the idea that in market economies consumers determine what gets produced. Hence we should not blame the bankers and Wall Street traders for selling us a bill of goods and walking away with our money while we lost our homes and our savings went up in smoke. They were just giving us the loans and mortgaged backed securities we asked for. But of course that is not true if they were lying about the risk embodied in the assets they were selling.
The myth that an individual’s income is a measure of her contribution to society, furthermore, is belied by the fact that a world-class athlete like Serena Williams earns many millions while a world-class high school science teacher earns a tiny fraction of that amount. And the myth that markets breed democracies is belied by the fact that the highly unequal distribution of income and wealth that results when markets are left alone to allocate resources undermines democracy.
The democratic ideal, after all, is one-person one vote. But in the market it is one dollar one vote. Hence those who have the most dollars have the greatest say in determining what gets produced and the greatest ability to bankroll the campaigns of favored politicians and pay lobbyists.
Finally, what about the myth that markets lead to the production of those goods society values most? Just ask yourself whether people would mind if we traded some of the automobiles we produce for better public transportation systems.
“These kids just don’t understand how the world works,” said the Wall Street Journal columnist Stephen Moore on Fox News, referring to the Occupy Wall Street protesters. But in fact the protesters understand the question Geko was addressing when he made his greed is good speech better than he, Moore and others for whom the myths of the markets are gospel. Economists call it the principal/agent problem.
Think of our country as USA Inc. We are the owners or principals. Our elected representatives are our agents. We want to design an incentive compatible set of rules to ensure our agents act in our interests and not just the interests of a small group of Wall Street traders and wealthy benefactors who have made out like bandits while we have lost jobs and homes. That is the message, pure and simple, that the Occupy Wall Street protesters are sending the rest of the world.
Paul Cantor teaches economics at Norwalk Community College in Norwalk, Connecticut.