Ever since Michael Douglas’s character Gordon Gekko in the movie Wall Street declared “Greed is Good” capitalism has been cast in a sinister role that it has yet to overcome.
Capitalism is not about greed; it is about economic self interest, and this is far more than a semantic distinction. When you take a job paying $10 an hour over the job paying only $8 an hour you are displaying economic self interest, not greed. And when you decide to take the job paying $8 an hour over the job paying $10 an hour because you like the conditions or the work at the lower paying job enough to sacrifice the higher pay you are also acting in your own economic self interest. Economics is about far more than money.
When you decide to take a steady job in a traditional workplace rather than make much more money in drugs and prostitution you are also acting in your economic self interest. It is when your economic self interest disconnects from moral and ethical considerations that it becomes greed.
The ultimate power is the power over your own destiny and environment, but power is most often considered in the control over others. Whereas economic self interest in about control over your own destiny, political self interest is about controlling others.
Capitalism is about people acting in each other’s own self interest and the society benefiting as a result. This works because achieving your self interest requires serving others.
Advanced economic theory also realized that self interest and sharing is not mutually exclusive. In “A Beautiful Mind” John Nash had a Eureka moment courting ladies at the beer hall with his college buddies. He realized that Adam Smith was wrong, or at least incomplete. He developed a theory of equilibrium in competitive game theory. Basically this meant that he realized that your best outcome was not to grab as much as you can for yourself, but that your chance of success was enhanced by assuring at least some success for your competitors. Not only are consumers’ well being enhanced by competition, but the outcome for the competitors themselves is improved.
In order to profit you have to provide a product or service some one else values. Bill Gates, Michael Dell, and Stephen Jobs are very, very wealthy because everyone values Microsoft Windows and Office, iPhones, Macs, and laptops.
Few people complain about the wealth of these techno entrepreneurs because they all provide value we understand. The same can be said of Warren Buffet.
Yet we are outraged at the fortunes made in the financial industry where record amounts of value have been destroyed while CEOs made millions in bonuses. We do not understand derivatives, collateralized debt obligations, and financial models: Apparently neither did the CEO’s and boards of the companies selling these products.
The Wall Street mess was the product of “crony capitalism” which is to capitalism what National Socialism (Nazism) is to socialism. Crony Capitalism is a perversion of the principles of capitalism that includes the freedom “for every man to make himself” to use the phrase of Abraham Lincoln. “Crony capitalism” has its roots in the mercantilist tradition of Alexander Hamilton. During our early years Hamilton saw a need for financial interests and the government to work “closely”. He favored a central bank and such “public private partnerships.”
Hamilton was strongly opposed by Jefferson who favored decentralization and saw the favoritism fostered by mercantilism and the influence such financiers could have over our government as a threat to liberty.
Fannie Mae for example was given special treatment and access to low interest funds available to no other financial institution, and exempted from both SEC and FDIC regulation, Fannie Mae lobbied Congress and plied their special regulators with large campaign contributions. Senator Chris Dodd, head of the Senate Banking Committee and then Senator Barak Obama were the two largest recipients.
But the real damage was not compromising two high profile Senators. Fannie Mae was given special privileges in order to carry out the political will of Congress to make housing affordable for people who shouldn’t buy homes. They created the hunting grounds for the unscrupulous.
Bonuses and bailout funds for Fannie Mae did not elicit near the outrage of AIG and the Wall Street banks. The public still thinks it was the ‘Gordon Gekko’ greed of Wall Street rather than the political greed of K Street.
We still blame the economic self interest instead of the political self interest. Articles decry the old capitalism and herald the new era of state capitalism. The last time we heralded state capitalism was in Italy in the 1920’s and 30’s.
Crony capitalism was not limited to Fannie Mac and Freddie Mac. There has been a revolving door between Wall Street and Washington for decades. As long as the complicated instruments served the political greed, political leaders were willing to ignore prudent financial principles and assume that the overpaid magicians knew what they were doing.
The financial scandals of the 1980’s, the S&L collapse under George H Bush, the collapse of Long Term Capital in 1998, The collapse of the high tech bubble should have been a warning that high salaries and bonuses are not synonymous with competence.
But the solution is not to promote more crony capitalism, also called state capitalism or my favorite term used in the book “Nudge” (Richard Thaler and Cass Sunstein) , ‘Libertarian Paternalism’ (my vote for oxymoron of the year).
By now we should have learned that when business gets in bed with the government, somebody gets screwed.