When the word “greed” is used it is most often in a negative connotation describing some sort of socially unacceptable behavior. Individuals who are described as “greedy” are often considered thieves or usurpers. Yet, is greed really that bad? Is it not greed that, ultimately, motivates one to excel? In a commencement speech at the University of California-Berkeley’s School of Business Administration stock speculator Ivan Boesky declared, “Greed is all right, by the way…. I think greed is healthy” (James), could a man who seemed so successful be so very wrong? The short answer to this question is yes, greed really is that bad and although it can be the greatest of motivators towards success, ultimately when it takes the form identified below it only leads to failure as exemplified by Mr. Boesky’s conviction on insider trading charges. To more fully answer this question it is necessary to discuss what greed truly is, how it manifests itself in the business world in an economic sense and what effects it has on the market.
The Oxford English Dictionary defines greed as “Inordinate or insatiate longing, especially for wealth; avaricious or covetous desire”, in other words, constantly wanting more than what you have. This definition, however, does not offer a reason as to why greed is a bad thing. Wanting more, especially in the context of economics, is usually considered to be a desired manner of conducting oneself. Participants in a market are assumed to be “rational maximizers” in that they always choose the basket of goods or method of production that provides them with the highest levels of utility or highest profits. If it were possible for an individual to obtain a higher level of satisfaction economics expects that person to do so. The problem with trying to examine greed in an economic context is that it is too closely related to ideas of straight profit maximization. For example, if a consumer who loves apples has a choice between a basket containing three apples or a basket containing four apples for the same price she would obviously choose the basket containing four apples. The consumer in our example cannot be considered greedy for trying to satisfy her insatiable desire for apples by choosing the basket with the extra apple, she is simply maximizing the return to her investment (the price paid for the basket). This principle is of course applicable to business as well. If a producer has a choice between a piece of equipment that reduces marginal cost by $100 and a piece of equipment that reduces marginal cost by $150, that producer will of course choose the second piece of equipment. This “good” behavior turns into “bad” behavior and deserves to be identified as greed when it is pursued at the expense of others, leading to a reduction in social benefit.
In his paper Good Faith and Profit Maximization James Gordley discusses the theories of Adam Smith, specifically that of the “Invisible Hand”. Smith’s idea was that individuals appeal to the self-interest of others in order to satisfy their own self-interest, he says, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love” (Smith). According to Smith it is through this pursuit of self-interest that the wealth of nations ultimately arises. Smith is however not advocating greedy behavior whatsoever. As Gordley notes in his paper, when Smith speaks of self-interest he does not really mean self-interest in the sense of doing whatever one thinks is to one’s own advantage. The cases that Smith has in mind rely on the assumptions of competitive markets, specifically perfect information. If, as Gordley mentions, Smith’s ideas were limited to cases where there are no market failures he is able to show that the pursuit of one’s own self-interest is in fact socially beneficial. Yet, in reality, most markets are do not function perfectly.
Greed, in the sense of taking advantage of another for a gain in individual benefit, is an externality born out of asymmetric information, one party in a transaction having more information than the other party or parties. For example, the CEO of a large corporation has more information about that corporation’s actual performance than do the shareholders of the corporation. This puts the CEO in a position in which he can extract some individual benefit out of the less informed shareholders. This may be good from the CEO’s point of view, but the shareholders would hardly agree. It is this example of greed that is most applicable to our area of study and which can be contrasted from simple notions of profit maximization.
In his paper Market Crash Born of Greed Lester Thurow recognizes that capitalism relies on the “good” version of greed, the desire to serve our own self-interest from Adam Smith’s theories, but that the “bad” side of greed, serving one’s self-interest by taking advantage of others, cannot be separated from the system and leads to financial failure and stock market crashes. The stock market is a breeding ground for asymmetric information and consequently greed. Insider trading scandals such as that of Worldcom, falsification of earnings and other financial information are all actions taken to improve individual benefit at the expense of others, in other words, these actions are greedy. It is not only the greed of executives that leads to stock market crashes, but that of stockholders as well. This greed is a bit harder to separate from profit maximization, but if it were not for the desire of stockholders to get rich by investing in these companies with hugely overpriced shares. People see that the price continues to rise and they feel the need to serve their own self-interest by buying stock with the expectation that the price will continue to rise.
One might argue that greed is neither good nor bad in an economic sense. It could be said that greed simply causes a transfer of welfare from those who are ignorant to those who are able to take advantage of the ignorant leaving society at the same level of social welfare as before the act of greed occurred. This may be true in the short run but certainly not in the long run. In the long run the greedy must and will pay for their avarice whether it is through a prison sentence or pain endured through a stock market crash caused by their greed. Ultimately greed is bad for society as a whole and “infectious greed”, to which Federal Reserve Chairman Alan Greenspan attributes the current business crises (James), can do a great deal of damage to an economy.
Gordley, James. Good Faith and Profit Maximization.
James, Michael S. Is Greed Ever Good?
Oxford English Dictionary Online. Oxford University Press. 11/23/02
Smith, Adam Wealth of Nations. Prometheus
Books. December 1991.