Greed Isn’t Good: The Lost Lessons of Adam Smith

 

Takeaway

  • Adam Smith expected individuals to set their limits on their own self-interest, through prudence, justice, and benevolence
  • Smith compared unethical behavior to rust in a machine: if it wasn’t paired with self-restraint, self-interest could end up breaking the machine

It’s a short hop from Adam Smith to Gordon Gekko. At least, that’s what most economists would tell you. In his 1776 classic The Wealth of Nations, the father of free-market economics explained how the market’s “invisible hand” transformed private self-interest into public wealth. In the 1987 film Wall Street and its recent sequel, Gordon Gekko summed it up in three words: “Greed is good.”

Both Gekko and those economists got Adam Smith wrong, says Eli Cox, marketing professor at the McCombs School of Business. In a manuscript called Creed of Greed, Cox resurrects a forgotten Smith, a more complex thinker than the free-market cheerleader who gets taught today. Cox contends that Smith’s original conception of self-interest has been distorted by modern economists. He singles out the Chicago School of Economics, and its credo that the only social responsibility of a business is to increase its profits.

“Adam Smith would be appalled by the greediness of people in general,” says Cox. “Smith recognized that unbridled greed can destroy a society, and that even groups of murderers and thieves living together require rules of conduct in order to survive.”

How did Smith get so misunderstood? By reading him out of context, says Cox. Economists cherish passages like this one from The Wealth of Nations: “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 interest.”

But that book’s 1,080 pages represent less than a third of Smith’s writings, points out Cox. The other two-thirds throw a different light on what Smith meant by self-interest. 

As chair of moral philosophy at the University of Glasgow, Smith considered his most important book to be The Theory of Moral Sentiments, published in 1759 and revised up through his death in 1790. In it, he first used the phrase “invisible hand,” describing not economic markets but a deity’s ordering of the moral universe.

In that moral universe, says Cox, Smith expected individuals to set limits on their own self-interest through prudence, justice, and benevolence. The goal of self-love was to provide life’s necessities, not its luxuries, and not to take advantage of other citizens. “Society,” wrote Smith, “cannot exist among those who are at all times ready to hurt and injure one another.”

In contrast, Smith wrote harshly of greed: “What is the end of avarice and ambition. . . . Wealth and greatness are mere trinkets of frivolous value no more able to procure ease of body or tranquility of mind than the tweezers cases of the lover of toys.”

To Adam Smith, concludes Cox, greed was not part of self-interest. He envisioned free markets in which merchants practiced both prudence and fair play. He compared unethical behavior to rust in a machine. If it wasn’t paired with self-restraint, self-interest could end up breaking the machine.

If Smith could view today’s markets, guesses Cox, “He’d be delighted to see the prosperity enjoyed by the world and the extent of free trade.” As a thrifty Scot, though, he’d be dismayed by the rise of fly-by-night investments and credit-card debt. Above all, he would bemoan the decline of business ethics and the rise of greed.

“The best system is a deregulated free-market system, assuming that a critical mass of individuals are trustworthy and play by the rules,” says Cox. “If not, government should and usually does step in. If people will not regulate themselves, government is better than anarchy.

“When one person screws up, a little bit of the freedom of the markets goes away. When people are unethical, they’re hurting the system of free enterprise.”

 

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About The Author

Steve Brooks

In a quarter-century as a journalist, Steve Brooks has won two Neal awards for excellence in trade reporting and a Press Club of New Orleans award...

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