Greed: Is It Still Good?

Twenty-three years ago, fictional Wall Street trader Gordon Gekko summed up a business era in three words: “Greed is good.” In this year’s Wall Street sequel, Gekko twists that observation into the question: “Is greed good?”

He’s not the only one asking. Since Adam Smith, it’s been an article of faith among economists that private self-interest creates public wealth. But for many, the Great Recession has shaken that faith. “This notion that everybody striving simply for their own good will produce a common good — it sure didn’t work in the market for residential mortgages and the mortgage-backed securities created from those mortgages,” says Greg Hallman, senior lecturer in finance at the McCombs School of Business. “It failed so spectacularly, it seems difficult to even defend it.”

In this four-part series, reporter Steve Brooks talks to McCombs faculty members about greed and its limits and how to revive the neglected field of business ethics. They offer fresh lessons on self-interest run amok, from overlooked writings of Adam Smith to overpaid CEOs, from misguided incentives in mortgages to unconscious biases in ethics.

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

Most economists would tell you it’s a short hop from Adam Smith to Gordon Gekko. In his 1776 classic "The Wealth of Nations", Smith explained how the market’s “invisible hand” transformed private self-interest into public wealth. 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.

Shifting Risk: Greed and the Mortgage Mess

There’s no place like a home. For most of a decade, that belief fueled a boom in home mortgages and mortgage-backed securities. It looked like a win-win-win-win proposition for borrowers, mortgage brokers, bankers, and investors alike. It offered the ultimate proof that private greed produces public good. Until it didn’t. “We still wanted to believe it was true that acting in your own self-interest would produce good results,” says Greg Hallman, senior lecturer in the finance department at the McCombs School of Business. “But in this case, that idea clearly led to a horrible outcome.”

Greed at the Top: CEO Pay and the Great Recession

It’s the best of times and the worst of times — to be an American CEO. On the one hand, the top 500 CEOs took a 30 percent pay cut this year, according to Forbes. On the other hand, 17 banks paid $1.6 billion in bonuses while begging for federal bailout funds. Executives might believe they’re sharing the pain, but to many an unemployed worker, “chief executive officer” is a synonym for “greed.” When it comes to executive compensation, what is the line between fair pay and greed? Two McCombs School of Business professors offer two different perspectives. But they agree on this: The structure of CEO pay might have helped to bring on the Great Recession.

Greed in the Mirror: Behavioral Economics and the Obstacles to Ethics

In theory, the Great Recession was never supposed to happen. According to the mathematical models of most economists, free markets regulate themselves efficiently, because human beings make economic decisions based on rational self-interest. Now, a new field of research is challenging that portrait of Homo economicus, say two faculty researchers at the McCombs School of Business. It’s called behavioral economics. At the junction of economics and experimental psychology, it studies how real people make economic decisions. Outside mathematical models, they say, the human mind is fertile soil for the weeds of greed. We have high ethical intentions, but an array of unconscious biases tilts us towards irrational self-interest.