In defence of “Greed”

The common story now making the rounds is that Wall Street’s “greed” is at the root of the financial crisis and that this “greed” needs to be reined-in. However, “greed” (or less derisively and more accurately “self-interest”) is not the problem or the reason for the current crisis. Wall Street, Bay Street, Main Street, my street and every other street in North America is built on individuals and businesses pursuing their own self-interest. Self-interested individuals and businesses are the backbone of our economy and ought to be celebrated rather than be demonized.

Start with the definition of greed, “a selfish and excessive desire for more of something than is needed,” according to the Merriam-Webster dictionary. But who exactly should determine what is really “needed,” and by what measure?

Do we all really “need” mobile phones and iPods? Do we “need” to eat-out as often as we do or buy the latest clothing fashions? What is “needed” is a subjective judgement and makes the definition of “greed” vacuous.

The reality is that “greed” is a contemptuous word that is purposely used to stir emotions and negatively smear the principle tenant of human behaviour, self-interest. Simply put, self-interest is the human desire to improve our situation or the “concern for one's own advantage and well-being,” according to Merriam-Webster.

Adam Smith, an 18th century philosopher and the godfather of modern economics, provided great insights on the benefit that individuals acting in their own self-interest can have on society. As Smith famously noted, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”

The quality of food and high level of service we receive from our favourite restaurant is not the result of a kind act by its owners; but rather, the owners are self-interested and wish to operate a profitable restaurant. They do not provide us with quality food and great service because they like or care about us; they do so to secure our business, money, and our continuing patronage.

The same goes for Sam Walton, the founder of Wal-Mart; Howard Schultz at Starbucks; Steve Jobs at Apple; or any other successful entrepreneur. All acted in their own self-interest and provided us with great innovations, cheaper products, better service, and continuous improvements in technology. All became extremely wealthy by providing benefits to others. And the benefit to others vastly exceeded the private benefit accruing to these entrepreneurs.

Economically free societies in which individuals and businesses are free to act in their own self-interest and to engage in voluntary exchanges, enjoy substantially higher living standards. Increased economic freedom has been shown to increase per capita incomes, economic growth rates, investment, life expectancy, civil liberties, and environmental performance, while reducing poverty.

Of course, self-interested individuals and businesses can also do harm if channelled improperly through deceit, corruption, force, fraud or theft. That is precisely why it is critical to maintain sound institutions (a sound legal system, protection of private property, etc.) to provide people and businesses with the right incentives and to hold them accountable for wrong doing.

This brings us back to the current financial crisis. Of course, self-interested investors and banks played a part in the current crisis by lending money to unqualified applicants, issuing unsound mortgages, and trading in risky mortgage-backed assets. Home owners also acted in their own self interest in seeking out and taking these loans. However, what is rarely mentioned is how government policy provided the incentives to do so.

For starters, the Federal Reserve kept interest rates historically low for too long, increasing the demand for mortgages and fuelling the housing boom. In addition, government-backed mortgage giants Fannie Mae and Freddie Mac increased their purchases of mortgages issued to low income earners, thereby funding billions of dollars in loans, many of which were sub-prime. The Community Reinvestment Act is yet another culprit that further encouraged banks to make high-risk loans to low and moderate income families. Generally, lending standards fell to accommodate a social policy objective of increasing home ownership amongst those who were least able to afford a home.

It wasn’t greed that fuelled the crisis; banks, borrowers, and investors simply acted rationally and in their own self-interest, following a set of rules created by poor government policy.

Canadians and Americans have benefited tremendously from individuals and businesses pursuing their own self-interest. Vilifying self-interest or “greed” is to condemn the economic system that has significantly improved our lives.