Does Greed Need to be Harnessed?

Today’s Wall Street Journal contained an editorial by Alan S. Blinder, economics professor at Princeton. The article is titled “When Greed is not Good”. According to Blinder, Adam Smith said greed is good only when properly harnessed and channeled. The necessary conditions for greed to be good include, among other things: appropriate incentives, effective competition, safeguards against exploitation of what economics call “asymmetric information” regulators to enforce the rules and keep participants honest, and protection against pilferage or malfeasance by others. When these conditions fail to hold, greed is not good.

This is the foundation Blinder uses to argue that new and more financial regulation is necessary, “My fear is that a once in a lifetime opportunity to build a sturdier and safer financial system is slipping away.” Blinder argues that partisan politics will be the death mill of what should be a great time to increase regulation of the financial services sector.

There are so many errors in Blinder's editorial that it is difficult to count them. First, Adam Smith did not argue that greed was good only if channeled and harnessed. He found greed or self interest to be a basic motivating factor that led to good outcomes. Recall the butcher, baker and candlestick maker?

Second, lack of financial regulation or lack of "proper" regulation had nothing to do with the financial collapse of recent years. That collapse was the result of government corruption, government intervention in markets, and the policies of the Federal Reserve. What would have occurred had there been no Freddie or Fannie? What would have occurred had not Barney Frank pushed Fannie and Freddie into providing subprime loans? What would have occurred had rating agencies been competing for business rather than being a cartel of three created by the government? What would have occurred had the Fed not kept interest rates far below the “natural” rate? There would have been no bubble and thus no collapse.

Blinder appears to be among those economists who see market fialures everywhere. Economists have spent the last 50 years discovering cases where markets might fail. Nobel prizes have been awarded for finding that there is asymmetric information in markets, that externalities exist, etc., etc. Unfortunately, few economists have realized that markets work – that if left alone these so-called failures will not exist. Much like the prisoner’s dilemma, if the game is played more than once, the players have an incentive to find a way out of the dilemma – the dilemma disappears.

I find it disheartening that an economist could argue that he knows what is best -- and that is to limit the functioning of markets and to harness greed. How arrogant! Is the answer to our economic problems really that “…at least a few senators – Republicans and Democrats – will have to temper their partisanship, moderate their parochial instincts, slam the door on the lobbyists, and do what is right for America.”? Blinder thinks so.