Oliver Stone has made of sequel of sorts to his 1987 movie Wall Street. In the original the central character, Gordon Gekko, famously says, “Greed … is good.” He seems to have meant that wealth-creation and innovation are founded on “greed,” something that, understood in a certain way, many readers of The Freeman might agree with. But it’s important to realize that he was only partly right.
First, greed or, better, self interest, certainly does in a sense drive material progress and so on, but only if and to the extent that social institutions, the “rules of the game,” are truly consistent with the free market – that is, private property, free exchange, and the rule of law.
But not everything that looks like a free market is a free market. If the economic system departs from the rules of the free market, self-interest tends not to promote the general welfare at all. For instance, private property is violated every time special interests use government to seek a bailout or protection against competition.
Nevertheless, there is a certain “free-market” attitude, which I am told can even be found on Wall Street itself, that whatever self-interest produces must indeed be good. Those with this attitude don’t take the trouble to sort out the basic requirements of the free market from the various regulations, protections, and transfers that are at odds with it. You know, the sort of “free marketer” that Steven Colbert satirizes on his television show. To such persons, the collapse of the financial market and the recession are evidence of failure of the “free market” and unbridled capitalism.
Two Kinds of Free Marketers
I think this attitude can be traced to two different mindsets that you could call free-market-friendly. One of these sees self-interest itself as a virtue, and unfettered self-interest in particular as the highest good. But what does “unfettered” mean?
While the subject is far too involved for me to delve deeply into here, I will say that I think it depends on whether the fetters reside within the agent, in the form of norms and conventions she has internalized, or outside the agent, in the formal rules and regulations that are enforced by external authorities.
Those who tend to use the phrase “unfettered self-interest” or “unbridled capitalism” seem to have in mind a situation in which there is no locus of restraint whatever, either within the agent or outside the agent. Of course, the complete absence of restraint in this sense would result in the Hobbesian “war of everyone against everyone,” precisely the picture of modern finance that Oliver Stone paints in his movies.
In this rather naïve view the agent is free to pursue her self-interest wherever she finds it, even when it means acting opportunistically and dishonestly – so long as she observes or appears to observe the external rules and regulations. Thus the hotshot Wall Street operator takes advantage of any opportunity she chances on, even if it violates the norms of honesty and conventions of fair play, since these don’t really exist in her internal moral world. They believe that “greed is good” even when the rules of the game violate the rule of law, for example, by spreading the cost of risky investments among taxpayers (e.g., Fannie Mae) and concentrating the benefits on a few big players (e.g., Goldman Sachs).
(See Horwitz and Boettke’s “The House that Uncle Sam Built” for an excellent explanation of just how government policy did this leading up to the recent housing/financial crisis.)
Now, a more mature view doesn’t claim that everything that shakes out of even an ideal free market, whatever that may mean to you, is good and without (even significant) imperfections. It recognizes that in such a world aggression and fraud would still take place (though probably a lot less than in one dominated by standing national armies) and that nonaggressive behavior ranging from the annoying to the offensive to the deeply disturbing (no need for me to detail what these are for me or might be for you) would still be plentiful.
But the mature view recognizes that honesty, fair play, and trust are all important elements of the free market. Without these, private property, free exchange, and the rule of law may still be observed under the watchful eye of external authorities, but they would not flourish, and neither would material prosperity and wealth-creation take place on the scale and consistency that we’ve seen since the rebirth of the liberal idea in modern times.
Moreover, this view recognizes that when profits and losses, the good and the bad, redound to those responsible for making the decisions that produce them, market participants tend to grow more responsible and make better decisions. That is what the free market does: It makes us more responsible by making us more responsible. As a result, just those kinds of internal restraints against opportunism that grease the wheels of the market process emerge over time: the norms of trust and the conventions of reciprocity and fair play. This doesn’t mean, of course that “greed is good.”
Rather, the attitude is something like, to paraphrase Winston Churchill on democracy, “the free market is the worst possible system – except for all the others.”
The sequel just opened and I haven’t seen it yet. Let’s see how much the filmmaker has grown up in the past 23 years.