Adam Smith and Greed
Wight, Jonathan B., Journal of Private Enterprise
The virtues of greed have been widely promoted by some economists in the 20th century. Allegedly it is Adam Smith who provides this new dignity to greed (Lerner, 1937, ix). Kenneth Arrow and Frank Hahn in the General Equilibrium Analysis (1971), for example, implicitly assume that Adam Smith's self-interest is the greed that promotes economic efficiency (quoted in Evensky, 1993, 203). Walter Williams (1999), a devoted follower of Smith, writes in his column that, "Free markets, private property rights, voluntary exchange, and greed produce preferable outcomes most times and under most conditions." These pronouncements have become part of the cultural tableau. The noted investment banker Ivan Boesky gave a commencement address to MBAs declaring, "You can be greedy and still feel good about yourself (Andrews, 1966).1 In a movie loosely based on his story, the character Gordon Gekko in Wall Street (1987) opines that, "[G]reed is good.... Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit." In other words, greed is said to promote survival in Smith's competitive environment.
Ethical egoism may be flourishing in American culture, but the association of Adam Smith with these views is simply wrong. Smith decried selfishness often and at length. The quotes above do relate to Adam Smith's dictum that in exchange we should appeal not to the butcher's humanity but rather to his self-love, and never address our own necessities but only his own advantages (1981, 26-27). But Smith drew sharp distinctions between greed and selfishness on the one hand and prudent (and virtuous) self-interest on the other. The confusion about Smith's view arises in part from the fact that modern economists put man into the psychological box of homo economiatss-an isolated, rational, calculating, materialist with no social or moral connections with other human beings, and no scope for heroism. By contrast, Smith found man to be a fundamentally social animal with at times weak powers of rationality and a great capacity for heroic action.
Given the problems of asymmetric information that are inherent in many economic relationships, self-control is needed on the part of economic actors. Self-control is encouraged within an institutional setting of competitive markets because economic actors have an incentive to create good reputations for the long term. Hence competitive markets support the development of virtuous behaviors (McCloskey, 1994, 181). Yet Smith's system goes far beyond enlightened self-interest in explaining the internal controls that humans develop as they become properly socialized. Smith's moral system is based on sympathy, and Smith states emphatically that "Sympathy, however, cannot, in any sense, be regarded as a selfish principle" (Smith, 1982, 317).
Accordingly, this paper seeks to clarify Smith's views on the difference between self-interest and greed. It argues for a subtler, and richer, understanding of the role of self-interest in the economy-one that extols virtue and not vice as a more reliable defender of freedom. To begin this discussion we first examine the "greed is good" philosophy in its two components: a demand-side view (that lust and vanity will prop up flagging sales to maintain full employment) and a supply-side view (that envy and avarice will spur greater work effort). Both views relate to ideas found in Adam Smith.
The Demand-side View
The notion that one's personal vices (such as selfishness) could benefit the broader society by stimulating demand was an idea promulgated by Bernard de Mandeville in a famous poem, The Fable of the Bees (1714). Mandeville imagines a macroeconomy composed entirely of exemplary citizens who are living lives of frugality, simplicity, and virtue. Such saintliness leads to economic disaster, however, because aggregate demand collapses. Like a good Keynesian, Mandeville would stimulate demand by tempting people with vices: "Avarice, prodigality, luxury, pride, envy, vanity, folly, fickleness, and inconstancy employed millions / encouraging ingenuity and industry and creating pleasures and comforts. …