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The Role of Greed in Economic Troubles

April 13, 2009

Two fine paragraphs from Will Wilkinson responding to a silly post by Matt Yglesias:

Now, I am willing to say that, ceteris paribus, a certain kind of grasping, unprincipled pecuniary self-interest is a destructive quality. If that’s greed, then I’m against it. But I’m not willing to say the same thing about the pursuit of wealth generally.

I think we have recently punctured some dangerous misconception about the real value of certain kinds of “financial innovation,” and so we should reconsider how much those who have become wealthy in these fields have actually enhanced general welfare. I think a lot of execs basically failed to do their primary job: to manage their firms’ assets responsibly on behalf of the owners of those assets: the shareholders and creditors. This makes them justifiable targets of outrage. We’ve learned a lot of lessons. I think we’ve been given reason to think much harder about the principal-agent problem — the mismatch of incentives between owners and managers — at the heart of corporate organization. I think we’ve learned just how “socially responsible” maximizing long-term value really is, and how anything that distracts from focus on long-term value creation (whether it be myopic bonus systems or irrelevant-to-the-business “corporate social responsibility” initiatives) is a potentially hazardous nuisance. The Smithian congruence between self-interest and the general welfare is not a natural fact of the world, but is mediated by social norms and the structure of institutions. We need to make sure the desire for wealth takes the right shape, and that the institutions within which people pursue wealth tend to actually work to convert “low” aspirations into real social benefits. But we’ve been given no special reason to second-guess the general utility of the desire to become wealthy. It is a crucial and necessary resource. And it remains a much more likely engine of utility than the desire for political power — a truly dangerous motive Matt tends to ignore.

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