Economics

How the Deadly Sin of Greed Was Rehabilitated as Self Interest

And why economists have come to have second thoughts about Homo economicus

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By Samuel Bowles

In the aftermath of the stock market crash of 1987, the New York Times headlined an editorial “Ban Greed? No: Harness It,” It continued: “Perhaps the most important idea here is the need to distinguish between motive and consequence. Derivative securities attract the greedy the way raw meat attracts piranhas. But so what? Private greed can lead to public good. The sensible goal for securities regulation is to channel selfish behavior, not thwart it.”

The Times, surely unwittingly, was channeling the 18th century philosopher  David Hume:  “Political writers have established it as a maxim, that in contriving any system of government . . . every man ought to be supposed to be a knave and to have no other end, in all his actions, than his private interest. By this interest we must govern him, and, by means of it, make him, notwithstanding his insatiable avarice and ambition, cooperate to public good.”

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The idea that base motives could be harnessed for the public good is what I term economic alchemy. And in Hume’s time it was definitely a new way of thinking about how society could be governed.

During the Middle Ages, avarice had been considered to be among the most mortal of the seven deadly sins, a view that became more widespread with the expansion of commercial activity after the twelfth century. So it is surprising that self-interest would eventually be accepted a respectable motive, and even more surprising that this change owed little to the rise of economics, at least at first.

How this came about, you will see, is a remarkable story, one that is finally running its course in light of mounting evidence not only that people are not really all that knavish, but also that  treating citizens as if they were knaves may lead them to act is if they really were knaves! But I am getting ahead of the story.

It all began in the sixteenth century with Niccolò Machiavelli. “Anyone who would found a republic and order its laws” he wrote in his Discourses, “must assume that all men are wicked [and] . . . never act well except through necessity . . . It is said that hunger and poverty make them industrious, laws make them good.”  Hume, it seems was channeling Machiavelli!

It was the shadow of war and disorder that made self-interest an acceptable basis of good government. During the seventeenth century, wars accounted for a larger share of European mortality than in any century for which we have records, including what Raymond Aron called “the century of total war,” which happily is now finished.

Writing after a decade of warfare between English parliamentarians and royalists, Hobbes (in 1651) sought to determine “the Passions that encline men to Peace” and found them in “Feare of Death; Desire of such things as are necessary to commodious living; and a Hope by their Industry to obtain them.” Knaves might be preferable to saints or at least likely to be more harmless.

The year before Adam Smith wrote in his Wealth of Nations (1776) about  how the self-interest of the butcher, the brewer, and the baker would put our dinner on the table,  James Boswell’s Dr. Johnson gave  Homo economicus  a different endorsement: “There are few ways in which a man can be more innocently employed than in getting money.”

Adam Smith showed how a constitution for knaves might actually work at least as far as the economy is concerned. The economic actor, he wrote “intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

This is hardly making the case for laissez faire that later generations have attributed to Smith. But it is a milestone in the emerging view that motives other than self-interest could be pernicious. The sentence following one of Smith’s rare references to the invisible hand makes this point:  “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

The Wealth of Nations was still hot off the press when Archdeacon William Paley in his Principles of Moral and Political Philosophy let his readers know that he had no time for the “usual declamation upon … the worthiness, refinement, and delicacy of some satisfactions, and the meanness, grossness, and sensuality of others: because I hold that pleasures differ in nothing but in continuance and intensity.”  The economists’ conception of “preferences” was in the making: a ragtag collection of undifferentiated motives including everything from addictions to moral commitments.

The result, remarked John Maynard Keynes in a 1926 pamphlet, The End of Laissez Faire,   was that “The political philosopher, could retire in favor of the business man – for the latter could attain the philosopher’s summum bonum [greatest good] by just pursing his own private profit.”

Less than century after Smith’s Wealth of Nations, Lewis Carroll’s Alice had taken the economists’ message to heart. When the Duchess exclaimed, “Oh, ’tis love, ’tis love that makes the world go round,” Alice countered, if only in a whisper:  “Somebody said that it’s done by everyone minding their own business.”

From there, it was a short step to thinking that while ethical reasoning and concern for others should inform one’s actions as a family member or friend; the same did not go for shopping or making a living.

And so it came about that since the late eighteenth century, economists, political theorists, and constitutional thinkers have embraced Hume’s maxim and have taken Homo economicus as their working assumption about behavior.  Partly for this reason, competitive markets, well-defined property rights, and efficient and (since the twentieth century) democratically accountable states are seen as the critical ingredients of governance. Good institutions displaced good citizens as the sine qua non of good government.

In the economy, prices would do the work of morals.

Neither Hume, nor Smith – author also of The Theory of Moral Sentiments — nor any of the other great classical economists had imagined that people really were knaves in fact. Hume, in the sentence following the passage quoted at the outset added:  “it appears somewhat strange, that a maxim should be true in politics, which is false in fact.

John Stuart Mill played a leading role in restricting what was still called political economy  to the study of  “such phenomena . . . as take place in consequence of the pursuit of wealth. It makes entire abstraction of every other human passion or motive.” But he immediately termed this “an arbitrary definition of man.”

Unmitigated self interest was always just a handy simplification, one that in the late 20th century greatly simplified the eventual rendering of much of economics in mathematical form. But Homo economicus is now in retreat.

In my recent book  I explain why economists have come to have second thoughts about Homo economicus.

First, economic experiments have provided evidence against the “harnessing knaves” approach once favored by the economic alchemists. Motives other than self interest – generosity, reciprocity and ethical commitments – are also important. And explicit economic incentives designed to induce people to act in the public interest some sometimes are counterproductive because they crowd out what Lincoln called “the better angels of our nature.”

Second, Smith’s invisible hand has always needed the helping hand of both public policy and personal morality. Smith’s economy was not the stateless world of sociopaths that so many students of economics encounter in their intro courses. Smith’s insistence that self interest be constrained by elementary morality now resonates in unlikely places.

As the housing bubble burst in 2008 and the financial crisis unfolded, many U.S. homeowners found that their property was worth less than their mortgage obligation to the bank. Some of these “underwater owners” did the math and strategically defaulted on their loans, giving the bank the keys and walking away.

Unlike the New York Times editorial from two decades earlier, the executive vice president of Freddie Mac, the Federal Home Loan Mortgage Corporation, made a distinctly Aristotelian plea for moral behavior in the economy: “While a personal financial strategy might argue for a strategic default, entire communities and future home buyers can be harmed as a result. And that is why our broader social and policy interests will be best served by discouraging strategic defaults.”

Rather than trusting that the market, by getting the prices right, would induce people to internalize the effects of their actions on others, Freddie Mac urged “borrowers considering a strategic default [to] recognize the damaging impact their actions can have on others.”

They were hoping, in short, that morals would do the work of prices.

The greatest challenges now facing the world—including controlling the spread of epidemics and managing climate change and governing the knowledge-based economy–arise from global social interactions that cannot adequately be governed by channeling entirely self-interested citizens to do the right thing by means of incentives and sanctions, whether provided by private contract or by  government fiat. With economic inequality increasing in the world’s major economies helped along in many cases by flagrant abuse of legal and moral standards, one may also now doubt Dr. Johnson’s reassurance that “there are few ways in which a man can be more innocently employed than in getting money.”

The novel 18th century idea that economic self interest might under the right institutions sometimes be mobilized for social purposes remains essential to tackling these problems. Markets remain an essential and vast arena of human cooperation (albeit unintended). But the idea of an economy of avaricious knaves waiting to be harnessed for the public good by a discredited economic alchemy now appears to be anything but harmless.

2016, 26 May


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  • Alejandro Sánchez

    I think you could’ve tackled it as a problem towards the future. Right now, economics is the moral channel to the human masses, but it is not to be that way. What are the consequences of this and what is the economics of the future?

    • Rick Susor

      It is the regulation of Greed that is the economics we should be following and striving for.Greed is and always has been the downfall of every civilization.That should be the goal of every government.The regulation of man’s appetite for power and wealth.And that regulation should be decided by the majority.For the public good.That is the delema we face.And we have those that will say and do anything to increase their wealth even if it hurts the public good.

  • Derryl Hermanutz

    “Priests” were the priesthood of feudal Christian society. They preached the Divine Right of Kings. Economists are the priesthood of capitalist society. They preach the Divine Right of Property. The human beings who are the kings and the owners enjoy the Divine Rights.

    The priesthood preaches the moral norms that people “should” aspire to live by. Telling people they are self-interested materialist value maximizers normalizes, promotes, and socially rewards that kind of behavior. Possessing opulent property is ‘proof’ of one’s virtue as an exemplary human being.

    Propaganda “works”. The masses “believe it”. The priesthood’s job is to rationalize, normalize and make virtues of the behaviors by which the society’s ruling class gained their wealth, power and privilege. As “the virtuous”, the rulers “deserve” the admiration that elevates them to the pinnacle of the society’s social order.

    Economics — as a priestly endeavor — is the art of “motivated reasoning by proxy”. First you — the budding aristocrat — behave driven by urges and emotions not of your choosing and not even consciously known to you. Then the priests think up virtuous “reasons” why you did what you did: as if it was your conscious choice to do it. People claw their way to the top of the social hierarchy driven by non-conscious animal passions. Then economists make a virtue of “clawing”, and the masses consciously try to emulate that virtuous behavior.

    It was Hume who wrote, “Reason is, and ought only to be, the servant of the passions.” So much for the Confucian and Aristotelian schools of moral development that advocate rational education of the emotions to train people to feel the appropriate intensity of the appropriate emotion in response to morally laden situations. Hume and the economists make a god of undisciplined childhood vices as the natural flower of mankind. Deliberately uncivilized little beasts as the moral ideal.

    • John M Legge

      You have to acknowledge that many priests actually believed what they were preaching. The mad courage of the Jesuits who kept entering England for a date with Elizabeth’s master torturer never ceases to amaze me. Some priests (and bishops and cardinals) were cynical manipulators but many weren’t.
      I think that the same applies to most economists. If we hope for a better future we need as many people on our side as possible; and while some economists might see themselves as the hired propagandists of the bourgeoisie, most are simply deluded. Accusing them of motives that they do not have will not make it any easier to bring them to a more reasonable understanding of people and the economy.

  • Gerard Schofield

    The Achilles Heel of the Neo-Liberal/Neo-Conservative shallow reasoned devotion to the Invisible Hand Theory is that prices can do the work of morals. The psychologist turned evolutionary anthropologist Michael Tomasello and colleagues reveal very clearly in two papers why this cannot be so:-

    “The ultra-social animal” 2014 and “Two Key Steps in the Evolution of Human Cooperation” 2012

    http://www.eva.mpg.de/psycho/staff/tomas/index.html

    The real conundrum I believe, however, lies in why human beings engage in such shallow reasoned devotion to such concepts as the Invisible Hand Theory when outcomes prove to be sub-optimal for many. One can only realistically I propose point the finger at why poor “attachment” (emotional collaboration) occurs in the nurturing of babies and children in the first instance.

  • Edward Mycue

    Adam Smith’s invisible hand is in your pocket up to no good there yanking the cortex roots.

  • Laurie Matson Mattson

    Sin, you say! Look up the definition of sin. No god no sin. Darwins theory.

  • Alan

    “While a personal financial strategy might argue for a strategic default, entire communities and future home buyers can be harmed as a result. And that is why our broader social and policy interests will be best served by discouraging strategic defaults.”

    And so the defaults inevitably arrived as a result of the greed of the New York Bankers and their government cronies who had elected to “roll the dice” (Barney Frank) in a bid for “equity” for the poor renters after being released from the bonds of natural economic prudence (20% down payments). Under the hood of course, all this was to enrich real estate interests of bankers, lawyers, and government sanctioned economic entities. (Fann and Fred).

    The author seems to be suggesting more of the same.