Ted Frier

Ted Frier
April 02
Ted Frier is an author and former political reporter turned speechwriter who at one time served as communications director for the Massachusetts Republican Party, helping Bill Weld become the first Bay State Republican in a generation to be elected Governor. He was Chief Speechwriter for Republican Governor Paul Cellucci and Lt. Governor Jane Swift. Ted is also the author of the hardly-read 1992 history "Time for a Change: The Return of the Republican Party in Massachusetts." So, why the current hostility to the Republican Party and what passes for conservatism today? The Republican Party was once a national governing party that looked out for the interests of the nation as a whole. Now it is the wholly-owned subsidiary of self interest. Conservatism once sought national unity to promote social peace and harmony. Now conservatism has devolved into a right wing mutation that uses divide and conquer tactics to promote the solidarity of certain social sub-groups united against the larger society while preserving the privileges of a few.


Ted Frier's Links

MARCH 21, 2013 9:37AM

Greed Not So Good

Rate: 7 Flag

Ever since he first proposed it in the same year Thomas Jefferson declared all men to be created equal, people have been delighted and beguiled by the hidden workings of Adam Smith's famous "invisible hand."

For a millennia or more, humans who marveled at the orderly movements of the heavens sought to invent some system to explain and predict the comings and goings of the planets. And so, it was entirely inevitable that in the fullness of time people would seek to impose the cosmic reliability of celestial mechanics onto more terrestrial phenomenon as well, like economics.

"Let the market decide!" That has been the battle cry of free market aficionados from the day Adam Smith first suggested that private avarice might transubstantiate into public virtue right through to the unspoken suppositions buried deep within Congressman Paul Ryan's god-awful budget that tax cuts pay for themselves and the whole point of national fiscal policy is to lift from the minds of America's job-producing investor class the dark clouds of "uncertainty."

But what if the laissez faire conception of the free market doesn't hold up any better than did the Ptolemaic vision of an earth-centered solar system that very nearly got Galileo burned at the stake for contradicting?

What if private vice doesn't produce public virtue at all, as Adam Smith surmised, but rather invites a heedless and reckless pursuit of private profit that leads inexorably to public catastrophe? That was the conclusion which the Chicago-school conservative Richard Posner reluctantly reached after sifting through the rubble following the collapse of capitalism in 2008.

In his 2009 diagnosis of the most recent financial crisis, The Failure of Capitalism, Posner concluded that the fundamental problem with free market capitalism is that behavior which is perfectly rational when pursued by individuals, and individual firms, is disastrous when that behavior is aggregated across the entire society.

The micro-economic laws of supply and demand that tell an economic participant how to use the price mechanism to maximize profits, in other words, are worse than worthless as a macro-economic guide for the national policymaker whose aim is, not profits, but the productivity and prosperity of the economy as a whole.

It makes perfect sense for the consumer to buy when the market is strong and save when it is weak, "but by doing this they make the downturn worse," says Posner, since from the standpoint of the overall society "we want people to save when times are good and spend when times are bad."

Likewise, it can be rational to ride one of the serial economic bubbles that have become all too commonplace since high finance replaced making things as America's signature industry -- even if you know it is a bubble -- since the individual investor can never know when that bubble will burst. And until it does, says Posner, there are lots of profits to lose if one climbs off the bubble too soon.

As a former Citigroup CEO put it: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing you got to get up and dance. And we're still dancing."

Because risk and return are positively correlated, Posner says a firm that plays it safe is, paradoxically, "courting failure because investors will turn elsewhere."

Likewise, while a "cascade" of bank failures could bring the economy to a halt, Posner says "no individual bank has an incentive to take measures to avoid such a consequence."

That is why, he says, it may be risky to follow the herd, but it is not irrational.

Since the 2008 collapse, the media has been on high alert (unlike the government) for the scoundrels and knaves who brought our economy to grief. But in apportioning blame, Posner says "there is no need to bring cognitive quirks, emotional forces, or character flaws into the causal analysis."  

The "rational maximization" of businessmen and consumers all legally pursuing their self-interest, together and intelligently, within a framework of property and contract rights, was all it took to "set the stage for economic catastrophe."

It's this "rational indifference" to the consequences of one's own business and consumption behavior -- an indifference baked into the very nature of the "free" market itself -- that explains why government has a duty to do more than merely prevent fraud, theft and other infringements of property and contract rights, even though this "is the only duty that libertarians believe government has," as Posner says.

Government also has an obligation to regulate financial behavior, says Posner, for without such regulation "the rational behavior of law abiding financiers and consumers can precipitate economic disaster."

Given the structural deficiencies of the free market and the perverse, self-destructive incentives it creates, it was probably smart for conservatives to shift the focus of their cheerleading away from capitalism's economic performance and towards laissez faire's imagined moral underpinnings instead -- freedom, liberty, individualism and all of that. That's because, as an economic incentive that promises broad-based prosperity, greed, it turns out, has not been so good.  


Your tags:


Enter the amount, and click "Tip" to submit!
Recipient's email address:
Personal message (optional):

Your email address:


Type your comment below:
Well done. I hadn't known about Posner's conversion experience, but I'm going to catch up on it. This is an exceptionally thoughtful and well-reasoned piece. I say this as one old enough to remember a time when greed was considered a private vice rather than a public virtue -- i.e., before the Gecko-Reagan age.
The distinction you make between what's 'good' for the individual and what's good for the society is excellent.
This is at the heart of my long held contention that the economic system must always be subservient to the social system.

It is the job of the social system to select, control, and keep in check, its economic system. For too long we've allowed the two to be thought of as synonymous or intermingled. They aren't. They're different systems with different goals and different means of achieving those goals.

I happen to like capitalism very much. BUT... it is a tool only. It, as with any economic system, is to be used by the society for its purposes. When any economic system, no matter what it might be, comes to serve only a small portion of the society in which it exists, it harms that society greatly.

We see the results of our economic system dominating our social system today. We've even come to accept economic principles and methods as acceptable social mores! This is upside down. It is the social system that ought to rule the economic system; to make it work on behalf of the social good.

This is not to say that it cannot be a "for profit" economic system but it makes clear that the whole society must share the benefits provided by its economic system.

The communal ownership of property and production may be one manner in which a society does this. I don't like common ownership of property much at all, save where absolutely necessary. Those who come to manage such communal property always end up acting as though they owned it WITHOUT having any personal responsibility for it or for their decisions regarding it.

But it is not impossible to design a socio-economic system where the 'socio' is in the drivers seat and uses the tool of an economic system to achieve social goals and concurrently allows opportunity for individuals to obtain their personal goals without harm to the society.

politics must direct economic activity, and since the varieties of oligarchy have only demonstrated that greed can be fed through command economies as well, it may be time to try democracy.

only when political power is distributed widely in democracy, can you hope for widely distributed wealth as well
Thank you Daniel and Sky for your comments. I cannot tell you how my eyes lit up when I read Posner's distinction between an act that is rational for an individual to take but irrational for a whole society to pursue, because Posner's distinction utterly destroys the myth that "the market" is somehow self-regulating or anything other than a blueprint telling people how they can make more money.

"The market" has nothing to say about whether those actions are wise or foolish in the long run or for society at large, which should be the more important point. And in that way, Sky, the market is exactly what you called it -- "a tool" -- a very effective tool, perhaps, which is why even liberals support capitalism by and large. But it is no substitute for real governance. And to say it is - to say "let the market decide" -- is to shift real political power and governing responsibility away from duly-elected leaders and to unelected economic oligarchs whose first priority is to make a buck, not to make sure that a rising tide raises all boats -- which is the only real utilitarian justification free marketers offer for giving capitalism a free hand.

Just as an aside, I did not include it here but there is a great scene in Sorkin's book "Too Big to Fail" where hedge fund billionaire Steve Schwarzman, at the height of the market collapse in 2008, pleads with then-Treasury Secretary Hank Paulsen to step in and "do something" to rescue Wall Street.

"The system's going to collapse in the next few days," screamed Schwarzman. "I doubt you're going to be able to open the banks on Monday. People are shorting financial institutions. They're withdrawing money from brokerage firms because they don't want to be the last people in -- Everybody is pursuing his self-interest. You have to do something!"

"Everybody is pursuing his self-interest" and you, Mr. Government, have to step in and "do something." I don't think there is a clearer admission that not even those who profit most from capitalism believe their own bullshit about the divinity of the free market or the god-like qualities of Adam Smith's invisible hand.
Has no one ever pointed out that the "invisible hand" might be invisible because it just doesn't exist? Might as well look for 'the hand of god'.

Of course they know that "free market" philosophies are just that - philosophies. Pretty words that have never been of any lasting or true value.

The only time an economist is fairly sure to have it right is when he acts as a historian.
As usual, a finely-written post, Ted. I have little to add to what you and Skypixie0 have said, except to note that Mr. Schwarzman wasn't the first big businessman or banker to beg for federal government intervention, bailouts, and regulation to mitigate the disasterous results of the "free market." If I remember my Gabriel Kolko, it was the Robber Barons themselves who demanded the creation of the Federal Reserve system and other federal agencies to stabilize modern capitalism's uncontrolled "bipolar disorder" of boom and bust. These "Progressive Era" reforms were not populist measures but demaded by the Robber Barons themselves tp have the taxpayers bear the financial burden of regulating and mitigating the self-destructive tendencies of modern captialism.