Greed is NOT good

By Kevin Kang, Editor in Chief

In the famous words of Wall Street’s Gordon Gecko, “greed is good.”  According to free-market economists, the incentive of profit is what drives efficiency and innovation in the modern world.

Why work hard if you do not get paid for it?

Who would share a new idea or invention with the world if there was no payment in return?

The opportunity for profit pushes businesses to produce efficiently and constantly create new ways of improving our lives.  For supporters of the profit incentive, money is truly what makes the world go round.

However, greed is also known to provoke unethical and illegal behaviour.  So the question must be asked: is money making the world turn the wrong way?  Does your paycheque always reflect the value you have added to society?

Countless examples of controversial compensation can be drawn from the recent global financial crisis.  Often, those who were to blame for the economy’s troubles were those who reaped the most rewards.

At the height of the crisis, AIG Inc. distributed millions of dollars of government bailout money as executive bonuses.  Major investment banks were taking executives to expensive corporate retreats, while middle-class Americans were evicted from their homes.  The realization of this growing disparity even led the Obama administration to place a salary cap on CEOs.  These events make it clear that the laissez-faire pursuit of profit leads to inefficient outcomes.

The unrestrained profit incentive can be examined at a micro level in China, where small village farmers have stopped growing crops to “grow” houses instead.

This strange phenomenon started years ago when the Chinese government began buying large plots of farmland for urban development.  To do so, farmers were reimbursed for the fair value of their land.  However, farmers saw that profit was to be made: if they constructed buildings on their plots, the value of their land would increase.

Soon, poorly built brick-and-mud houses sprung up all over the countryside, crowding out fields of crops.  Although some are built illegally without permits, they quickly grow into communities and homes, making it difficult for the government to step in and demolish them.  Even if the houses were demolished, crowds of farmers would illegally build them again overnight.

The result?

The Chinese government has no choice but to pay farmers more than what their land was originally worth.  In the end, regardless of what happens in the buying process, all of the houses that are “grown” will be torn down by the government for development.  Thus, all construction and demolition that occurs is completely pointless.

When more money can be made without actually having to create value for society, the profit incentive leads to inefficiency.  Like the farmers, businesses and individuals without a strong sense of morality would be encouraged to cut corners and invent ways of creating profit without having to work as hard for it.  The Chinese government is in the process of creating further legislation and boosting law enforcement, but the legal process is always two steps behind.

Milton Friedman, famous economist and free market advocate, once wrote an essay stating that “the social responsibility of business is to increase its profits”.  Friedman argued that the modern concept of corporate social responsibility was idiotic and inefficient: if businesses operated according to the law and focused purely on profit, they would be acting morally enough.

He added that by spending the business’s money on social initiatives, businesses are using up a substantial chunk of their employees’ and shareholders’ paycheques.  Thus, Friedman argued that by pursuing profit and at the same time, playing by “the rules of the game”, society is pursuing a better future.

Unfortunately, the theoretical free market works very differently from the real world.  In practice, profits have a tendency to lead people astray and encourage them to commit unethical, illegal and economically inefficient acts.

In the perfect world, everyone would follow greed to the limits of the law.  However, our legal system is infamous for being slow and critically flawed in dealing with white-collar crime.

As shown in the recent financial crisis, regulations on financial markets that should have existed were simply not there.  As we amend our regulatory policies, we realize that innovation in the financial services sector evolves more quickly than the law, and that something else is needed in order to prevent such a crisis from happening again.

The famous philosopher, Immanuel Kant, had a utopian solution for such moral dilemmas.  He believed that morality could only be achieved if we pursue an action as a “means in itself.”

This means that to be moral, we must do things because we believe in what we do and not because we are pursuing ulterior motives.

What does this mean for profit?

It means that people should work and contribute to the society simply for the purpose of improving our collective quality of life—not for making a profit.  Farmers in China should farm purely for the sake of providing food to the nation.  Otherwise, they may be able to find other ways of making profit without being truly productive.

Of course, Kant’s philosophy is neither practical nor possible.  A world that tries to live by those rules would be too inefficient and could never exist.  However, it is obvious that we each need our own sense of morality and social justice.

To be practical, we can and should seek profit.  Nevertheless, when unrestrained by a strong code of ethics, greed is definitely not good.

By Kevin Kang, Editor in Chief

In association with:

The ARB Team
Arbitrage Magazine
Business News with BITE

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