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The rules need fixing, but greed can be good Samuel Brittan: Financial Times 04/07/02 The public can benefit from the seemingly irrational pursuit of wealth by business leaders well beyond what they can personally use even on the most self indulgent basis The biggest obstacle faced by proponents of a competitive market economy is the belief that it is based on, or encourages, selfishness, materialism or acquisitiveness. This belief will have been powerfully reinforced by recent US corporate scandals. Capitalism has always been subject to boom and bust; there have always hoping human beings who break or stretch the rules. Such scandals have been a feature of the late stages of a high powered boom. At the height of the South Sea bubble in the early 18th century, fraudulent promoters were able to sell shares in ventures, "the nature of which will be later disclosed". The boom of the 1920s saw the activities of Clarence Hatry, the British financier jailed for fraud. A few years ago the American financier Ivan Boesky, who was jailed for insider trading declared "greed is great." The same belief could have been behind the activities of American corporate leaders who falsify accounts or bury their activities in hosts of off balance sheet ventures. None of this destroys the fact that competitive free market capitalism has been the biggest engine for growth -- and for the reduction of poverty -- that the world has ever seen. We should never rule out superior alternatives; but they have yet to be discovered. Moreover, the wrongdoers usually get caught and the rules are subsequently tightened - which is more than one can say about the misdeeds of governments. Does that mean that greed is really good? My dictionary defines greed as a never satisfied longing, especially for wealth. It is obviously a loaded word. If you approve of an activity you talk about people's honourable desire to better themselves and their families and not to be a burden on their fellow citizens. If you disapprove you call it greed. A more neutral description would be the pursuit -- not of selfishness -- but of self interest, which can have many motivations. It can be the desire to found a dynasty which could motivate people like Rupert Murdoch or Tony O'Reilly. Or it can be the desire to be remembered by posterity, which is often best accomplished by endowing a museum, a concert hall, an academic institution or a sports ground. And there are some souls like Scott Fitzgerald's Great Gatsby who frenetically pursue more and bigger automobiles, more and bigger residences to attract a particular female. We can be too preoccupied with motivation. Some people, especially leaders in business or fashion or sport, want to amass far more wealth that they can possibly use even on the most self-indulgent and sybaritic basis. What does not receive enough emphasis is that the rest of us can benefit from this seemingly irrational fetish. If the Medici rulers of Florence had stopped acquiring wealth when their personal needs were satisfied we would not have had much of the art of the Renaissance. If Henry Ford had stopped developing the motor industry when his own personal wants had been satisfied the cheap mass produced car would have been long delayed. If Bill Gates had left off when he became sufficiently rich, the development of household computer technology would have been delayed. The desire to pile up endless treasures beyond rhyme or reason would not be a healthy basis for the great mass of human activity. But we all benefit from the fact that some people are made that way. The point is not motivation but the framework of rules, conventions and assumptions within which market activity is carried out. Reading accounts of what has gone wrong with the many attempts to establish a free enterprise society in the former Soviet Union, I am stuck by some similarities with New York today. With all the wisdom of hindsight many western economists now emphasise that it was not enough for Russia to remove controls and prices and wages, to privatise state industries or even to balance the budget and introduce currency convertibility. None of these things will work without a whole lot of other institutional changes, such as an effective legal system, the rule of law and a state which can police it, clear and secure property rights and a social safety net. Not to speak of the introduction of standard western accounting and banking techniques. I originally supposed that these were less and less known the further you moved from Germany's eastern border towards Moscow. But now they do not seem to be all that well known if you move west towards the Atlantic seaboard of the United States. A clear conclusion is that we need a tightening up of accounting rules to reduce the gulf between ownership and management on the lines detailed by Peter Martin in the Financial Times on July 2. If I might throw my own suggestion into the ring: it has long seemed anachronistic that boards of directors should choose their own auditors -- whether these auditors give them other managements advice or not. It is like schools appointing their own inspectors or, as one taxi driver put it to me, like criminals appointing their own policemen. The auditors should be there to represent the interests of shareholders. It is admittedly not easy to say who else should appoint them. To say the government would bring in further temptations to corruption or political favours. Maybe it should be some body such as the Stock Exchange Council or, in the UK, the Financial Services Authority. There is in fact a growing body of knowledge about the conditions in which competitive markets will bring socially beneficial results and in which they will not. By far the most readable book I know on the subject has just appeared. It is by John McMillan entitled Reinventing the Bazaar, a Natural History of Markets, Norton, (£19.95). The book covers far more than the title suggests. The author is enviably up to date on matters such as the internet and modern auction theory. But he writes simply and directly without talking down. At long last I have found a book that I can recommend to the proverbial nephew who desires to find out about economics without wanting to pass an exam or become a practitioner himself. Although Prof. McMillan is enthusiastic about markets he has far from the messianic belief found in some circles; and he insists that markets require careful construction, which may come from the bottom upwards, but may also need a vigorous steer from the top downwards. He gives five conditions for well functioning markets:- a smooth flow of information; trust that people will fulfil their promises; competitive, contestable markets; the protection, but not overprotection, of property rights; side effects on third parties are taken into account. There is clearly a long way to go before these conditions are even approximately fulfilled. But let us avoid an overreaction towards, if not vindictiveness, at least over caution, which could put the fragile and tentative world economic recovery at risk. It would be so easy in a bout of anti-corporate frenzy to slay the goose that lays the golden eggs.
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