Greed Is Central to Capitalism

Greed - grabbing the maximum for oneself in any given situation - isn't some exceptional trait that financiers in the last few years suddenly displayed.

It's central to capitalism; the system functions precisely through the greed of the capitalists.

There is a very common view that the current financial crisis of the capitalist world, and its fall-out in the form of the most severe slump since the Great Depression of the 1930s, are a consequence of “greed” on the part of the financial sector.

This view has even entered the thinking of many progressive intellectuals. To talk of greed as underlying the crisis is certainly not incorrect, but it is not enough.

“Greed,” or grabbing the maximum for oneself in any given situation, is not some exceptional trait that financiers in the last few years suddenly displayed.

It is central to capitalism; the system functions precisely through the greed of the capitalists.

In fact Adam Smith the founder of classical economics drew attention to the paradox that the system as a whole functioned benevolently (so he thought) even though functionaries of the system, the capitalists, were motivated exclusively by their own self-interest (a euphemism for “greed”).

His predecessor, Mandeville in his Fable of the Bees, had gone even further, underscoring how “private vice” produced “public virtue.”

But those who explain the crisis in terms of “greed” often do not emphasize that “greed” is what activates capitalism in its entirety, that it is not some abhorrent trait exhibited by a few people in some exceptional circumstances, but what drives the system all the time.

Now, since this is not said, and since the totality of speech consists of both what is said and what is not said, the “greed” explanation, by being incomplete, is also wrong and misleading.

It suggests as if it was possible for capitalism to have escaped this crisis if only the greed of some financiers could have been controlled, as if the crisis had nothing to do with the structural aspects of capitalism but only with the avoidable excesses committed by some financiers.

It suggests an implicit distinction between capitalism marked by excessive greed and capitalism sans such greed, between, as it were, “good” capitalism and “bad” capitalism, and attributes crises to “bad” capitalism.

The crisis then becomes the result of an aberration of capitalism, not of its basic character: if only such “greed” were eschewed, capitalism would be crisis-free.

Greed – Essence of Capitalism

This suggested explanation is fundamentally wrong. Those accused of excessive “greed” were doing nothing more than simply maximizing their gains which is what all capitalists are supposed to do.

In fact maximizing gains is supposed, in economic theory, to constitute “rational” behavior on the part of capitalists.

So, what is called “greed” is not, as we have seen, an aberration; it is the essence of the behavior of the capitalists. All capitalism is like this; there is no “good capitalism.”

Karl Marx had in fact gone further in this matter. In his view, “greed” or so-called “rational behavior” was not merely a general feature of capitalism; it was actually forced on the capitalists.

The capitalists did not have a choice in the matter, since any capitalist who is “non-greedy” would fall by the wayside. Capitalists maximized gains not out of individual volition but as a matter of necessity.

In the Darwinian struggle in which all capitalists, competing against one another, were involved, any one who did not maximize gains, and hence fell behind in the race of accumulation, would go under.

The process of centralization of capital, whereby, as Marx put it, “one capitalist kills many,” necessarily meant that large capital displaced small capital.

There was intense pressure on every capital therefore not to remain small but to grow large instead, for which it had to accumulate capital.

For accumulating capital, surplus value had to be earned to the maximum possible extent, i.e. gains had to be maximized.

That was the essence of capitalist behavior, the pursuit of a “rationality” peculiar to it, whence it followed that a rejection of this “rationality” was possible only with the replacement of capitalism by socialism.

Indeed the same “greed” which is supposed to underlie the slump is what underlay the preceding boom as well. In other words, since “greed” drives the system it causes both booms and slumps.

The manner in which it does so is as follows. Booms in capitalism, as is well-known, are supported by bouts of euphoria, or “speculative excitement.”

An initial rise in asset prices gives rise to expectations of a further rise, which makes wealth-holders, precisely because they are “greedy,” demand more of the asset and hence causes an actual further increase. And so the process goes on creating a speculative bubble.

Of course the decision to demand more of an asset depends not only upon its expected price appreciation, but also upon the evaluation of the risk associated with holding more of it.

But the same euphoria that makes wealth-holders expect a continuation of asset price increases, also gives rise to an underestimation of risk.

It is this phenomenon of euphoric expectation of capital gains net of risk premium that makes for bubbles, given the “greed” (or the “rationality”) of the wealth-holders. More...

tags: greed  capitalism  marx