Selfishness blamed for recession – Columnist – Selfishness blamed for recession
March 11, 2008
Richard Gwyn

As is well known, Adam Smith, the 18th century author of that groundbreaking economic treatise, The Wealth of Nations, decreed that the motivating force of economic growth was selfishness.

The desire of businessmen and shopkeepers and entrepreneurs to make money benefited everyone, he argued, because others picked up part of this extra money in the form of jobs or sales or whatever.

Less well known is that Smith himself assumed that selfishness was self-regulating, or at least had some decent limits.

In a second book, The Theory of Moral Sentiments, now little-read but that Smith himself regarded as the more important one, he wrote: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him.”

Would that Smith were right. But he wasn’t.

Our contemporary contribution to the history of human evolution has been the doctrine that “greed is good” and, indeed, that unlimited greed is even better.

On the basis of some depressing statistics last week – a drop in employment of 63,000; the largest drop in non-farm incomes in five years – a lot of capable American observers are now saying the United States is already in recession.

This recession, if confirmed, will be unique. It will have been caused by selfishness unconstrained by any of the moral sentiments Smith thought would act as a brake on social destructiveness.

An excellent illustration of this – from another perspective, a quite disgusting one – was provided last week, just when all the depressing statistics were being made public.

In Washington, various executives of firms involved in the subprime mortgage collapse came before a House of Representatives committee to explain why they personally were still making so much when millions of Americans are losing their homes, and their own firms are losing vast sums.

Thus, Merrill Lynch CEO Charles Prince walked away after being dismissed with $161 million, including $38 million in a bonus and stock options, at the same time as his company lost $10 billion.

Committee chair Henry Waxman observed, “It seems that CEOs hit the lottery when their companies collapse.” Prince and the others explained the bonuses were for earlier performances, and could not be ratcheted back.

Why should moral sentiments now be so weak?

The sheer scale of the money has to be a factor. Pay packages of bankers and financiers are now so vast that even the Institute of International Finance, a global association of banks, is discussing the need for a voluntary code of limitations.

With globalization, money zips around the world in nanoseconds, and no one any longer knows who owns it. Also, regulation across national borders is near impossible.

Relevant equally is that regulatory agencies, such as the U.S. Federal Reserve, have responded by giving a helping hand, not to those suffering the consequences but to those who caused them.

Last week, two lenders heavily into subprime mortgages, Carlyle Capital and Thornburg Mortgages, looked close to being insolvent. The Federal Reserve response was to pump $200 billion in fresh capital into the market so these companies could be propped up by the banks to which they owe money.

So the crisis can only be solved by bailing out banks. But they’ve just been told: go on being greedy.

It isn’t that we no longer have any moral sentiments. It is that our system now makes mock of them.

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