Saturday, December 06, 2008

The Economist’s Individual

Tibor R. Machan

You may recall that about a month ago Alan Greenspan said, in his testimony on the Hill, that he had been mistaken to think that the self-interest of those working in financial institutions will serve their clients’ interest and, thus, avoid anything like the meltdown we have experienced recently. As he put it on Wednesday, October 22nd, "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."

Greenspan was in fact referencing on two basic tenets of modern economic science, namely, that (a) everyone acts selfishly all of the time (even when one seems to be benevolent) and that (c) if people are not interfered with as they pursue their self-interest, this will turn out best for all.

Here is how the late Milton Friedman put the first point: . . . every individual serves his own private interest . . . . The great Saints of history have served their 'private interest' just as the most money grubbing miser has served his interest. The private interest is whatever it is that drives an individual.” (The Line We Dare Not Cross," Encounter, 11/76:11) Adam Smith laid out the second tenet back in 1776. He argued that when one is guided by one’s own self-interest, this is going to promote the greater good "of the society more effectively than when he really intends to promote it which was no part of his intention."

Why such confidence in self-interest? Because it really means something very vague and can apply to all kinds of actions, just as Friedman suggests. For economists self-interest is whatever one chooses, whatever one freely selects as one’s goal, even if it is what would ordinarily be considered self-destructive, such as suicide, or altruistic, such as helping the poor in Africa (as Bill Gates has been doing with his foundation recently)! My writing these lines, your reading them, indeed everything we do of our own initiative is self-interested conduct.

In common sense terms, whenever one does what one chooses to do, one necessarily advances one’s own agenda, no one else’s. Even if one is being thoroughly helpful to others, this still is true--after all, one is acting as one thinks best and that must be, the theory has it, something that serves one’s own interest. To put it another way, the idea that we are all acting from self-interest means merely that we are all doing, when not being coerced by others, what we ourselves want to do. There is nothing more to the idea, as the economist uses it. (After all, another widely embraced thesis of economics is that what is best, what is right, is all subjective, so there is no right versus wrong, good versus bad other than how one sees things.)

So when Greenspan recanted the theory that “the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms” what he was saying, in common sense terms, is that the expectation, the one advanced by Adam Smith, is sometimes mistaken, namely, that all these people in all these organizations will always act to everyone’s benefit.

Of course Smith’s thesis is by no means a wild and crazy one. Even if we do not assume that people, when they act freely, follow their own lights and so will always also benefit others, the opposite by no means follows. That is the view that, for us all, to do what is best overall we must be guided by government regulators, by the likes of, say, Representative Henry Waxman, the man whose questioning elicited Greenspan’s comments and a most fervent advocate of government intervention in the economy. This latter theory, the one that places great confidence in government regulation, is not made true just because the first theory, that the self-interested or free conduct of everyone always promotes overall welfare, is false.

Quite apart from the two tenets of modern economic theory, there are independent reasons to be very weary of government regulation and good reason to favor deregulation. Here, too, we can invoke a famous quote but not from an economist but a political theorist, Lord Acton. He is the one who observed, and quite truthfully, that "Power tends to corrupt, and absolute power corrupts absolutely.” This means that government agents are routinely corrupted by the power they hold. They aren’t always but they are nevertheless tending in that direction and the greater their power over others, the more they do so.

It is this thesis that the likes of Henry Waxman need to absorb but are very likely to resist to the day they die.

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