Fifty years ago this month a young Alan Greenspan published in The Objectivist Newsletter of Ayn Rand an essay titled The Assault on Integrity. Here are the opening two paragraphs:
Protection of the consumer againt "dishonest and inscrupulous business practices" has become a cardinal ingredient of welfare statism. Left to their own devices, it is alleged, businessmen would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings. Thus, it is argued, the Pure Food and Drug Aministration, the Securities and Exchange Commission, and the numerous building regulatory agencies are indispensable if the consumer is to be protected from the "greed" of the businessman.
But it is precisely the "greed" of the businessman or, more appropriately, his profit-seeking, which is the unexcelled protector of the consumer.
He argues that fraudulent practices or shoddy products would put a company out of business overnight and remarks that the basis of business regulation is armed force: "At the bottom of the endless pile of paper work which characterizes all regulation lies a gun."
Since the young Greenspan wrote these immortal lines, the United States has witnessed fraud in the savings and loan industry, the collapse of Enron under fraudulent accounting practices, the collapse of Long Term Capital management, The Madoff scandal based on a Ponzi scheme, the financial crisis of 2007-8, as well as the Vioxx scandal in pharmaceuticals, and many, many other examples of "dishonest and unscrupulous business practices."
Greenspan energetically opposed any regulation of derivatives, one of the principal causes of the financial crisis. One is hard-pressed to think of another economist who has been so clearly and continually wrong in his economic philosophy over his entire lifetime, yet he is revered by conservatives even though Greenspan has admitted that he was wrong—and on precisely this point. He admitted in testimony that he misjudged the banks, thinking they would regulate themselves against the excesses which brought about the financial crisis. He testified in front of a House committee in October of 2008:
"I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms."
To this day Greenspan remains a wealthy and respected advisor on economic matters. It seems that economics is a field where major mistakes are never punished.
Cut to the chase and what you have is Alan Greenspan saying that the fox should be permitted to guard the chicken coop.
It's even worse because he did not consider the fox to be a fox at all, but an agent whose self-interest made him recognize the value of keeping the chicken coop safe from foxes.
Having just been through a LOT of grief from a (now ex) landlord who did sell shoddy buildings, who is a con artist, who lied and deceived constantly - I did not feel protected by his greed. I called him rapacious - a word that is related to raptors, predatory birds.
There is an idea that greed is a virtue. That there is an evolutionary process that will weed out the abusive and fraudulent players, leaving society with those who benefit all.
That idea is philosophical, from one narcissistic point of view. It has not been borne out by history.
Possibly Greenspan should not be held to what he said 50 years ago. I know I have changed 180 degrees on many thoughts. But with a long career of supporting unfettered greed, he has a lot to answer for.
Possibly Greenspan should not be held to what he said 50 years ago.
There is good evidence that he continued to believe it throughout his career until the financial crisis proved him wrong.
This is in part a false dichotomy. There are times when regulation is a useful tool (such as medicine) where the buyer has no reasonable market chance to correct the situation.
On the other extreme you have things like the inane Louisiana flower arranger license, which required people pass a long test about things like what temperature different species need to be stored at. This, like many cases of regulation, is a kind of turf protection to keep the established businesses free from competition.
Regulation can raise costs. An interesting example is the 'magnifying reading glasses' that are available in many places for about $10. Optically these are IDENTICAL to standard correction for farsightedness (and I mean identical) but they cost only a small fraction of the cost of prescription glasses. The difference: closed regulated market.
The big loaded word 'greed' gets thrown around a lot, but in a true market situation, buyer and seller are each looking out for there own interests, there is nothing wrong with this. Each one wants the best they can get. There are times when there is a disconnect, where one side has excess control where problems develop. At times regulation may address those issues, though there are often much more efficient ways (including making more information available to the under-represented party).
Excellent points. And there are many good examples.
At the time Harvey Wiley promoted the Pure Food and Drug Act there was no requirement to list ingredients on labels and many patent medicines for children included narcotics. The patent medicine business was huge. As soon as ingredient labeling was mandated and the public was informed about contents, the business declined quickly.
Pharmacies today are mainly counting out pills, which is rapidly becoming automated, but pharmacists want you to think they are professionals like doctors. Pharmacists make high salaries and add to the cost of drugs unnecessarily.
Probably the reason the word "greed" gets thrown around a lot is because it is an accurate description of the motivation of many (not all, mind you) sellers in the market place. I'm reminded of a law, passed during the American Civil War, referred to as Qui Tam. It was a way for a citizen, in conjunction with the US Atty Gen., to bring suit against companies defrauding the government - rotted food, defective weapons, sub-standard uniforms, etc.. The whistle blowing citizen can get up to 25% of the recovery of the money reimbursed to the taxpayers from the wrongdoer. I know of a case a few years ago (atty. is a friend of mine), where the complaining citizen received $25 million (10%) of the recovery against Blue Cross/Blue Shield for medicare fraud.
Regulation of flower arrangers is probably inane - unless of course, the flower arranger is going out at midnight and stealing vases from the graveyard. Then again, there are criminal laws that deal with theft. Not all regulations are good, as not all are bad. And, not all who get defrauded are the individual consumers. The taxpayers as a whole can be easy pickings by the greedy, whose lobbyists help write the regulations in the first place.