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Brooks Wilson's Economics Blog: Smith, Acemoglu and Friedman on Greed

Tuesday, February 9, 2010

Smith, Acemoglu and Friedman on Greed

Many, perhaps almost all, think that greed is a byproduct of markets (capitalism).  It has existed since the dawn of time and is fully independent of the economic systems used to allocate resources, goods and services.  It is fitting that Adam Smith, the first economist, explained our field's divergence in thought from the rest of society concerning greed ("The Wealth of Nations").
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
Daron Acemoglu provides a more nuanced evaluation of the impact of greed ("The Crisis of 2008: Structure Lessons for and from Economics,").
A deep and important contribution of the discipline of economics is the insight that greed is neither good nor bad in the abstract. When channeled into profit-maximizing, competitive and innovative behavior under the auspices of sound laws and regulations, greed can act as the engine of innovation and economic growth. But when unchecked by the appropriate institutions and regulations, it will degenerate into rent-seeking, corruption and crime. It is our collective choice to manage the greed that many in our society inevitably possess. Economic theory provides guidance in how to create the right incentive systems and reward structures to contain it and turn it into a force towards progress.
This old exchange between Milton Friedman and Phil Donahue further elucidates the differences between economists and non economists on the subject of greed.

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