Gordon Gekko got it wrong; greed is killing our economy

Gordon Gekko got the math right. Greed is one word and there is no better one.

Gekko, the corporate raider played by Michael Douglas in the 1987 movie, “Wall Street,” in his memorable appeal to stockholders, said, “Greed, for lack of a better word, is good.”

“Self-interest” might have been more accurate in his speech, but it is two words. To make an impression on your audience, the fewer words the better. One word is better than two.

Gekko’s sentence is a good example of how the economy of words works. There is no better example of the “fewer words the better” principle than what happened to his quote when movie audiences and the rest of us got a hold of it. As memorable as it was in its original form, popular usage shortened it even further to “Greed is good,” which is the way we choose to “remember” it today: three memorable, one-syllable words. Perfect.

It’s a powerful speech and getting the arithmetic right is always helpful, but Gordon Gekko was still dead wrong about greed. It isn’t good. It isn’t good for markets or for our economic system.

Besides getting it wrong, he didn’t do us any favors by using “greed” instead of self-interest. Self-interest is a healthy function, an outgrowth of our survival instinct. Greed is its unhealthy, pathological form, a natural process gone haywire. It bears the same relationship to self-interest as gluttony does to appetite, cancer to normal cell reproduction.

Certainly, self-interest is the motivation behind most investments in the stock market. People are looking to get some return on their savings in order to prepare for retirement, create an education fund or some other healthy economic purpose. There’s no pathology, no greed involved.

An excellent statement of the role that healthy self-interest plays in investment shows up in another film from 1991, “Other People’s Money,” in which Danny DeVito plays corporate raider Lawrence Garfield, otherwise known as “Larry the Liquidator.”

After a moving, “stay the course” speech by Gregory Peck as the company’s long time CEO – and a tough act to follow — the DeVito character has to convince stockholders to support his plan to break up the company and sell off its parts.

DeVito takes the stage, greeted by loud boos from the stockholders. Danny DeVito was an unlikely casting choice for the part, but in some respects it was probably easier to get his Larry the Liquidator’s speech right. Larry didn’t have to carry the weight of the plot and sub-plot baggage that Gordon Gekko was burdened with in the “Wall Street” script.

Ultimately, Larry the Liquidator’s speech was a better one, for it was anchored in the economic reality, the “creative destruction,” of our changing world. Gekko’s speech simply reflected an attempt to overthrow an inefficient management.

One important reason why greed is ruining our economy is that its impact is not evenly distributed. The greed that afflicts our financial markets today, for example, does not routinely originate on the buyers’ side. If we think back to the recent financial market meltdown, for example, it was the sellers’ greed and the deception it spawned that created and eventually burst the bubble.

The one-sidedness of greed as a market force provides a clue to its corrosive effect on our economic system. Greed as a character flaw has been around for a long time. It is perhaps as old as recorded history but we survived and have prospered despite it.

What is different about greed today is not what it says about enduring individual shortcomings but their transformation of the organisms — the institutions that influence, and often define, our markets.

This gives birth to a new phenomenon, “institutional greed,” where institutions exploit their buyers or consumers as a matter of routine, even when there is no apparent gain to the individuals involved. This allows it to spread to the public sector.

Information propels the market, and one side — the sellers — controls a disproportionate amount of it. Economists call this “asymmetrical information” and although a good deal of research has been devoted to the subject, and a Nobel Prize awarded, there is still a lot to learn.

We do know that asymmetrical information has become the principal tool of greed, and that it reduces the efficiency of a market, sometimes markedly. We also know that the enabler of greed is deceit, and its organizational DNA marker is disdain. Whenever we hear or read about customers referred to disdainfully as “marks,” for example, we know that honesty has left the building. And it took market efficiency with it.

We cannot enjoy robust economic recovery and growth without efficient financial markets. And we won’t get that efficiency without rebalancing the information that drives those markets.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.

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