Greed vs. Self-Interest

I’m still reading Poverty of Nations. (I wrote about it Monday and Wednesday.) I hadn’t intended to write multiple posts on it, but some basic concepts keep coming up worth thinking about. No promises that there won’t be more posts on this book. There’s still a lot of book to finish reading.

The other day I read a section on self-interest that helpfully identifies the difference between greed and self-interest. This is helpful because the detractors of free enterprise often talk about greedy capitalists, out only for their own interests. So we could use some clarity.

Self-interest is seeing that you take care of yourself and your needs. Greed is wanting more than your just deserts. We need self-interest. We try to root out greed within ourselves, because it is harmful to our own souls, and tends to harm others as well.

The book quotes from Jay W. Richards’ book Money Greed, and God,[1] which lists a number of things you do out of self-interest:

·         Breathing

·         Washing your hands

·         Eating more fiber

·         Taking your vitamins

·         Clocking in at work

·         Looking both ways before crossing the street

·         Going to bed

·         Taking a shower

·         Paying bills

·         Going to the doctor

·         Hunting for bargains

·         Reading a book

·         Praying for God’s forgiveness

I’m sure there’s more: getting a good education, putting on a sweater, going to the gym, teaching good manners to children, celebrating your birthday, taking a vacation, doing a raise-worthy job at work, learning to play a musical instrument. The list will go on much longer if we include things that we do for others because the giving makes us feel good: donating used clothes, coaching a youth sports team, reading bedtime stories to your children, teaching Sunday School, shoveling your elderly neighbor’s driveway, helping a friend fix his car, donate to a favorite charity, volunteer time at a charity.

learning early to make some good
self-interested purchases

Do any of these things get done out of greed? If you didn’t take enough interest in yourself to do them, would your life be better off or worse? If you gave up taking a shower because you thought you would be a better person by denying yourself that bit of self-interest, neither you nor the people who have to be around you would be better off.

If you give up eating enough fiber, taking your vitamins, going to the gym, and brushing your teeth, simply because you believed it was selfish to take care of yourself, and then your resulting bad health leads you to need a doctor, do you deny yourself that too, because it would be selfish? Truly all the people in your world appreciate your taking care of yourself as well as you can. Think of them.

But what about in a sales transaction? Is a merchant greedy for asking his price? The book quotes Adam Smith, from 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.”[2]

Just for amusement, let’s take a look at such a transaction, with a butcher who lacks self-interest. First of all, the butcher probably wouldn’t have sought a means of making a living if he had no self-interest. So he probably wouldn’t have invested the time and capital necessary to open a butcher shop. But say that was placed into his hands and he ran the business as a favor to someone. He would have to buy the livestock to butcher. Without self-interest, he wouldn’t be interested in getting the best livestock for the best price; he would be thinking it less self-interested to take an inferior animal off the rancher’s hands and pay a premium price for it. The next step for him is to offer inferior meat to you, the buyer. Then he can either charge you a high enough price that he can make a bad deal for another inferior animal another day to sell to you (quickly losing you as a repeat customer), or he can ask only enough that he can afford only an even lesser animal. In other words, he quickly goes out of business and offers you nothing to buy. Do you really want to be dealing with a butcher with no self-interest?

Suppose you’re selling a house. Do you look for the most deserving buyer, who may not be able to afford your price, and then drop your price to, say,25% below what he can offer? If you do, what is the likelihood you can then go ahead and buy your next home? (Wouldn’t the buyer be greedy if he accepted such an offer?) Do you benefit from feeling guilty of greed if you stick to your asking price so that you can buy your next home? I think both you and the buyer are better satisfied with the deal if you both believe you benefit from the exchange. Satisfaction for both, regret and resentment for neither.

Now we get to the even more interesting thing about actual greed in a free market: the free market still works. Here is what Grudem says in Poverty of Nations:

Greed cannot be prevented by human laws, since it is an internal attitude. It can be reduced only with a change of heart coming from inside a person.

When greed manifests itself through violations of the rights of others, a free-market system is most likely to limit its harmful effects through the reactions of consumers (who will soon refuse to buy from a merchant they perceive to be greedy) and through the protections provided by the rule of law and legal protections of others’ rights.

Has any economic system ever eliminated greed from every person in a society? No. So what shall we do? Why not favor a system that utilizes people’s healthy self-interest and even their sinful greed in a socially beneficial way by rewarding those who best serve the needs of others? That is what a free-market system does” [Kindle location 4065-4080].

One of the basic characteristics of a free market is that two people make a trade that makes both of them better off. If either of them isn’t satisfied with the deal, they don’t have to make it; they can keep their money or their commodity and wait for a more agreeable arrangement. Both take care of their own self-interest and trust in the self-interest of the other. And that’s a good thing.

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[1] Richards, Jay W., Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem (New York: HarperOne, 2009), p. 121.

[2] Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations, ed. Edwin Cannan (1776; repr., New York: Modern Library, 1994), p. 15.

Prices

I’m still reading Poverty of Nations, as I mentioned in the last post. So I’m tuned in to some basic economic concepts right now. A couple of times this week I came upon the concept of prices as a shortcut to a lot of truthful information.

For background, let’s take from the Spherical Model definition of money, and a few other terms. (I also wrote about basic money terms here and here.)

Wealth

Wealth is the accumulation of the results of work above what is needed for subsistence. Let’s quickly review the Robinson Crusoe (simple world) example:

Robinson Crusoe illustration
from the first edition of
Daniel Dafoe's book

At first, whatever Crusoe has, it’s a matter of what he is able to obtain for himself. He fishes. He gathers. He hunts. He plants, irrigates, and harvests. And barring a catastrophic hurricane or some such disaster, he is free to enjoy the fruits of his labor. This is his wealth—the results of his capacity to recover from the shelterless, foodless situation he finds himself in right after a shipwreck.

But his wealth is limited by his personal time, talents, and energies. It might be that, once he discovers another person on the island, Friday, they commiserate about their limitations. And somewhere along the way they discover differences in abilities. Crusoe is pretty good at farming, but fishing is tedious and frustrating, so he often goes without that protein source. Friday, on the other hand, finds fishing easy, but he’d sure like his garden to yield more veggies and rice to go with it.

Specialization and Exchange

An idea finally dawns on them. How would it be if Crusoe gave up fishing altogether and spent more of his time farming, expanding his garden to provide for the entire population of the two of them? And at the same time, instead of struggling to farm without success, Friday would spend even more hours fishing. Then he would trade his surplus fish for Crusoe’s surplus harvest. They try this, and it works so well, they both have more to eat than they had before, and they both have more spare time for climbing coconut palms or hunting—necessary tasks which neither one is particularly good at.

But this trade thing is working out so well that, when they meet a native who has no trouble at all shinnying up those palm trees, they make exchanges with him. And another native is very handy with a spear and can easily take down a wild boar, which is much too big to use up by himself before it spoils, so he’s glad for the exchange, and the others are very glad not to have to face those wild boars any more.

They specialize. They all work mostly at what they are best at. The result of their total labor is now considerably greater than the total would be without specialization. This leaves them all more actual wealth (results of labor) and even more time to enjoy the wealth.

Money

Money is a more convenient means of exchange than bartering goods; a unit of money represents a particular value, equivalent to a standard unit of work. Money is used for convenience,

When it becomes convenient for the laborers making the exchanges. It’s up to the society. If Crusoe wants more coconuts, but the palm tree climber doesn’t happen to want more veggies right now, but he would like more fish—and it turns out Friday wants more veggies, not coconuts, but he already checked with Crusoe, who didn’t need more fish. They can make a three-way deal. Bring in more if you want. But it gets more complicated to barter without some standard of exchange. Money, to symbolize that standard value, can be useful.

It’s also up to the society to decide what the symbol of exchange (money) will be. On this island, they might use clam shells, as some primitive societies have (bringing us the slang term “clams” for money). Some societies have used salt, which has some intrinsic value to everyone; that’s where the term salary came from. Early Central American societies used cacao beans, which were easy to carry, measure, and trade, and also useful for their own properties. These people also had incremental units based on a measure of grain; their units of gold and silver could always be exchanged for a measure of barley, so they had a standard value. More societies have used gold than any other single commodity as money. It’s usable as a decoration, because of its luster, and it’s easily malleable, making it easy to form into coins. It’s relatively rare, beautiful, and fairly heavy, which makes it natural as a representative of wealth. Silver, with many similar qualities, is next to gold in common use as money, most often used for smaller monetary units….

If Crusoe saved himself enough rice to last through a famine, he could safely exchange the rest of his surplus into clam shells, or gold. And that would even preserve his work, since his produce other than the rice is quickly perishable. In an ideal economy wealth would be represented by something that always exactly equals a standard amount of accumulated work-value. 

Price

Price is an agreement from the seller to the buyer regarding how much money (representing effort put into obtaining the good being sold) he is willing to exchange for the item/service being sold.

Do Robinson Crusoe and friends need a government bureaucrat stepping into their little island world and passing edicts about what would be a fair exchange? No. The price is set by the worker willing to exchange his labor. If it isn’t worth it to Crusoe to exchange a basket of veggies for a mended net, he is free not to make the exchange. But if Friday, who needs nets for fishing, prefers to spend his time fishing without having to stop and mend his own nets, he can figure out what a fair exchange is and offer it to the net mender. If his offer of fish is too low, the net mender is free not to make the exchange with him, until a bargain can be reached with a number of fish that will satisfy him. The price is set, then, by the experts on what they value—those willing to make the exchange.

 

OK, that’s enough background to help you appreciate these quotes on price that I came across this week.

This first is from Poverty of Nations:

Nothing conveys information faster than prices.

Prices convey objective information on the subjective attitudes and feelings of buyers and sellers. As relative prices change, options are altered and decisions are made. Perceived benefits and costs are continuously affected by changing circumstances, including many important variables that are never constant. In other words, not a person in the world knows how to make a market work or how to make even a simple thing like a pencil. But it still happens, because enormous complications are simplified when decentralization and prices take charge. In these ways, prices serve as an amazing, worldwide source of instant economic information [Kindle location 3495-3500].

So, price is what gives us accurate truth as buyers and sellers.

This next is from a Mises introduction of a new book by global investor and blogger Hunter Lewis, called Free Prices Now! I think the words are from the press release about the book:

The most reliable barometer of economic honesty is to be found in prices. Honest prices, neither manipulated nor controlled, provide both investors and consumers with reliable economic signals. They are the foundation for a successful economy.

A corrupt economic system does not want honest prices, honest information, or honest results. The truth may be unprofitable for powerful government leaders, private interests allied with them, or economic “experts” whose careers have been devoted to price manipulations and controls….

Can it really be this simple, that economic prosperity and job growth depend on allowing economic prices to tell the truth, free from the self-dealing and self-interested theories of powerful special interests?

Yes.

What do prices do? Tell the truth, in the most efficient way, about the value of a commodity to both the seller and the buyer—the experts involved in the exchange. No interference in price (particularly including manipulating the value of the monetary unit) can help convey that truth. Truth surrounding these exchanges helps economies prosper.

Labor

Labor Day, the day we don’t work. Hmm. The history (Wikipedia and Department of Labor) shows the intent to be honoring workers and tradesmen, and their valuable contributions to society, which seems worthy enough, even though we don’t have corollary doctors’ days, politicians’ days, or musicians’ days. Labor Day is a product of the labor movement; i.e., labor unions, which makes me less enthusiastic about it.

Instead of a day to bring attention to workers through parades and civic events, it is now a day for shopping, family barbecues, and marking the end of summer—and in fashion the end of wearing white shoes until Easter. We don’t actually learn much about workers on this day. Nor do we give a holiday to many lower skilled workers—food service, retail, theme parks, movie theaters, etc. So, as a holiday, it lacks meaning. But we enjoy the day off.

When I was growing up, we never started school until after Labor Day. That’s still true some places. (Daughter Social Sphere starts her college semester tomorrow.) But here in Texas, many public schools started last week. So this is a chance to regroup, gather supplies, and breathe one more time before diving in to daily routine unbroken from now until Thanksgiving. (The year we moved to Texas, school started August 11^th, which was particularly painful because we’d left a district that hadn’t ended until two weeks into June. It took until just a few years ago to push Texas schools later into August, long past the years we were using them.)

I thought, in the spirit of the day, it might be worth looking at the concept of labor, which is a positive thing.

I’m about halfway through a book called Poverty of Nations: A Sustainable Solution, by theologian Wayne Grudem and economist Barry Asmus. It’s an economics book, for general readers, with an emphasis on what systems and policies can get a nation from poverty toward prosperity. (Hint: natural resources and receipt of nation-to-nation aid don’t bring people out of poverty.) And it uses a Biblical approach; it looks at particular ideas and their known outcomes, and compares them to what the Bible says. It turns out, a free market is the most moral, and the most likely to both require and encourage moral behavior in citizens. Property rights (thou shalt not steal), honesty and keeping contracts (thou shalt not lie/bear false witness), and respect for life and liberty all directly contribute to prosperity.

I first heard of this book when the author was being interviewed on the Hugh Hewitt show (August 19, but you might need a membership to listen to the archive. Hewitt plans a week-by-week look at each chapter of the book starting, I think, this week). The connection between freedom, free enterprise, and civilization sounded very much in line with Spherical Model concepts.

They talked about the idea of “earned success.” I hadn’t heard that exact phrase before, but it struck me as true. I found the phrase in the book (on my Kindle, so no page numbers, but at location 3790), where he quotes Albert Brooks: “The secret to human flourishing is not money but earned success in life.”[1]

Brooks studies what makes people happy, or satisfied with life. There are other life factors as well, relating mostly to living the laws of civilization, emphasizing family and religion, but the economic factor contributing best to human happiness is earned success, which Brooks defines as “the ability to create value honestly—not by winning the lottery, not by inheriting a fortune, not by picking up a welfare check. It doesn’t even mean making money itself. Earned success is the creation of value in our lives or in the lives of others.”[2] I’d like to add that stay-at-home mothers earn success without a paycheck.  

On a national scale, rather than promoting redistribution of wealth, governments would do their people a financial favor if they encouraged earned success. One policy Grudem talks about is micro-capitalization. I’ve been intrigued by this concept for a few years. LDS Humanitarian Services started using this practice after the Christmas tsunami in Indonesia in 2004, which was the first I’d heard of it. They would interview the survivors about what they needed. Beyond the immediate offerings of food, clothing and shelter Humanitarian Services was known for supplying in the wake of disasters around the world, the survivors needed a way to replace some of what they’d lost, to get back on their feet and self-sustaining. Sometimes the aid provided a sewing machine or two, plus enough for a few starting supplies of fabric and thread. Sometimes it was a fishing boat, or even just a new sail.

The book Influencer (by Patterson, Grenny, Maxfield, McMillan, and Switzler of VitalSmarts) talks about the process of combining microloans with a small group council, to improve the success of fledgling businesses. They use as an example a small village in central India, where a group of housewives meet to discuss ways they can individual develop very small businesses, such as starting an egg business.[3]

Grudem suggests that organizations, or perhaps wealthy individuals looking to invest capital, make the microloans, rather than governments. And he encourages slightly larger investments as well:

While many organizations have promoted microloans (typically under $250) to start one-person businesses, we are also aware of encouraging cases in which Christians have decided to invest in for-profit businesses in the “small and medium enterprise” (SME) range, where $25,000 to $1 million is required to start a business. Such businesses are crucial for larger economic growth in poor nations, but they are more difficult to launch due to high start-up and due-diligence costs, and the challenge of providing a reasonable risk/return model for investors.

Foreign aid, or government aid, that does not encourage independence, or earned success, binds people in poverty.

Sometimes there’s an immediate need to give a man a fish. But that is never a long-term solution to his hunger. You teach a man to fish, and he has the skill to take care of himself. But maybe he also needs the means to make or otherwise get hold of a fishing pole or net or boat.

Following up each concept, Grudem gives a follow-up of the concept in scripture. One detail he brought out, that I guess I needed reminding of, because I hadn’t really noticed it, was that Adam and Eve were commanded to work in the Garden of Eden, to till and tend it, to be stewards over the earth. After the fall, out in the cold cruel world, work started having more challenges—heat, drought, insects. So work came to require more sweat to get from subsistence to creative, innovative earned success. But doing work is important to human beings, no matter how many basic needs are met.

Human creativity—our work— is part of our purpose and happiness on earth. Labor on, and be good at what you do. It pleases God, and will please your soul as well. We want that for everyone.

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[1] Arthur C. Brooks, The Battle: How the Fight between Free Enterprise and Big Government Will Shape America’s Future (New York: Basic Books, 2010), 71.

[2] Ibid., 75.

[3] Patterson, Kerry, Joseph Grenny, David Maxfield, Ron McMillan, Al Switzler, Influencer: The Power to Change Anything, (New York: McGraw-Hill, 2008), 168.