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Is Greed Good? The Professor vs. The Senator

posted by Jean Braucher

This is going to be really big picture. It's about the differences between formal economic theory, on the one hand, and ordinary thought about economic questions, on the other. It pits the views of an anonymous college professor (as reported by a freshman student) against the views of a famous US Senator (as reported by CNN). 

I have a 19-year-old son (with a different last name from mine) who is a freshman in college, taking first-year college economics from a teacher who received his PhD at Wharton and worked in various business economics jobs before returning to academe. My son is finding the dismal science, well, uninspiring. He almost dropped the course after the first class because he thought he was being asked to become a true believer and study "theology rather than religion." My husband and I encouraged him to stick it out, and we pointed out that the online syllabus showed that the second lecture was about the question whether economics is the "the dark side," so maybe he was going to get more than one perspective. Here's the e-mail we got home after the second lecture:

Subject:  why economics is the dark side

I thought I'd update you on that lecture you both seemed so excited about.

Prof. [X] explained that Economics is a valuable tool for modeling social interactions, but cautioned against too much faith in the market. He pointed out that unfettered capitalism can lead to the accumulation of capital in the hands of an elite minority, who can use their wealth to influence the creation of political, social, and economic structures that subjugate large portions of the populace and interrupt the free flow of resources to further concentrate power in the hands of the few.

oh wait, no, that's not what he said, that's the truth.

According to Prof. X, many are skeptical of Economics and capitalism for the following reasons:

1) Traditionally, the upper class has scorned participation in business, making commerce the province of a minority without political rights, who become scapegoats for social ills (Jews are the best example of such a group, but Indian and Chinese diasporas are other good examples).

2) Moralists hate economists because they think it's wrong to say people are motivated by greed.

3) Marx is a synthesis of the above two attitudes. Marx was a big ol'  anti-semite, and this explains his skepticism for capitalism (oddly enough, the fact that Marx was a non-practicing Jew didn't really come up).

Ah! intellectual sophistication.  [End of e-mail]

Finishing this, I'm of course feeling great about the $50,000 a year I am spending on this education.  He's sounding positively sophomoric as a mere freshman!

I know we avoid partisan politics on this blog, so let me hasten to emphasize that what follows isn't about that. Rather, it's about the differences between formal economics, especially the most elegantly parsimonious (aka oversimplified) version of economic theory taught to freshmen, as opposed to how most people think about economic questions in perhaps equally oversimplified ways.

Because of the recent message from my son, I perked up during the Republican debate tonight when  I heard my US Senator John McCain respond to a question about what to do about all the home mortgage foreclosures by saying, "I think that there's some greedy people on Wall Street that perhaps need to be punished." [I've pasted in as an Appendix below a longer excerpt of the senator's answer from the CNN.com transcript of the debate so you can see the full context.]

What would Professor X say to Senator McCain? Would the good professor say to the good senator that the latter is trapped in an outdated view developed by landed aristocracy to disparage members of outsider groups, needed to keep trade and money-lending humming, so that these upstarts would not be seen as equals and become rivals? Or does Senator McCain have the better argument, that history has moved on and today's greed is bad and should be punished or otherwise constrained?

I don't pretend to have a definitive answer. I have e-mailed my son to suggest that maybe McCain should be his presidential candidate (since his first choice dropped out today, and I'll let you guess which of the dropouts that was). My worry is that if we are going to declare a war on greed and lock up all the greedy people on Wall Street, the cost of the war in Iraq will seem like small change!

Appendix, from http://www.cnn.com/2008/POLITICS/01/30/GOPdebate.transcript/index.html, of Senator McCain's answer to the question "if you have a plan to help people with bad credit get lower interest rates so they can keep those homes and avoid foreclosure."

MCCAIN: Yes, and it's tough and it's tough here in California, it's tough in Arizona, it's tough particularly all over, but it's very tough particularly in the high growth states.

And I think the efforts that have been made so far are laudable. We may have to go further, but the fact that the FHA and the other organizations of government under Secretary Paulson's direction, and I think he is doing a good job of sitting down and fixing at least a significant number of these problems.

I think that we've got to return to the principal [sic in transcript] that you don't lend money [to people?] that can't pay it back. I think that there's some greedy people on Wall Street that perhaps need to be punished. I think there's got to be a huge amount more of transparency as to how this whole thing came about so we can prevent it from happening again.

When a town on Norway is somehow affected by the housing situation in the United States of America, we've gotten ourselves into a very interesting dilemma.

If necessary, we're going to have to take additional actions and particularly in cleaning up a mortgage. A mortgage should be one page and there should be big letters at the bottom that says, "I understand this document."

We ought to adjust the mortgages so people who were eligible for better terms, but were somehow convinced to accept the mortgages which were more onerous on them. We need to fix the rating systems, which clearly were erroneous in their ratings, which led people to believe that there were these institutions which were stable, which clearly were not.

So I think what we've done so far is good. I think we may have to take further steps if this subprime lending situation continues to be serious.  [End of excerpt from transcript.]


The boy should major in English.

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