Column : Why greed can still be good

Written by Michael Walton | Michael Walton | Updated: Mar 26 2009, 07:13am hrs
Greed is in the news. Greed is at the centre of two great economic and social crises of our times: the global financial crisis; and climate change. Greed of the financial masters of the universe combined with obfuscatory financial wizardry and loose money to create the financial crisis. New heights of greed emerged with the employee bonuses of the insurance giant AIG, a recipient of massive bailout funds. The accumulated greed of rich countries has set the world on course for levels of carbon emissions that threaten life as we know it, causing the Himalayan glaciers to melt, the monsoon to change, and putting significant parts of Bangladesh under water.

But naked greed is only part of the story. Both crises are also shaped by seemingly normal consumption decisions. The financial crisis was built on the desire of many Americans to buy or upgrade homes: to fulfill American dreams, in the promise of the boom years, dreams tragically dashed for those now suffering foreclosure. Nor are such aspirations an American preserve. Billboards on the road to Bengaluru airport portray a moderately fancy house by international standards, if luxurious for the vast majority of Indians, with the slogan: Now. Envy comes at a great price. Similarly, normal consumption of electricity, petrol, and many agricultural and industrial goods, is the source of carbon emissions.

So how should we think about this Is the mix of greed and excessive consumption a sign of something sick in todays globaliSing, AmericaniSed world Is too much consumption a bad thing Is greed intrinsic to capitalism, so we need a new paradigm of how to organiSe societies

And is economics up to the task In economic theory, increased consumption is (almost) always a good thing for the person doing the consuming. And (almost) all economics takes what people want as givenit doesnt mess with preferences. But these questions have to be confronted.

Lets put aside the big questions over capitalism for now. Arguably capitalism is the only system that has generated the innovation and dynamism necessary for transformative economic advance. But, for this column, the focus is on consumption and greed.

And lets also take as given the urgent need for big increases in consumption of much of the worlds population. This is clearly true of India. Over three quarters of Indians live on less than $2 a day. This is way below the moderate poverty line of Mexico, and around a fifth of the poverty line of the United States. Dramatic increases in consumption are needed to achieve modest levels of prosperity.

But there remain real questions over managing greed and patterns of consumption. And here the message is that all societies use mechanisms for such management, and these reflect political and social choices.

First, there is the question of controlling greeds excesses. In the most topical example, financial industries have to be better regulated. They will probably soon be over-regulated relative to some ideal tradeoff between risk and innovation. But that ideal is unknown, weve seen the costs of excessive risk, and better to sacrifice some innovation to avoid these costs. Some creative talent will go to other industries, and thats not a bad thing.

Second, all societies manage consumption through price, regulation and investment, to deal with unintended consequences of private consumption. Unintended effects of carbon-emitting production lie at the heart of climate change. This goes beyond taxes and subsidies: for example the design of cities has a big impact on the energy-intensity of living. These strategic decisions will be faced by India and other countries in the coming years.

Standard economics can handle the first two mechanisms. A third goes further: we need to accept that preferences, what people want, are socially generated. In response to the financial crisis theres a lot of soul-searching over life-style choices in rich countries. This type of question is familiar to India because of the Gandhian tradition. But recognizing that preferences are socially shaped, and can have social costs, neednt imply choosing modern day forms of village-based self-reliance; there are many alternatives.

Some may see engaging with the management of greed and consumption as a move into dangerous territory. But I think that misses the point. With the financial and climate change crises we have been looking into the abyss of particular forms of regulation and consumptionand it isnt pretty. More importantly, future action need not rely on old-style, bureaucratic governmental decision-making, but should look to new social and political forms of engagement to choose and effect social choices.

The unfolding financial crisis is exacting a steep human toll. There is just a chance it has a silver lining, if it becomes a source of individual creativity, societal reflection and political debate over what kind of greed, and what kind of consumption, is desirable in the quest for long-term prosperity.

The author is at the Harvard Kennedy School, the Institute of Social and Economic Change and the Centre for Policy Research