Is greed good?
That was the proposition Gordon Gekko put forth in the Oliver Stone movie Wall Street. But most people don’t think so. We see that greed was at the heart the recent financial crisis, where a real-estate bubble fed by easy credit almost brought down the entire global banking system. Five years later, the economy still seems stuck in second gear.
Which is why there is so much emphasis on wealth inequality now. The very rich—the .001 percent—control a huge portion of the world’s capital. And since the growth rate of capital is generally higher than the growth rate of the economy, it’s been suggested that this wealth will compound upon itself, so that the past devours the future.
Dante saw this back in the 14th century. In Canto XI of the Inferno, one of the characters describes how work and human effort is naturally good and noble, but those who “trade in debt” ignore this. By profiting from other people’s labor, the greedy violate nature.
But Dante was no economist. Incentives matter. There’s no inevitable “law of capital accumulation.” What we see in practice is that the super-wealthy tend to dissipate their money over a few generations. The hedge-fund barons of today may be the spiritual progeny of the medieval Medici clan, but that clan’s cash is long-gone.
Greed may not be good, but trade is. When people are free to do what they do best, we all do better. The Invisible Hand still works.
Douglas R. Tengdin, CFA
Chief Investment Officer