Why Greed Is Bad for Capitalism

10/13/2010 02:31 pm 14:31:29 | Updated May 25, 2011

Darwin celebrated the nasty side of life -- brutal competition. Yet, in the struggle for existence he perceived a creative force that produced the many varied and wonderful life forms around today.

In the realm of economic theory, many writers echo Darwin, waxing poetic on the merits of competition as a force that improves business practices and pushes creative businesses to the forefront.

Business competitiveness is partly motivated by greed, as Adam Smith recognized long ago. Yet, Smith recognized that greed is potentially very bad for free markets. As far as he was concerned, business people exhibit a marked weakness for rigging the system in their favor. To him, a group of merchants in the same room was all that it took for a price-fixing monopoly to emerge.

Greed may be creative in a competitive context but it has opposite effects in a cartel. When greedy monopolists set their own prices, watch out because they are going to hurt you.

The fleecing of America
When markets are truly free, they regulate prices at reasonable levels. Conservative commentators often make the mistake of conflating free markets with absence of government regulation but that is a huge error. Without regulation, markets always move in the direction of monopoly where large players fix prices to their own advantage and do everything in their power to squelch the competition.

Fair prices are what the market will bear in a competitive atmosphere and are the lowest price at which suppliers can afford to sell. Monopolies, charge the highest price that it is possible for customers to pay.

Americans suffer from the greed of many different monopolies:

We pay twice as much for medical care as other developed countries although many people receive grossly inadequate services.

Corporate officers influence their own compensation committees. This is a license to steal and CEOs of large companies have raised their own pay to astronomical levels some 263 times the salary of an average worker last year which compares to a ratio of 42 in 1980 (but down from 525 in 2000, according to AFL-CIO).

Such corporate theft has been very bad for business. It has hurt investors who have made no money on average over the past decade. American workers have also lost a decade receiving no pay raise despite dramatically increased productivity over the period.

Imagine how much better off we would all be if the money siphoned off by corporate officers (including their absurd severance packages) went instead to workers and small shareholders who would spend it domestically rather than squirreling it away.

In 2009, there was some excitement about the recovery in profits of financial firms that had recently been bailed out by tax payers. It turned out that much of the seeming good news was attributable to the implementation of predatory "overdraft protection" fees in which customers were charged around 100 if they bought a cup of coffee on an over-drawn account. This practice was sneakily introduced by major banks in advance of new financial regulation that outlaws it. There was no free market here. The same applies to predatory fees levied by credit card companies on retailers.

Executives of financial companies booked a record year of compensation, leaving no doubt as to where the bailout money ended up.

Monopoly software crashes our computers daily. Many utilities, such as phone companies, have no competitors and charge a plethora of creative fees. Banks get money from the government for nothing and lend it back to us for a fee when they purchase government bonds. Lawyers charge whatever they like.

One could go on and on but the conclusion is plain enough. Unbridled greed on the part of legal monopolies is sucking Americans dry. This is too big of a problem to permit the taking of sides. We are all suffering and must support government efforts to bring greedy monopolies under control and support free markets that will bring fair prices, fair wages, and prosperity for all.