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Dec 6, 2017

No, Free Markets and Prosperity Don’t Require Greed or Vanity

Greed isn’t good.

Defenders of free markets often do more harm to their cause than detractors. One of the first of these defenders, the infamous 18th C satirist, Bernard Mandeville, makes two fundamental errors in his argument for free markets. He equates self-interest in the economic realm with greed, and he fails to realize that the so-called “private vices” of greed and vanity have costs that make them, at best, very mixed “public benefits.”

In his infamous The Fable of the Bees; or, Private Vices, Publick Benefits (6th ed., 1729), Mandeville proclaims that the great advancement in people’s welfare in the early 18th C is due to the vices of the wealth-creating individuals. Vanity and greed motivate people to work hard and produce. Consequently, discouraging vice and encouraging honesty and other virtues is foolish, as it leads to poverty. If we want “the hive” to be “a paradise”, we should want it to remain full of vice (The Fable, Vol. I, pg. 31).

It is true that vanity and greed can lead an individual to work hard and become rich. But there is no reason to believe that these traits are the best motivators of hard work and wealth, or that if most people were motivated thus, society would become wealthy. Mandeville’s claims rest on his crude, unnuanced conception of vice (and virtue). He labels all desires and actions to produce wealth beyond subsistence level as greedy, instead of only those that (in Aristotelian language), are excessive in some way. Commonsensically, these include desires and actions that lead you to step over other people, or act dishonestly, or break your word, or devalue your family and friends, all for the sake of making more money. Mandeville seems to think that the only alternative to greed is self-sacrifice, which is rather like thinking that the only alternative to gluttony is starvation, or that the only alternative to cowardice is recklessness. His moral psychology leaves no room for rational self-interest, or for recognizing that working and creating value is a fundamental need for most people, even when it doesn’t lead to great wealth. There is no shortage of examples here: think of entrepreneurs who risk all their savings on a new cafe, or a new app, or a DNA testing service, or a “tiffin” service for office workers in Mumbai. Mandeville sees no intellectual or moral virtue in such entrepreneurship, or in carrying out a task well because, in his view, they are all motivated by greed and vanity.

Mandeville also indicts honesty as detrimental to the economy in an argument that shows his poor grasp of a fundamental principle of economics: opportunity cost. In an early version of what Frédéric Bastiat later called the broken window fallacy, Mandeville argues that if everyone became honest, locksmiths and lawyers would lose their jobs and society would be harmed. What he overlooks is the loss to the victims of dishonesty, and the fact that, if there were no dishonesty or other vice, people would use the money they saved on locks and lawyers to lend or spend on services or consumption goods – provided, among others, by the erstwhile locksmiths and lawyers. The result would be the creation of far greater value for everyone involved than if people had to buy locks and lawyers in self-protection. Dishonesty creates a deadweight loss, and widespread dishonesty hinders or renders impossible ongoing cooperation and success in the marketplace.

Mandeville’s view that private vice leads to public benefit might even be incoherent. If it’s greedy to want more than the bare minimum, then prosperity cannot be seen as an unmixed public benefit. To the extent that it relieves the lot of the poor, we can agree with Mandeville that it’s a public benefit. But beyond that, if Mandeville is right that prosperity feeds people’s greed and vanity, it’s a harm, not a benefit (“The Grumbling Hive”):

Vast Numbers throng’d the fruitful Hive;
Yet those vast Numbers made ’em thrive;
Millions endeavouring to supply
Each other’s Lust and Vanity….

Perhaps Mandeville thinks that feeding people’s vices is not harmful to them, because vice and harm belong to different categories. If this is his reasoning, then his view that private vice is publicly beneficial is saved from incoherence, but only at the cost of utter implausibility. One does not have to believe in a soul or a god to believe that vicious traits, motives, or actions are vicious in part because they tend to undermine the agent’s peace of mind, and harm her character and relationships with others. Moreover, Mandeville himself claims that people’s greed and vanity leaves them dissatisfied and unhappy, whereas when they become virtuous, they are “Blest with content and Honesty.”

But Mandeville’s views are not merely of historical interest. In spite of Francis Hutcheson’s and Adam Smith’s criticisms of Mandeville, the confusion of self-interest with greed is common even now. In some TV shows, John Stossel and some of his guests have claimed that we are all greedy and that greed is good for a flourishing economy. Like Mandeville, Stossel doesn’t pause to distinguish greed from rational self-interest, or to ask if greed is consistent with honesty and integrity. In various TV appearances, even Milton Friedman has responded to the claim that people in capitalist societies are greedy with the words, “Isn’t everyone?” - before going on to point out that capitalist societies are the only societies that have raised the masses from poverty. This confusion of greed with self-interest harms the cause of free markets, because greed is ineluctably associated with the image of an ugly, short-sighted man with two grasping hands. And rightly so, because the idea of an inappropriate love of money (or power) is part of the very meaning of greed.

This is part of a series