15 December 2009

On the Virtue of Selfishness

In discussions about "Wall Street" - like this one, arising out of Dean Baker's recommendation of a transaction tax - I am often told that we need these people and their supposed wealth generating capacity. Although I have not noticed that it trickles down to me, this position is generally not based on evidence that it does, but rather on the principle that, at the root, "Greed is Good" - a natural force that motivates humans without which we would not have a productive and wealthy society. In the instant case, it means that with a transaction tax (or bonus tax or salary cap or...) traders will flee to Singapore and our markets will become slow and despondent and our glorious way of life will die the death of a thousand taxes.

This is a load of garbage. 

We have many alternatives to greed, things like meaning, purpose, altruism, hope, compassion... greed is not good. Greed is probably among the worst tools and methods for obtaining individual co-operation (although it's usually better than outright fear and coercion). It is hardly surprising that when held out as a virtue it leads to disgusting excess, an excess which our confused society (in labeling greed virtue, as many do) does not understand how to censure or punish. True, greed is a motivating factor for human beings, but it is not and need not be treated as the first or foremost, only perhaps a necessary evil with some utility.

Microeconomically, the equation of reduced liquidity and reduced efficiency is correct form a most simple standpoint, but since it ignores price elasticity and the marginal efficiency losses due to transaction taxes, it is meaningless. Similarly, it is true that a bonus tax or salary cap will make employment in that jurisdiction less attractive, but considers neither *how much* less attractive (as if bankers all keep a bag packed for Singapore under their bed) nor how much benefit we get from keeping these high-talent people. Neither case considers the prospect of interjurisdictional co-operation.

In the transaction tax case, the author presents evidence that the market is not as inelastic as one might think and that an efficiency reduction on a 0.25% scale will not have any significant effect on liquidity (which should be obvious anyway). From a macroeconomic perspective, I would further suggest a counterhypothesis that an excess of liquidity is structurally damaging to markets as it incents speculation over investment and therefore that decreased liquidity today should be a policy objective, not a danger.

In the compensation field, I'm not aware of compelling evidence to support the theory that these jobs will flee. Frankly if that's the kind of person we're dealing with (and no doubt in may cases it is) much of their wealth etc. is already hidden in a tax haven, but I digress. How many people would pack up and change *countries*, not just jobs or cities, for a marginal difference of 1%-2% of income? To openly admit to the world that they don't care about being an American and a captain of industry with a line to the White House, not if someone has a few more bucks to offer? And in any event, the people that are in the class of people we are supposed to be scared to lose are the same people that crashed our economy last year. I cannot fathom from either an economic or managerial perspective why we would want to keep them at all, much less pay them astronomical sums. It is beyond doubt that for every multi-million dollar senior executive who would threaten to leave there are 20 talented, smart, and ambitious junior executives who could and would do the job as well or better for $750K and a sweet title.

Which brings me back to greed. The reason greed is so often viewed as good is that it is the prism through which microeconomics is presumed to operate. It went from being understood to being believed to being taught not as a lens for understanding certain kinds of behaviour but as a governing philosophy and a way of life. We are encouraged to view ourselves as economic actors first and foremost, and in accepting this framework greed moves from something that is described to sometheing that is prescribed - something that is right. But simply because a system can be observed and explained does not mean it should be accepted, much less adopted and encouraged.

Microeconomics is a neat system for describing individual choices, but we were co-operative social human beings long before we were self-interested microeconomic actors, and one way or another we will be co-operative social human beings first and foremost once again.


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