Is Greed Good?

Is Greed Good?

Albert Edwards, the notoriously bearish economist and global strategist at Société Générale, has recently been warning that capitalism may, at long last, finally be at its end.  The general, global social unrest caused by the pandemic and exacerbated by extreme inflation may well boil over in the near future, causing systemic collapse and a retreat from capitalism.  Or so Edwards says.  He also says that the cause of this disaster will be the capitalists themselves and their eagerness to profit unduly from the highly unusual conditions of the last few years.  In an April 5 retelling of Edwards’ recent note on “Greedflation,” Fortune explained the story this way:

For over a year now, consumers and businesses, both in the U.S. and worldwide, have struggled with stubborn inflation. But the soaring costs haven’t prevented corporations from raking in record profits. The companies in last year’s Fortune 500 alone generated an all-time high $1.8 trillion in profit on $16.1 trillion in revenue. Voices largely on the left side of the political spectrum have been sounding the alarm on this—think: Bernie Sanders in Congress or Jon Stewart’s recent grilling of former Treasury Secretary Larry Summers—but now an economist at one of the world’s oldest and greatest investment banks is singing the same tune.

Albert Edwards, a global strategist at the 159-year-old bank Société Générale, just released a blistering note on the phenomenon that has come to be called Greedflation. Corporations, particularly in developed economies like the U.S. and U.K., have used rising raw material costs amid the pandemic and the war in Ukraine as an “excuse” to raise prices and expand profit margins to new heights, he said….

Furthermore, Edwards wrote, in the Tuesday edition of his Global Strategy Weekly, after four decades of working in finance, he’s never seen anything like the “unprecedented” and “astonishing” levels of corporate Greedflation in this economic cycle. To his point, a January study from the Federal Reserve Bank of Kansas City found that “markup growth”—the increase in the ratio between the price a firm charges and its cost of production—was a far more important factor driving inflation in 2021 than it has been throughout economic history….

Edwards added that he fears the “super-normal profit margins” of corporations in the U.S. and abroad could eventually “inflame social unrest” if consumers continue to struggle with inflation.

“The end of Greedflation must surely come. Otherwise, we may be looking at the end of capitalism,” he warned. “This is a big issue for policymakers that simply cannot be ignored any longer.”

Before continuing, a couple of caveats are in order.  First, Edwards is, as we said, a notorious bear.  He is forever pining for or, at least, warning about, one global crisis or another.  To update the old joke about economists, he’s called ten of the last five economic crises.  Moreover, there is, as The Financial Times has shown, evidence that Edwards, the Kansas City Fed, and even the European Central Bank are all (unwittingly?) exaggerating the pervasiveness of price gouging/Greedflation.

At the same time, we will concede capitalism today is beset by a host of moral failings.  This is, in part, the way it has always been and the way it will always be.  It is the byproduct of human nature, the inevitable result of the story about the man, the woman, the snake, and the apple.  But it is also, in part, the result of the conscious and purposeful abandonment of the practices and habits that man, over the millennia, developed to mitigate the consequences of that story.

Indeed, we would argue that the story Albert Edwards sees is less about the former of these issues and more about the latter.  It is less about, “greed,” for example, and more about the failure of society and of “capitalists” to manage that greed appropriately.

At the risk of coining a Hollywood-esque catchphrase, greed is good, or at least it’s necessary, as Adam Smith noted in The Wealth of Nations: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Greed must, however, be mitigated by the virtues that man once deemed essential but has largely abandoned.  Again, as Smith noted, “But upon the tolerable observance of these duties [of justice, of truth, of chastity, of fidelity] depends the very existence of human society, which would crumble into nothing if mankind were not generally impressed with a reverence for those important rules of conduct.”

In 1976, Irving Kristol recognized the importance of Smith’s moral message and its near perfect correlation with that of the American Founders.  In his essay, “Adam Smith and the Spirit of Capitalism,” Kristol suggested that capitalism and markets “could not be indifferent to traditional and distinctly bourgeois virtues, especially those that were instilled and reinforced in the family and organized religion.”

It is often noted that Smith was friendly with David Hume, one of the giants of the Scottish Enlightenment and one of those who led the abandonment of virtue ethics for values-based ethics.  It is worth remembering, however, that Smith was also quite close with Edmund Burke, whom he admired greatly.  Bradley J. Birzer, the Russell Amos Kirk Chair in History at Hillsdale College, has argued that Burke and Smith shared not only a friendship but the ironic belief that the destructive potency of the Enlightenment had to be resisted in order to preserve that which was good and truly “enlightening” in Western Civilization.  Burke and Smith, Birzer wrote, could be seen “as fighting a rear-guard action at the end of their age, synthesizing and defending the best thought each had inherited—much as Socrates, Plato, and Aristotle came at the end of classical Athens; Cicero at the end of the Roman Republic; St. Augustine at the end of the Roman Empire; or Thomas More at the end of what scholar Stephen Smith has called the English springtime.”

Interestingly, Birzer made this connection in an article titled “The Celtic Mind,” in which he portrayed the Irishman Burke and the Scot Smith as two Celts standing athwart history yelling stop (to coin a phrase).  It is worth noting that Adam Ferguson – also a Scot, whose work, in many ways presaged Smith’s and who had a tremendous impact on F.A. Hayek, among others – would probably fit better with these two than with the rest of the Scots and their Enlightenment.  He too fought the rear-guard action at the end of his age.

In any case, both Smith and Ferguson understood that the “spontaneous order” that characterizes both capitalism and self-government is impossible to create and maintain without specific preconditions, including the practice and application of virtues.  Prudence, courage, and trustworthiness are among the virtues that enable the self-interest that drives man to seek power and wealth to be tempered and to become that which Tocqueville described as “self-interest rightly understood.”  They are also, Baruch Spinoza would add, the virtues that enable men to live together, to their mutual benefit, pursuing the Conatus Principle while nevertheless actively endeavoring NOT to destroy their fellow men and loot their belongings.

Is it possible that Albert Edwards is correct, that we are nearing the “end of capitalism?”  You bet.  Is it also possible that the political extremists on both sides of the ideological spectrum are correct and that we are nearing the “end of democracy?”  Yes, again.

The catch, however, is that, in both cases, this “end,” if it comes, will NOT be a function of bad ideas or poor expression of them.  Rather, the problem is in their execution.  Capitalism requires good capitalists, just as democracy requires good democrats.  And for more than two hundred years, Western Civilization has been gnawing away at the principles and practices that ensure that the good guys outnumber and overwhelm the bad guys.

There will always be bad guys in business and government, of course.  Such is the Fallen nature of man.  Ensuring that they are aberrations whose damage can swiftly be undone is civil society’s job.  And it is failing at that job.

Albert Edwards suggests that the solution to Greedflation may be the return of price controls. We doubt it.  Edwards may be right, and politicians may trot this tired and ineffective 1970s retread policy out to save their own skin.  But that won’t be the “solution” to anything.  It’ll only make everything worse.

In the end, the solution to capitalism’s problems is to build better capitalists.

Stephen Soukup
Stephen Soukup
[email protected]

Steve Soukup is the Vice President and Publisher of The Political Forum, an “independent research provider” that delivers research and consulting services to the institutional investment community, with an emphasis on economic, social, political, and geopolitical events that are likely to have an impact on the financial markets in the United States and abroad.