What the Framers Knew and Alan Greenspan Didn't

Every now and then even the smartest of us need to relearn the lessons of American history. Take Alan Greenspan and the unfolding story of the current credit crisis. Mr Greenspan, former chairman of the Federal Reserve, is the Oracle given much of the credit for America's great economic boom and now some of the blame for the current bust. Critics say the growth of largely unregulated investments known as derivatives -- a growth Mr. Greenspan encouraged and defended -- helped produce the present crisis. Mr. Greenspan's defense of these investments was based in part on an optimistic view of human nature. Excesses would be prevented because individuals would restrain the worst of their greed and self-interest to protect their own reputation. In a speech two weeks ago at Georgetown University Mr. Greenspan expressed distress that this turned out not to be true.

But he need not have been disappointed or surprised. A rereading of American History 101 would have reminded him that the Framers lived through the same rude awakening about human nature. Mr. Greenspan's speech was largely a rousing reaffirmation of the vital role played by the United States Constitution in the growth of the American economy -- the greatest economic success story in human history. In this he was correct. But he missed the central genius of the document. It was based on a view of human behavior considerably less sanguine than Mr. Greenspan's belief in the restraining power of reputation (what the founders called honor, sometimes sacred honor). The Framers had learned over the eleven years that separated independence from the Constitutional Convention that people could not be counted on to suppress their greed and self-interest, but would pursue them relentlessly. What the framers did, for the first time in political history, was to design a democratic system of government that took that reality into account. They did not ask people to rise above this self-interest but instead expected them to pursue it and channeled these drives. Pitting interest again interest, as Madison put it, and thus ensuring liberty.

The genius of the American Constitution, under which Americans have, as Mr. Greenspan notes, prospered magnificently over the long run, is an explicit rejection, based on painful experience, of hopes that people will restrain themselves. And in this story there are enduring lessons which might have made a difference if Greenspan, and other Americans, had recalled them.

***

The belief that this new breed, Americans, would be better as people and particularly as citizens was widely held among the revolutionaries in 1776. Frankly, it gave them the guts to throw off the English. Alexander Hamilton and John Adams, who would later be among the strongest proponents of strong government to channel self-interest, were both more optimistic about Americans in the early days of the new country. No one captured the belief better than Tom Paine, who, like Alan Greenspan, had a big vision. Independent, Americans could begin the world over again. In the infancy of this new world, Americans could form the good habit that would allow them to live and thrive together regardless of their backgrounds or experiences. Paine's good habit was public virtue, the capacity of the citizens of the new republic to suppress their individual interests for the public good. Americans rallied to this vision of virtuous Americans. And from this faith in people they constructed the first version of the United States after 1776, a confederation featuring a central government left intentionally weak because the founders could not imagine that citizens and states would refuse to set aside local or personal interests for the larger good of the country.

The result of this republican experiment was chaos. The nation was beset by internal factions, greed and self-dealing. The Army nearly starved to death in the field of battle because no one would pay for it. States competed with other states for trade advantage, preventing any semblance of a national economy. The entire country, John Quincy Adams noted, was groaning under the intolerable burdens of... accumulated evils. Some Americans were even considering the restoration of a king as the only solution. The most famous founder of them all, George Washington, recognized that the problem stemmed from the rosy view of human behavior on which they had built the new government. When Mr. Greenspan said in his Georgetown speech that he was distressed at how far we have let concerns for reputation slip in recent years, he sounded a bit like George Washington, the university s namesake, who in 1786 wrote to John Jay: "We probably had too good of an opinion of human nature in forming our confederation.... We must take human nature as we find it. Perfection falls not to the share of mortals." Americans, it turned out, were like everyone else self-interested and unwilling to bend their self-interests to some supposed common good. Only the intervention of coercive power, wrote Washington, could accomplish measures best suited for the common good.

In Philadelphia in 1787, the challenge became how to create that coercive power without abandoning the dream of democracy -- how to frame a government that would both guarantee individual liberty while protecting people from excesses caused by unbridled pursuit of that liberty. They needed, James Madison said, a republican remedy for the diseases most incident to Republican government. The answer they came up with was to make a virtue of the vice of self-interest. A reliance on public virtue was to be replaced by a policy of supplying by opposite and rival interests the defect of a better motive, Madison explained. From this flowed the original American idea of separation of powers and checks and balances. The result was the most enduring democratic government in history.

The Framers left us both their document, the Constitution of the United States, and a fundamental lesson in self-government that we could all benefit from recalling: a system which counts on individuals to restrain their self-interest historically fails. But a system that anticipates and encourages the pursuit of self-interest while creating checks on it can succeed magnificently. Or as Madison put it, but what is government itself, but the greatest of all reflections on human nature?

Eric Lane, a Professor at Hofstra School of Law and Senior Fellow at the Brennan Center for Justice, and Michael Oreskes, Managing Editor of The Associated Press for U.S. News, are coauthors of The Genius of America: How the Constitution Saved Our Country and Why It Can Again.

Comments

[StupidDoesNotWork]

I agree with your essay that capitalism and checks in balance were fore thought that has created the magnificent form of government the world has ever seen.

The fore fathers expected intelligent people to steer this political vehicle they created down the road of economic prosperity, physical improvement, social value and human health and well being with good planet stewardship.

Unfortunately they did not envision the evolution to such reckless, drunken drivers of this political vehicle on a bumpy road paved of their Economic Monopolies, Political Lobbying, Think Tanks, Farmer Subsidies, etc. This ambition is creating the destruction of democracy and capitalism itself with the accumulation of Wealth in the hands of so few.

They could not have imagined that a few people once all material ambitions were met several times over would not seek Self Realization, but chaise the All Mighty Dollar as an end to their means. Maslow"s hierarchy of needs too misses this behavior trait. Not unimaginable greed, but greed for greed sake or to cut their own endless selfish desire "nose off" to "spite their" future family if not mankind face
I am inclined to think and hope this is only insanity that will pass with time.

[vietveter]

All organizations are led from the top.

When the nations chief executive refuses

to recognize the rule of law

why do we expect any better from

our banking and financial institutions?

We don't need no stinking checks and ballances

[phasechange]

While the golden rule "Do unto others as you would have them do unto you" is all well and good, it's only inspirational, not motivational, and the founding fathers knew it wouldn't work. I don't think we can replace that with "If you keep an eye on me I'll keep an eye on you"; where's my motivation? Maybe there's a middle way, such as "Those who strive together thrive together".

[HalleBurton]

Mr. Greenspan doesn't know people like Andrew Lahde of Lahde Capital Management who wrote this letter to The Financial Times:

"I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America."

It was W. C. Fields who said "Never give a sucker an even break." And, Mr. Lahde is the embodiment of this philosophy.

[realpolitic]

I hope the reputation of Greenspan really suffers in history. He has worn blinders his whole career. He raised the social security tax, a regressive tax that falls equally on us all despite income, then later advocated huge income tax relief for the wealthy. He did little as the Bush budgets busted our governmental finances and mired us in debt. He always spoke out against such things as a minimum wage increase, yet was blind to anyy asset bubble like the tech bubble or the housing bubble. He kept interest rates artificially low which created the asset bubbles. At the same time he fiercely advocated for deregulation allowing financial firms to leverage 40 dollars for every dollar invested of their own. He is just another ideologue and his vision of perfectly free, self-regulating markets is an absymal failure.

[Pdubya]

the framers and greenspan also knew of sound money and that economic freedom = liberty.

except, in the 1960s, greespan started selling out from his admission that he supports a gold standard, got bought out and blew it to hell.

[faust2001]

I'l paraphrase Ronald Reagan: "American Conservatism is another sad, bizarre chapter in human history whose last pages even now are being written."

[mouselion]

Time to cast aside a belief in the Greed/Fear mechanism and cultivate the self-interest/public good approach.

As you point out, greed will still always be there. Society can do to temper this greed into a more noble form of self-interest. The balance with the greater good will still have to be achieved by government as the framers envisaged. This must also be shaped by contemporary culture.

So, as important as economists and political scientists, the creative class must do its part to help foster the values needed to bring things back into balance. Less disconnected hedonism and financial gain by celebrities, and more thoughtful, engaged persons in the public eye.

[LeftRight]

As Obama said in his speech about Race and the Rev Wright:

"'We the people, in order to form a more perfect union'. And yet that union is not perfect, but it CAN BE perfected!"

[northstar11]

i guess you didn't notice but the constitution was suspended over the past eight years . self interest reputations were caste asidein favor of the rubber stamp.(with no impeachment in sight)

in corporate america self interest lead to unrestrained greed and stupidity all that was necessary was a few peanuts for the boards of directors whose own self interest trumped the self interest of the shareholders.(no reprisals due to complexity of collapse)

the executive branch and the CEO's neutered the checks and ran amok.(and why not--no one is going to do anything about it and our pockets are full)

[JVene]

The vote has been our corrective power against the failure of our government, but like the unseen hand of the free market, the corrective action is often too late to prevent disaster, because the correction is in response to disaster.

Hundreds of people suffered nearly fatal side effects before we realized our heparin supply was contaminated. Tens of thousands of pets died before we 'corrected' the food problem at its source. Apparently we won't solve the energy supply problem until fuel exceeds $10 a gallon, especially if there appears to be any relaxation of the problem along the way.

So, too, we wait until the warnings of a financial meltdown become reality before we're able to vote for new leadership. Chaos moves more rapidly in the modern world than it did before the 20th century. Either the public's involvement must broaden and deepen (to replace the failed 4th branch), or there must be new means instituted which permit corrective actions based on wisdom and foresight, instead of hindsight and hysteria.

Our lives, indeed the world's status, would be much more stable if corrective actions were preventative, and thus more reasoned. In the past 30 years we've been forced into the civic equivalent of swerving off the road to avoid running head first into obstacles we should have seen earlier, if only we had the wipers on and our eyes on the road.

[northstar11]

the american people had it right in 2000 . the majority vote did not go to the "victors"

the florida vote was contaminated and the supreme court became the supreme enablers

[IssyWise]

Pleasant discussion of the founding times, but anybody whose actually listened to Mr. Greenspan's public utterances cannot give him credit for having articulated any guiding principle. For instance, with the release of his most recent book, Greenspan told a TV interviewer that he was against liquidating the national debt in 2001 because he "didn't trust the government with surpluses."

So to Greenspan--if we credit him with thoughtful candid utterances, he went along with the Bush rush into deficit finance because he thought the government would be better off in debt than solvent. Well, he's sure got his wish.

Time has caught up to our most powerful contemporary financial guru. He'll pass into history with his contributions known: a man of his times--infinitely flexible to the felt needs of immediate advantage, oblivious to any longer-term guiding wisdom.

[davedave]

the wheels very nearly came off our government w the bush ll crowd. the election and enablement of evil people should be predictable.

how do we treat this cadre as they finish their term so as to prevent this from recurring?

d

[egal]

Do you guys have in mind a prescription for preventing future descent into such abuse of power and special-interest-run government as we have now? It seems like we need to add a tool by which partisanship is robbed of this crippling stranglehold that interferes with good government.

I think there needs to be a tool by which all our leaders are held accountable, judged, penalized, and overruled--like a version of the judiciary attuned to the views of the people and strictly adherent to the law (the Constitution and its spirit, as much as that can be codified). It must be chosen through a means other than appointment, preferably by simple judicial record, and would need reasonable term limitations to ensure it contained people as loyal to the Constitution as they are representative of the issues (and educated responses to them) important to modern citizens.

But then, how would one establish and maintain such integrity and independence when members must not be driven to curry votes or favor or focus on political and not Constitutional pursuits?

We need to be able to ensure--or rather, political parties and businesses need to NOT be able to PREVENT--appropriate legal actions in all cases, especially in those against high-ranking persons or powerful organizations. Personal, party, and corporate interests currently trump national and human interests, and it seems like we ought to guarantee those special interests won't be able to influence decisions that should be based on law.

[egal]

Beautifully articulated.

If only our leaders, themselves so caught up in ensuring their own self-interests, could have possessed the sense to leave intact the checks and balances that prevent them from bringing about their--and our--own ruin. Since they have proven that no longer can we trust common sense, intellect, and morality to even be present in our government, let alone to hold any power over it, I hope that we begin setting some things in stone, certain limitations that cannot be bypassed simply by maneuvering into the presidency those so stupid and evil they wouldn't know or care how they destroyed our government, economy, rights, laws, and everything else that could be good about our nation.

We do need to ensure that never again can our leadership sell out to those who best profit them at the expense of our world, our nation, and our people. Regulation, limitation, oversight, and tranparency are a vital first step.

Hopefully not just many activitsts and voters and citizens of the nation and the world, but also many leaders, will benefit from, keep in mind, and build upon your apt reminder that we designed our government to take advantage of our faults, and that trying to bypass its checks and balances is self-destructive and already proven to have hoffiric results.

[RepugsOut08]

Fantastic article. Anyone proclaiming the virtues of supply-side economics should be forced to read this.