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What the Framers Knew and Alan Greenspan Didn't

11/19/2008 05:12 am ET | Updated May 25, 2011

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.

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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.