How Self-Interest Destroyed The Economy

Do you find yourself asking this question: How is it that so many ostensibly smart people in the financial world made such terrible choices for so long?

Thirty years ago, an ecologist and professor named Garrett Hardin wrote a classic article in the journal titled "The Tragedy of the Commons." His thesis was that individuals, acting in their rational self-interest, may ultimately destroy a limited resource over the long term.

To illustrate, Hardin used the metaphor of an open pasture - "the commons" - to which herdsmen bring their cattle to feed. The herdsmen understandably want to feed as many of their cattle as possible - or as Hardin put it: "As a rational being, each herdsman seeks to maximize his gain." This works fine for everyone so long as there's enough grass to feed all the cattle. As demand rises, however, the effects of overgrazing take a progressive toll on the commons, until ultimately they're destroyed for everyone.

"Therein is the tragedy," Hardin writes. "Each man is locked into a system that compels him to increase his herd without limit - in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his interest in a society that believes in the freedom of the commons."

Hardin's focus was on the ultimate costs prompted by the individual freedom to have children without limitation - namely overpopulation and insufficient resources for the many. The more narrowly limited resource in the financial world was profit. To generate ever more of it during the past decade, institutions, hedge fund managers, brokers, investment advisers mutual fund managers and individual investors all took ever bigger risks.

The "commons" in this case is the economy, which eventually collapsed under the weight of what amounted a global Ponzi scheme, prompting suffering and dislocation for everyone but those at the very top of the pyramid.

We're not all innocent victims. Bernard Madoff may have lost $50 billion, but an awful lot of his investors set aside their better judgment in favor of their greed and handed over their money to someone who produced unjustifiably outsize returns and was unwilling to disclose how he did it.

As for Wall Street more broadly, the bubble that finally burst had many enablers: regulatory agencies that failed to play the oversight role they were assigned; politicians from both parties who oversaw the deregulation of the financial markets; ratings agencies who colluded with the banks that paid them by giving unduly high credit ratings to their toxically risky bonds; and the rest of us, millions of investors and borrowers who poured money into markets as if they could only rise, and took out mortgages in order to buy homes we knew we couldn't afford.

We wanted what we wanted, and we didn't think much beyond that. Bankers and their agents were happy to give us what we wanted in order to get what they wanted, and they didn't think much beyond that.

Far too many of us conspired to get as much as we could while the getting was good, never stopping to consider that if everyone keeps trying to get more - leveraging their bets and running up debt to do so -- there will eventually be a day of reckoning.

Is there a lesson to be learned belatedly from Hardin's observations - a long term good to be derived from what we must hope is pain that will eventually diminish as the system reequilibrates?

Of course there is. We live now in a world of palpably limited resources. Every choice we make has an increasingly visible impact on the commons. The leader who suggests that his company's only obligation is to maximize profit for his shareholders is dangerously delusional.

We're all in this together, and we literally can't afford to act any longer as if we're each free to pursue our self-interest with blinders on. The antidote is a higher level of awareness - the capacity to see the consequences of our actions over the long term and to make choices from that perspective rather than succumbing to our most primitive impulses.

Profligacy, excess and greed aren't merely vulgar and offensive, they're inimical to our collective sustainability, and therefore to our self-interest.

 

 

Follow Tony Schwartz on Twitter: www.twitter.com/TonySchwartz

Comments

[sailez]

The Greeks have a word for it. KOINONIA=society and KOINON= the commons
something that the neocapitalists have totally set aside.

[Ibackobama]

As Bruzinksi (sp) said this morning on Morning Joe. How much is enough.. how many houses, cars can one person own ... When you hear Liddy explaining that the reason they have to pay out Millions is so that they can retain the best. What does that one person do exactly to warrant a payment of 30+ Million in one year. He does not physically manufacture something, in most cases he is not the owner of the company (brainchild). Who are these in the board that think that you will not find an American who can do the same for say $500K? Those vast somes of money have to come from somewhere, so they lay off a couple of thousand people, so that you can get paid. I just dont get it but then, I'm a commoner ...

[Ibackobama]

sorry ... meant to say vast sums of money ...

[rajoro]

Imagine you bought a house and the last owner built an addition that was not only not up to code and had to be removed but severely damaged the foundation. Now here you are already in debt with a new mortgage and you must make a critical decision; do I borrow even more money to fix the faulty construction and the foundation before even more damage is done? or do I leave the problem to successive buyers to fix and hope the house won't suffer significantly more damage or even collapse while I am in it?

There is only one responsible answer... Obama is doing just that...

[LeftRight]

Thank you. That's a great analogy to what's happening now in Washington!

[TheDopeSack]

Quite an interesting post, and a realistic one as well. I'm glad that people are endorsing greater awareness about the scarcity of resources and the impact that lack of corporate social responsibility and personal greed are having on our society. Recently I learned of another instance of both personal greed and lack of corporate ethics as an affluent rehab in Malibu decided to claim that there is a cure to addiction. With a scarcity of treatment resources I believe the public is entitled to clear and precise information about treatment availability rather than be distracted and dissuaded by a book and a claim that there is a permanent end to addiction. What this big Malibu rehab is doing is simply deception through clever marketing. Accordingly, I call it predatory marketing and it's designed to exploit the hopes of any addict or family member who feels the pain and suffering caused by addiction. The leaders at Beckman Consulting Worldwide vehemently disputed the claim recently and countered such a fraudulent claim with facts about the reality of addiction treatment and ongoing recovery during the life cycle. Balancing care with resources is needed, not another book by someone who only wants to make millions and millions off the suffering of others. The White Paper, "Is there a cure to addiction?" has been released by Beckman Consulting Worldwide. Save the $25 you'd pay for the book and donate it to an established treatment center in your local neighborhood doing the real human service.

[SCG]

"We have always known that heedless self-interest was bad morals; we know now that it is bad economics."

- Franklin D. Roosevelt (Second inaugural 1937)

[Westof405]

Part of the problem with any of this analysis is defining "self-interest." Corporations and their proponents jusfity all sorts of ultimately bad behavior by stating that a corporation's only duty is to maximize profits for their shareholders.

Assuming this is true, then it is up to government to regulate them to prevent such acts as dumping toxic chemicals in lakes and rivers. Otherwise, they will do so because it is cheap and benefits them. If corporations don't care who they hurt by making toxic toys, dangerous cars or medicine that will kill you, then the people being harmed must step up to prevent it from happening.

It is much easier to rob a bank than work for a living, but we deem that wrong and punish people for doing it. However, we allow corporations to do the equivalent and praise them for it.

How is putting hundreds of thousands of people out of work in the self interest of corporations who want people to invest in them or buy the products they make? It can't be, but they are too short-sighted to see that it is not.

[LeftRight]

And that's why capitalism ultimately fails. The only way that you can keep capitalism alive and kicking is to REGULATE IT!!! Prevent those in charge of the corporations from dumping in the streams. Prevent them from selling toxic food just because it gives a larger profit. Prevent them from pouring tons of mercury every day into the atmosphere.

That's the ONLY way that we can survive with capitalism!!

[sposton]

I was alluding to this exact point in an older comment:

http://www.huffingtonpost.com/stephen-mo-hanan/why-save-capitalism_b_148914.html?show_comment_id=18618084#comment_18618084

I also believe that the "commons" are not properly recognized in our society. The self-made men assign all their success to their own initiative but this patently absurd. They build on top that is already there, built by previous generations, public investments, etc. The rich use the justification of private property as the right to their riches but how much of that "private property" is due to their initiative and how much to the "commons"? That which is due to the commons would naturally belong to the commons. If we allowed for a revised concept of private property, more aligned with reality we could actually begin to nourish our commons.

[Wombaticus]

Great comment, let it be so sometime soon.

[overd0g1]

In other words, we can't "afford" to be free. What form of slavery do you advocate?

[bbrecht]

Freedom and responsibility to others are not opposites. In fact, freedom only exists in tangent with responsibility--and with some kind of laws that protect it. Deregulating the banks under the illusion of "the virtue of selfishness" put the entire system in jeopardy.

[sposton]

Ought you be free to dump toxic chemicals on your private property? If you say yes, then you don't understand the responsibility part of the equation. If you say no, then you are beginning to understand it.

Libertarian's notions of freedom are as childish as anarchist's. I will grant you that what we currently have is not freedom, either. It is closer to a kleptocratic system with the richest among us free to continue robbing us backed by the government powers. Our aim ought not be no government or government, small government or big government. Our aim ought to be an optimal government. If that were the goal then we would soon find out that in order to have optimally sized government you cannot allow business enterprises to grow beyond optimal size and certainly well below the "to large to fail" size. Most people do not grasp that our government's size is connected to the scale of business enterprise. This goal may not be fully attainable but we could start trending toward it over time. And after a while we will be both more free and more responsible.

[Wombaticus]

Ok Sposton, I flagged myself as a fan of you. Great comments with logic and positions clearly stated.

[JScott]

Didn't Iceland dither with Libertarianism and guess what-IT FAILED!!!!

[Badfickle]

What do you mean by "free?" Are you only "free" when you have anarchy? Is democracy slavery?

[LOCUTUS13]

Live simply - simply live

Don't buy something more than you need
Don't get a variable mortgage
Pay off your bills as soon as possible
Use credit cards with caution
Don't try to keep up with your neighbors

I used to be laughed at by my former neighbors for being tight with my money. Whenever they did anything to their home they payed someone else to do it while I worked on my own home. They payed someone else to mow their lawn while I mowed mine myself. They put in a nice pool in their backyard while I planted bushes, flowers and trees to attract birds, butterflies and other wildlife and to conserve water. They got a new car every 3 years while I worked on mine to keep it running. They bought expensive fancy clothing while I bought only what I needed. The bank took over their home last year because they couldn't keep up the payments while I payed off my 30 year mortgage in 12 years!

Guess who's laughing now.

[suzc]

Don't be mean. There are a lot of stupid people out there, most of them apparently greedy for more!

I ran across a book once, based on the theory of ENOUGH. I've always believed that enough is enough. And ENOUGH isn't all that MUCH really! The basics. The rest is chaff. And we see how easily it is blown away when the TRULY GREEDY have taken charge (Washington and Wall Street et al).

How many trillions can one person spend? How many trillions do you need to feel self-fulfilled? satisfied? Honestly, how many houses does one family really NEED? Now, it may help local economies to have billionaires buying sixth vacation homes in their community, but does it really help very much? Really? And since money does NOT "trickle down" from that top 3%, how much is really spread around? How helpful is it to have wealth concentrated in the hands of a few -- especially when the few have basically stolen most of it and left the PRODUCERS of society in the ditch!

It's time to say ENOUGH! And enough is enough! And ethics, honor, honesty, integrity -- all those old Biblical tenets blasphemed by humanists and others -- really ARE needed for a community to be self-sustaining.

[LOCUTUS13]

If I had billions of dollars I would donate most to charity, and spread most of the rest to my family and friends (enough to have them live comfortably).

As far as Biblical tenets, I personally favor Zen Buddhism teachings that say material goods are a drag on the soul.

The list I made I learned that from my father who was in his early twenties during the depression.

[Ibackobama]

Hmmm... you can do all that (living simply, I mean), and an illness in the family can come in and wipe out all your savings. Never assume to know what is going on with someone else. You just never know. . . . .

[Peter007]

The logic is flawed. A commons means just that. It similar to government owned land. Its for everyone. Had the commons been owned by one person, there would be an incentive to preserve it.
The financial collapse is similar. The mortgage market is a quasi-government system. The reason so much money flowed into the mortgage system was because it was sanctioned by the US government. The US government has a long history of protecting American home ownership and finance. The US seal of approval was on every financial instrument or it was inferred that it was. That was the problem. US mortgage rates are tied to US government bonds. What could be safer?
More regulation? The problem was that there was too much regulation that lead to complacency. Money burns a hole in ones pocket. or A fool and his money are soon parted. Take your pick.

[bbrecht]

In fact it was greed that has brought us to this juncture, not a lack of private ownership! As a result of the republican "revolution" of the past 30 years, there were very few government regulations regarding banks, investments and mortgages, hence the craziness and repackaging of all these loans into derivitatives, not all of which were mortgages. It was greed that drove the banks to give out loans to people who didn't qualify and without downpayments because they could repackage the loan and sell it to someone else, and the investors found a way to make 30% on their investments...for awhile.... until those bad loans came up default, the investors stopped buying and the housing market bubble popped. The only thing the government did wrong was refuse to regulate the market.

[Peter007]

The next person that mentions "greed" I'm going to throw up. Greed is a desire to have more. Everyone is greedy. If you buy a lottery ticket, you are greedy. If you want separate bedrooms in your house, you are greedy. Unless you are like Gandhi or Jesus, or a Buddhist monk, you are greedy.
Greediness is a matter of degree.
The statement about banks not being regulated is an ignorant statement. The banking industry is the most regulated industry in the country. I work in the banking industry and the government controls about 95% of what goes on in this business.

[396]

URL: http://www.rollingstone.com/politics/story/26793903/the_big_takeover

[Badfickle]

No if the commons in this scenario was government controlled land then the government could control the number of cattle allowed on the commons and the crisis would be avoided.

For libertarians there can never be too little government and whenever their systems fail they always always always try to find some way to blame it on the government because the start with their philosophy and make the fact fit that philosophy.

In this case the banks had a completely deregulated securities market. The Commodities Futures and Modernization act of 2000 made it ILLEGAL for the government to regulate the Credit Default Swaps and privately made and traded mortgage derivatives at the heart of the crisis. The quasi governmental entities like freddy and franny played a much smaller role than unregulated the private sector.

[Peter007]

The credit default swaps were insurance policies on US mortgages and loans made by US regulated banks. The bets were placed knowing that the US government stands behind the American housing industry. Imagine if the bets were placed on something like the value of soybeans or gold. That's only for high risk speculators. The government doesn't support gold prices or soybean prices but they do support housing prices.

[Peter007]

Your assumption is that the government always makes the correct decission. Government policy is based upon popular opinion. LBJ won in a landslide yet he was hated at the end of his term, Nixon won more states than any other president yet he had to resign. Bush had 70% approval ratings yet by the end he was stuck at 24% approval. Democracy is government by the lowest common denominator of our society. Thats our system. I won't want to have a medical procedure that was determined by a vote of people in my neighborhood.

[gemzenith]

More like irrational self interest.

[mcthorogood]

The Crash Course attempts to tie together three topics in the news today; the economy, energy and the environment.

http://www.chrismartenson.com/crashcourse

The early chapters focus on how money is generated in our debt based money supply, and explains about asset bubbles. Peak oil is also discussed in later chapters, along with environmental degradation. A common thread is the exponential growth evident in the economy, energy, and the environment, in the face of limited resources. Dr. Albert Bartlett, University Colorado-Boulder, also explains exponential growth in his lectures. Exponential growth is summarized by the "rule of 70"; seventy divided by the annualized rate of growth determines the doubling time. While a 3.5% annual growth rate might not sound like much, it means a doubling will occur in 20 years.

This course concludes that the we're living in an exciting time of change, and that the next 20 years will be completely different than the last 20 years. Everyone should watch the Crash Course, especially our politicians, who expect to re-inflate the asset bubble and to return to the previous years of prosperity.

[loki]

You bet. We live in the country of ME ME ME ME... Never again will be be Americans working together to make America better as a whole. We are no better than others like Sri Lanka or Zimbabwa where its all about uber individualism. When everyone only worries about themselves and how much they can keep or get, then as a whole the country dies. There will always be some who dominate and take from others, and then you get a country with a few rich, and a lot poor. When everyone pitches in you can at least keep a functioning society as a whole country. right now we are living on the dregs from those great days of the past, and those are running out now.Uber individualism has killed everything that was once great about America. Where everyone worked to make this a great country. Now, everyone seems to be working to make just a few very rich and powerful, and to hell with the country. Aint it great!!

[FearlessFreep]

"The tragedy of the commons" could also be called "the tragedy of laissez-faire."

[loki]

ill agree with that

[Peter007]

Not true. Just the opposite. The commons means just that. Common land. Public land. No one owns it. Had the common been owned by one individual, the grass would continue to grow in order to protect the future of the land. If its owned by " everyone", there is no incentive to preserve it. Sort of like our democracy.

[JScott]

And most the lhe land in the Imperial Valley and the western San Joaquin Valley is owned by few large absentee corporations, coincidentally those parts of California are the poorest, because folks there own practically nothing and work at low skill, low paid, low benefit work because that's all the corporations provide.

[JScott]

And in the IP and W. SJ Valley those corps. get HUGE susidies for their water and subsidies for the commodity crops they produce like grain and cotton. Sorry but this is hardly laissez-faire capitalism.

[Badfickle]

If it is held by the government then it is the governments job to regulate it's use. Hence laissez-faire is a fools game.

[LeftRight]

That's not the definition of the commons. The commons aren't necessarily owned by the government. The commons are something less tangible. It is something that we all use, whether it be the air, the water, the land, a resource on property, whatever, it's the commons. I would also suggest that health insurance is in the commons as well!

[radbam]

While self-interest amplified as greed is an obvious cause of the recent financial travails, the upside of self-interest is the quality evoked by community organizers ala Olinsky. This is the dynamic that drives community organizing. Similarly, the yetzer hara...the evil inclination described in Rabbinic Judaism, is damaging if unchecked, a necessary streak of ambition that is the source of children, business success and career aspirations. It is a question of degree, not whether self-interest should exist or not.

Rabbi Daniel A. Weiner
goodgodforus.com