May 24, 2006

Commencement Speeches and Economics.

During the month of May we hear many commencement speeches. Most are excellent and provide the graduates with wisdom, while offering a unique insight into how the speaker thinks and approaches problems. Unfortunately, there are a few that are full of useless rhetoric and downright embarrassing.

One that fits the latter category was when the speaker made the audacious claim that “greed is a necessary lubricant to the market system.”  When I heard this statement I uttered an expletive a bit too loudly, as some of my colleagues around me shot me several dirty looks.

I’m not sure whether to be disgusted or saddened at the fact that relatively well educated people still believe that greed is somehow a necessary component of our market system.

The confusion, I think, comes from a misunderstanding of Adam Smith. Smith’s famous quote from An Inquiry into the Nature and Causes of the Wealth of Nations  that goes:

“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 self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."

Ah hah!  People argue…see Smith was saying “greed is good.”  But, with any quote one must understand its context. 

When Smith penned Wealth of Nations in 1776 he was attempting to counter the mercantilist philosophy.  Mercantilism held that the means of production of a society should be used to export as much as possible and import as little as possible.  By doing so, mercantilism required self sacrifice and it required the state to dictate that goods be produced for export.  Thus, mercantilism argues, producers and consumers must suffer but it is for the good of the kingdom.

Smith was countering the mercantilist approach by saying, no…allow people to make their own choices.  When people make choices based on what is best for them, that is how wealth is created and how the society will prosper.

In 1759 Smith wrote The Theory of Moral Sentiments where he described the need for society to “bettering of our condition” through impartiality, sympathy, and reason.  Hardly espousing “greed is good.”

But still to this day, people confuse Smith’s “self interest” with greed.  But to do so would be the equivalent of saying gluttony is a necessary component of a successful diet.  Rubbish.  Eating food is important for sure, but eating to excess leads to gluttony.  The same holds true with self interest and greed.

Or think about self respect and arrogance.  The former is a necessary quality, but when done to excess it leads to the later, arrogance, which is bad.

And so it happens today with Smith’s self interest and greed.  Competition, the desire to do well, and self interest are all important aspects of how our market system works.  But greed, the perversion of self interest, is not and should not be condoned by market participants.

On the other hand…there have also been some great commencement speeches by people with wonderful insight.  One such speech was given by Gary Kusin, former President and Chief Executive Officer of FedEx Kinko’s.  Kusin argued that managers and corporate executives need to keep in mind three important P’s of business:  profit, people and the planet.

I could tell that Kusin’s speech made many in the audience uncomfortable.  He correctly pointed out that profits should be earned in an honest, respectful manner, and not by trying to manipulate or bully suppliers and customers.  People, Kusin explained should be compensated fairly and honestly.  Finally, Kusin strongly argued corporate American has an important role in the stewardship over our natural resources.  It was a powerful speech.

Sometimes commencement speeches are enlightening (like Kusin’s) and some times they are nauseating.  Let’s hope for more the former and less of the latter in the future.