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Friday, December 21, 2007

Greenspan's brain:

In today's Krugman column, he makes a passing reference to something Greenspan wrote four decades ago:
In a 1963 essay for Ms. Rand’s newsletter, Mr. Greenspan dismissed as a “collectivist” myth the idea that businessmen, left to their own devices, “would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings.” On the contrary, he declared, “it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”
But you should read more of Greenspan's essay, as excerpted at The Mess That Greenspan Made: (emp add)
"Protection of the consumer against 'dishonest and unscrupulous business practices' has become a cardinal ingredient of welfare statism," Greenspan began his essay, which Rand included in her 1967 book, "Capitalism: The Unknown Ideal."

"Left to their own devices, it is alleged, businessmen would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings. Thus, it is argued, the Pure Food and Drug Administration, the Securities and Exchange Commission, and the numerous building regulatory agencies are indispensible if the consumer is to be protected from the 'greed' of the businessman.

"But it is precisely the 'greed' of the businessman or, more appropriately, his profit-seeking, which is the unexcelled protector of the consumer.

"What collectivists refuse to recognize is that it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product."

."Protection of the consumer by regulation is thus illusory," he said. "Rather than isolating the consumer from the dishonest businessman, it is gradually destroying the only reliable protection the consumer has: competition for reputation

"While the consumer is thus endangered, the major victim of 'protective' regulation is the producer: the businessman."
Regulation endangers the consumer! How naïve. As if concern about reputation held back Charles Keating. There are many problems with Greenspan's asserions: consumers would have to keep tabs on all manufacturers for quality. Rregulation helps avert problems before they happen. When shoddy goods are sold, there are huge barriers to getting recompense. Some companies flat out disappear, thus rendering compensation impossible. Etc. [Troll note: regulation doesn't solve all these problems but makes them less frequent and establishes clear criteria for safety, whereas "reputation" is ephemeral, nebulous, and ultimately worthless. Did Merrill Lynch's reputation suffer after they drove Orange County into bankruptcy? Not much, if at all. People forget these things and here we are with ML selling crummy mortgage backed securities.]

As the Bloomberg report (excerpted at TMTGM) put it:
Four decades later, Greenspan's argument seems almost childlike in its idealism. Yet, judging by his inaction, it looks like he never stopped believing.
He knows what he's doing. Using libertarian free-market fundamentalism to hold off the regulators so the fat cats can ripoff the public. Because without a regulatory state, it's pure Capitalist Darwinism, where the strong crush the weak and businesses have the advantage over the consumer.



5 comments

I think of Louis Armstrong's recording of "Loveless Love" which is the same as "Careless Love" except for the words. In "Loveless Love" Armstrong was addressing a social concept in the late 1910s-early 1920s and makes reference to the adoption of a "Pure food law" in a skeptical manner. Perhaps Greenspan as a jazz musician in the past had an awareness of "Loveless Love" but preferred "Careless Love" (although it was long in coming).

By the way, I have been unable to determine which came first, "Careless Love" or "Loveless Love." A little help, please.

By Blogger Shag from Brookline, at 12/21/2007 5:46 AM  

Nicely said: "Using libertarian free-market fundamentalism to hold off the regulators so the fat cats can ripoff the public."

This voodoo still works, sad to say. This semester I had a student, an older guy, who routinely spouted crap like this: "You don't need to regulate businesses 'cause it's in business's self-interest to be ethical 'cause otherwise the marketplace will punish them" and "You don't need a minimum wage 'cause businesses will always pay more for the best talent" and so on. The concepts of "cashing out at the top" and "gaming the system" and "collusion to keep wages low" had never occurred to this guy, so full to bursting was he with libertarian Kool-Aid.

Honestly, it's always a toss-up with me whether these people are dumb, evil, insane, or some heady combination of all three at once.

--nashtbrutusandshort
Categorical Aperitif

By Blogger nash, at 12/21/2007 8:03 AM  

"What collectivists refuse to recognize is that it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product."

I'm not sure if "collectivists" (I myself have a bitchin' set of figurines) refuse to recognize this, but it is absolutely true that every businessman wants a reputation for honest dealings and quality products. But reputation and reality are two entirely different animals. Or hadn't Maestro thought of that?

By Blogger Charlie, at 12/21/2007 5:41 PM  

What libertarians refuse to recognize is the "free rider" problem. (Among other things: I love how Ayn Rand glorifies the human brain while completely ignoring the fact that each human brain has a right side as well as a left side.)

By Anonymous djmm, at 12/22/2007 2:39 PM  

I'm a little late to the party on this one, but something else struck me about Greenspan's writings. The FDA and SEC weren't created in a vacuum. The Pure Food and Drug Act and the Securities Exchange Act were the direct result of businessmen selling adulterated food and fraudulent securities. It's not theoretical that these things would happen.

By Blogger Jeff, at 12/31/2007 9:21 AM  

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