To an economist, it is greed, not love, that makes the world go 'round. While the world's relgions condemm avarice as a deplorable vice, the world's economists exhalt it as a cardinal virtue. Unlike priests, economists know that avarice is useful in understanding some of the major issues in today's economy.
The current campaign against inflation conveniently ignores avarice as a major human motivation. President Carter has called the battle against inflation "the moral equipment of war," but that calls for a civil war, not a foreign one.
The man who would sacrifice his life for his country may be totally unwilling to make the sacrifice of a ( percent wage increase when he sees his neighbor get 10 percent. Inflation is not a sinister foreign plot to fight against, but rather stems from the understandable efforts of millions of workers and companies to improve their lot by raising wages and prices.
Calls for a war on inflation simply reveal confusion about the identity of the enemy. In Pogo's words, "We have met the enemy and he is us."
The closest thing to a foreign enemy is the speculators who are blamed whenever the dollar declines. In fact, many of these speculators are the treasurers of American corporations who want to limit the financial damage to their companies from a falling dollar.
Many foreigners are involved, too, such as wealthy individuals and some central banks. The way they see it, they trusted America to maintain the dollar as a stable store of value, but we violated that trust by our inflationary policies. As a result, they sell dollars and move into currencies they believe to be more stable such as the Swiss franc and the West German mark.
Thus, the waves of selling pressure against the dollar do not spring from a sinister foreign plot but rather from the action of many self-interested people and institutions trying to prevent taking losses in what they believe is a mismanaged currency.
One reason for our current low rate of economic growth is the distortion of incentives due to inflation. In an economy with stable prices, the best way for talented and ambitious men and women to get ahead is to find new ways to produce more goods and services. In an economy with high but uncertain inflation, the best way to get ahead is to speculate on which existing assets (e.g., homes, gold) will go up in price most.
Many of our most talented people have been drawn into this financial roller derby that leads nowhere, for society as a whole but encourages each player to elbow his way in front of the others. Economic growth is more likely when talented people perceive that the best way to make money is to produce more rather than to speculate on which prices will go up next.
Farmers are an example of workers who believe that they can make more money by producing more. Farmers comprise only 4 percent of our labor force but they are so productive that they can feed the rest of us and still export large quantities of grain.A major reason our farmers are so productive is that each one can see a direct connection between the amount of food he or she makes, so the farmer works hard to produce more food.
The Soviet Union has a far larger proportion of farm workers but often is unable even to feed itself. The reason is not just an occasional spell of bad weather, but the way theircollective system robs their farmers of the incentive to produce as much as they can. A major reason we have the world's most productive farmers is that our economic system effectively harnesses their self interest by convincing them that the way to make more money is to produce more food.
The recent Republican attempts to cut personal income taxes sharply were based squarely on the assumption of greed. They assumed that a substantial portion of the population is working to utilize that potential. They further assumed that a tax cut would restore that incentive to work and lead to a renaissance of economic growth that would make up for lost tax revenues. It is an interesting theory, but no one really knows just how much underutilized potential there is in the U.S. labor force or what it would take to tap it.
The current consumer behavior is understandable only by considering economic self-interest. Consumers save an historically low proportion of their income today, but that is a rational reaction to the current inflation which destroys the real value of personal savings. Instead of saving, consumers spend heavily to beat inflation and borrow heavily to do it because they hope to repay in cheaper dollars. The result is the current record level of consumer debt. Economic growth is better served by more saving and less consumption, but consumers acting in their own self interest have chosen to go on a spending spree.
Eventually the administration's anti-inflation program must come to grips with greed. The antidote to the greed that raises wages and prices is fear and pain. The traditional form of fear is a recession that makes unions afraid of losing customers and profits. Wage and price controls are an attempt to solve the inflation problem without the pain of recession, but past experiments with controls show they rapidly become a problem in their own right rather than a solution to inflation.
Who will bear the pain necessary to control inflation is the major unanswered question of the administration's program. In 1970, the pain fell on corporate profits, and a few companies, such as Penn Central, went bankrupt. In 1975, the pain fell of the real estate industry, a few local governments like New York City and labor as unemployment rose to levels not seen in more than a generation. Someone will get hurt in the process of curtailing inflation in 1975 or 1980, but it is not at all clear who that someone will be.
Avarice is the opposite of the weather. Everyone talks about the weather but no one does anything about it. No one talks about avarice but everyone does a great deal about it, and that is why economists believe that greed makes the world go 'round. CAPTION: Drawing, Avarice, pen and ink drawing by Peter Brueghel, dated 1556