In the article entitled, Greed, Need and Money, Walter Williams presents his take on the economics and logic of keeping CEOs highly paid. He essentially argues that these huge “golden parachutes” and corporate salaries are justified by return that these companies get in return. Just because a CEO gets a high salary does not mean that he does not deserve it or do anything to help the company recover that value. By comparing this to a simple supply and demand model, Walter Williams is able to show that the reason the salaries are so high is because the demand is high as well and supply is pretty scarce.
One manner by which the mention of the word greed can be applied to the economic lessons that have been discussed is to juxtapose this to the application of greed as an economic theory. Greed can be said to be the primal instinct for self-preservation of people. In an attempt to protect one’s self, man seeks only to pursue his individual interests without care for the well-being of others. In relation to economics, this pursuit of individual interests is greed or the pursuit of economic self-interests, otherwise known as individual wealth accumulation.
Greed as a driving force is not an entirely new concept as it was originally part of the Invisible Hand theory introduced by Adam Smith. The basic precept of the invisible hand is that in a free market a person who chooses to be greedy and pursue his own interests in invariably also furthering the good of the entire community. A perfect example is in a situation where a person seeks to maximize his personal profits in total disregard of other factors.
By applying the Invisible Hand theory of Adam Smith, it can be shown that when the total revenue of society is calculated this becomes identical to the summation of the individual revenues of every member of that society. In order to arrive at a better understanding of how greed, which is a key concept under the Invisible Hand Theory, both drives and regulates capitalist markets, it is essential to have a brief discussion of the basic supply and demand model. This is because production is driven by the willingness of the seller to supply and the basic goal of every seller is to increase profits (greed).
This can be understood from two approaches, however, the first being profit maximization through an increase in the volume of units sold (assuming ceteris paribus) and the second being profit maximization through a decrease in the cost of the factors of production which in turn increases the profit margins per unit sold. The basic supply-demand model becomes critical in this understanding because under the market model sales will only willingly occur at the equilibrium point. The price level of a good essentially is determined by the point at which quantity supplied equals quantity demanded.
The law of supply and demand predicts that the price level will move toward the point that equalizes quantities supplied and demanded. Greed is crucial in this sense because it is the basic assumption or behavior under this model. Without greed, there would be no drive for the individuals in society to pursue their own self-interests. The absence of this driving mechanism would mean that there will be no individual revenues and thus leading to the failure of the community revenue to equalize with its summation.
This basically means that society’s scarce resources become more efficiently allocated through the regulatory nature of greed in capitalist markets. While the Invisible Hand theory has already been rejected as an acceptable economic model by the works of John Maynard Keynes and Milton Friedman, the more complex markets of today have shown that the pursuit of self-interests, while natural of human behavior, must be regulated by external systems in order to ensure a more equitable and efficient allocation of resources.
This means that greed is not necessarily good in today’s current economic situation. As used in this discussion and in the article, this greed may not only be the effect of supply and demand but the pursuits of an individual’s self-interests for the improvement of the economic system.
Courtney from Study Moose
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