Gekko Echo

A closer look at the "Decade of Greed"

David Kelley & Jeff Scott from the February 1993 issue

(Page 3 of 4)

and wisdom and vision of its employees." It was these companies that created the surge in employment during the long economic expansion of the ‘80s, while the Fortune 500 were cutting their work force to improve efficiency. Yago’s research indicates that, from 1980 to 1986, firms using high-yield debt accounted for 82 percent of average annual job growth at public companies; they added jobs at six times the average rate in each industry.

Serious allegations have been made about Milken’s practices as a trader, an underwriter, and–later in the ‘80s–a deal maker in junk-backed takeovers. For example, there is evidence (though not enough for the prosecutors to make a case) that he offered personal inducements to fund managers to buy his bonds for their fund portfolios. But it is absurd to claim, as James Stewart and others have, that such practices were the essence of Milken’s success. They were a sideshow in what has become a $200-billion market.

Nor is Milken responsible for the collapse of the S&L industry. Only 161 out of 3,025 thrift institutions held high-yield bonds, with a total book value in 1988 of $13.2 billion; 69 percent of that total was held by 11 thrifts, and even in that small group, junk represented only 10 percent of their assets. It was only in a few specific cases, such as Thomas Spiegel’s Columbia

Savings and Loan, that junk was a significant cause of insolvency. Problem real-estate loans were the true "junk" in the S&L portfolios. And the essential causes of the industry’s collapse were government regulations and subsidies–especially federal deposit insurance–that encouraged S&Ls to make risky loans.

In short, whatever misdeeds were done, whatever speculative excesses were committed in financial markets, innovations in those markets created tremendous value, and the returns that innovators reaped were justly earned. The real question is: Why has all this escaped the notice of the media, which continue to present the ‘80s as a melodrama of greed? Harvard’s Michael Jensen observes, "I know of no area in economics today where the divergence between popular belief and the evidence from scholarly research is so great." Why does the illusion have such a grip on popular belief?

One reason, surely, is the disruptive and unsettling character of innovation. Corporate CEOs were unnerved by the "sharks" circling their companies. Old-line investment bankers had to compete with the brash upstarts from Drexel. Regulators couldn’t keep up with the new investment vehicles that sprawled across their categories. And all of them found a sympathetic ear in the press. Despite their self-image as an adversarial class, journalists depend on those in power for access and visibility; they enjoyed their seats in a boat that was being violently rocked.

But these sociological factors cannot be the full explanation. The establishment’s desire to preserve its power could not be put forward publicly and explicitly as a reason for attacking the innovators. The cause of the vested interests is a cause that dare not speak its name; it needs a plausible rationalization. And the standards of plausibility are set by deep-seated cultural premises.

One such premise was stated by Gordon Gekko: "It’s a zero-sum game. Somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred....I create nothing. I own." Unlike the production of tangible goods and services, it is often assumed, financial transactions do nothing but shuffle ownership from one set of hands to another, without creating anything. The clearest manifestation of this premise is the popular response to breathtaking incomes. People were scandalized by the multimillion-dollar earnings of LBO entrepreneurs like Henry Kravis and George Roberts of KKR. Yet for all that has been written about the "decade of greed," virtually no one has complained about the income of entertainers like Bill Cosby, who earned some $58 million last year. Nor are the accusations directed against entrepreneurs like Bill Gates of Microsoft or Sam Walton of Wal-Mart, who earned fortunes by creating new products and services. In 1987, the year that Michael Milken earned $550 million, no eyebrows were raised when Sam Walton gained $4 billion from the increase in the value of his stock.

This invidious distinction is invalid; as we have seen, innovations in the financial sector create value in the same way as innovations in the so-called real sector. In the one case, scientific knowledge about nature leads to inventions that exploit that knowledge, and the inventions are then developed and marketed by high-tech firms like Microsoft, which create benefits far in excess of the profits they retain. In the same way, theoretical insights about the economic and mathematical properties of financial structures lead to the invention of new financial technology that exploits those insights; the technology is then developed and marketed by firms like Drexel and KKR, which create much more value than they ever take back. As Milken said, "Walton used retailing technology to create value; Drexel used financial technology to create value...by enabling entrepreneurs to raise money far more efficiently than they could have done without us."

A second important cultural premise is a more general and elusive kind of antimaterialism–the attitude that material production is a low and degrading value by comparison with art, knowledge, love, or military glory. This pre-industrial attitude was the source of aristocratic disdain for the merchants and factory owners of 200 years ago. And of course it is a central theme of any deeply religious culture. In the highly secular societies of the West, this premise no longer has the power it once did. But it survives in a number of specific forms, including the tendency of journalists and literati to believe the worst of businessmen. In Den of Thieves. for example, Stewart refers casually to "corporate America’s our willingness to dissemble," a sweeping generalization about an entire class of people on the basis of a few specific cases.

The antimaterialist outlook is embodied in the conventional concept of greed. For centuries, religious authorities taught that any concern with material wealth beyond the subsistence level was greedy, just as any sexual desire not connected with the needs of reproduction was lustful. In effect, economic ambition and sexual enjoyment–the two most powerful this-worldly motives–were put on the list of mortal sins. Today most people would not consider it sinful to strive for material comforts beyond the level of a medieval monk. But a vestige of the old view survives in the notion that it is greedy to want too much. Indeed, some dictionaries define greed as an excessive desire for material possessions. Notice that we do not have comparable concepts for those who want too much knowledge, too much beauty, too much love. Why is wealth singled out for special concern, if not for a lingering bias against material success?

Considering how deep a rut the concept of greed has worn in public discourse lately, it is worth pausing to consider its proper meaning. In a market economy, money is the medium of exchange for the products and services people have created. It is thus the reward for productive achievement in a society of traders, of people who live by peaceful exchange rather than plunder. When the desire for money is connected with achievement, there is no vice involved, and the concept of greed is inapplicable. There cannot be any excess in the desire to achieve, and it is proper to want one’s achievement recognized and rewarded by those who benefit from it.

Because it is a medium of exchange over time, money also serves as a store of value. It is thus an input to the process of further production, just as information is an input to the process of producing knowledge. It would be absurd to accuse a scholar or scientist of wanting too much information, as long as he can profitably employ it. The analogous claim is equally absurd for investors, bankers, entrepreneurs, and others who specialize in using money to expand production.

The concept of greed can properly be applied only when the desire for money is divorced from any concern with achievement. Some people want money without having to earn it–a life of luxury without the effort of producing. Some people want the prestige and social status that come with wealth. Some want power over others. In motive, greed is a desire for wealth without regard for achievement or creation. In action, greed is the unprincipled pursuit of wealth. This includes the use of force, fraud, and other coercive means. It also includes the violation of ethical norms, both the universal standards of honesty and fairness, and the specialized standards that apply to particular professions.

Many of those convicted of insider trading fit this description. As far as one can tell from what has appeared in print, for example, Ivan Boesky’s motives had more to do with gaining prestige and power than with any concern for creating economic value. And his practice relied on the theft of information; he regularly bribed his informants at law firms and investment banks to violate their fiduciary responsibilities.