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 this model, greed is best illustrated by the desire of people to act solely for their own benefit without regard for the well being of others. Even the act of protecting ones own interests can be considered as having been motivated primarily by greed. Thus, greed can be defined as that singular driving force that prompts people to act in their own self-interests.
In as much detail as possible explain how greed both drives and regulates capitalist markets. 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. This means that in order for firms to maximize their profits (function of greed) it is necessary for them to employ the necessary strategies to either reduce cost of production per unit, which increases the profit margin per unit produced, or to increase the volume sold (at perhaps a lower price), which translates to more income per volume.
Greed is therefore essential in both these strategies and as such can be considered as the driving force in any capitalist market. Greed, however, also has another function and that is as a method of regulating the market. The best example of this is shown in the movie Wall Street where the stockholders, in pursuit of individual wealth, were able to regulate a firm. In the movie, the stockholders rallied against the corporation and the excessive spending that the firm was doing in favor of its own executives (vice-presidents).
Gecko shows that greed has a regulatory role when he urges the stockholders to go for more shareholders earnings. He cites that this may be greed but greed is good in this case. In this instance, greed acted as a way of regulating a capitalist market. Why is greed necessary for this economic system to work efficiently? The basic precept of the Invisible Hand theory is that in order for it to work every individual must pursue their own self interests. As stated by Gecko, Greed, in all of its forms ” greed for life, for money, for love, knowledge ” has marked the upward surge of mankind.
This essentially means that greed is the driving force under the Invisible Hand model. In order for the system to work properly, every individual must greedily pursue the accumulation of ones personal wealth (not necessarily to the detriment of others but without concern for the performance of others in this aspect). Without greed, the accumulation of individual wealth would disappear from the equation and the economic system would not be able to function efficiently.
How does the individual greed of the economic actor allocate a societys scarce resources efficiently? 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 societys scarce resources become more efficiently allocated through the regulatory nature of greed in capitalist markets. In the example of Gecko and Teldar, individual greed becomes crucial to the efficient allocation of scarce resources, which in this case are the corporate earnings. The redistribution of wealth that Gecko urges the stockholders to aim for is a function of the individual greed of the stockholders. This results in higher earnings and more wealth for each of the individual stockholders instead of the company holding on to those earnings.
Is greed good?! 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 todays current economic situation.