Greed Is Good Was a Movie Villain's Line, and Other Myths About Capitalism

Somewhere in Hollywood there is a screenwriter who has never run a lemonade stand, never met a payroll and never once priced a product, and he is about to explain capitalism to you. The villain wears suspenders. The villain slicks his hair back. The villain makes a speech about greed, the music swells, and the audience is supposed to leave the theater knowing, as a matter of settled science, that business is what happens when bad men get a chance.

Folks, I love the movies. I just do not take my economics from people who are paid to make you boo the guy with the factory. So let us do what the screenwriters never do and check the claims against the record. The 1987 film Wall Street, directed by Oliver Stone, gave us the character Gordon Gekko, played by Michael Douglas, and a speech to shareholders that people still quote as though it were the Constitution of capitalism. It was a villain's line, written by a man who intended it as a warning. It was never a theory of how markets work, and nobody at the Treasury, in the Chamber of Commerce or in a serious economics department ever treated it as one.

Here are seven myths, each stated at its strongest, each tested, each with a verdict.

First, what we mean by capitalism

Definitions first, because most arguments about capitalism are really arguments about a cartoon. Capitalism, as economists use the word, is an economic system in which people own property, including the tools and money used to produce things, and trade it voluntarily at prices that move with supply and demand. That is all. Four ingredients: private ownership, voluntary exchange, prices that carry information, and the freedom to keep a profit or eat a loss.

Notice what is missing from that definition. Greed is not in it. Neither is selfishness, nor cruelty, nor a requirement that anybody be unpleasant. The definition describes rules, not feelings. A church bake sale runs on private ownership of flour, voluntary exchange of brownies for dollars, and a price on a cardboard sign. It is a small capitalist institution, and the people running it are doing God's work.

With that in hand, the myths.

Myth one: capitalism runs on greed

The strongest version of the claim. Markets reward people who want more for themselves. The system works by harnessing selfishness. A man who wants to be rich is a man who will cut corners. Therefore capitalism makes a virtue of vice.

The record. The claim is usually pinned on Adam Smith, so read Smith. In The Wealth of Nations (1776) he wrote that we expect our dinner "not from the benevolence of the butcher, the brewer, or the baker, but from their regard to their own interest." That sentence is real, and it is the one people quote. What they leave out is that it is a sentence about how to get a stranger to cooperate. Smith's point is that you do not have to love the baker for him to feed you. You only have to offer him something he wants. The baker's interest is not greed in the Gekko sense. It is the ordinary interest of a man who wants his children fed and his shop open next year.

Then there is the book Smith wrote seventeen years earlier. The Theory of Moral Sentiments (1759) opens with the line "How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it." The father of economics began his career by arguing that human beings care about one another. See Before The Wealth of Nations, Adam Smith Wrote a Book About Conscience for the whole story.

And look at how the thing actually works. To make money in a free market you must give another person something he values more than the money he hands over. That is the only legal way to win. The baker who sells stale bread loses the customer. The contractor who botches the roof loses the referral. A system where your income depends on serving strangers well is not a system that rewards greed. It rewards service, and it rewards it by a method that needs no central committee to detect who is being nice. I made the full case in Markets Reward Serving Strangers, and That Is a Moral Achievement.

Verdict: false. Self-interest is universal. Greed, in the sense of grabbing what you have not earned, is exactly what a system of voluntary exchange and enforced contracts is built to punish. Fraud, theft and bribery are crimes under capitalism, and they are crimes because capitalism cannot function when they spread.

Here is a harder truth the screenwriter will not tell you. The economies that tried to abolish self-interest did not get saintly citizens. They got shortages, informers and a black market where everyone was a hustler. Greed did not go away. It just lost its legal outlet. Why Soviet shoppers stood in line, and the calculation problem behind it tells that story.

Myth two: the rich got rich by taking from everybody else

The strongest version. Wealth is a fixed pie. When somebody ends up with a bigger slice, somebody else ends up with a smaller one. Billionaires are therefore proof that others have been shorted.

The record. Follow this idea one step further than its fans do and it collapses under its own weight. If wealth were a fixed pie, then a man in the year 1700 would have had roughly the same slice as a man today, and the only story in history would be who got the knife. The actual story is that the pie grew. Ordinary families now hold, in their pockets, a telephone and a camera and a library and a map that no king could buy at any price. Nobody took those from anybody. Somebody built them, and millions of people paid for them willingly.

Here is a worked example, labelled as a hypothetical. Picture a man who invents a better way to pack boxes and sells it to a thousand warehouses. Each warehouse pays him $1,000 a year, because the packing method saves each of them far more than that in labor. He collects $1,000,000 a year. Every one of those thousand warehouses is better off, or it would not have paid. The inventor is a millionaire, and nobody was taken from. That is what the "fixed pie" theory cannot even describe.

Now the honest qualifier, because I owe you one. Some people do get rich by taking. They take through fraud. They take through government favors: a subsidy, a protective regulation, a bailout, a contract written for one bidder. That is not capitalism. That is the thing capitalism's critics claim to oppose, and conservatives have been attacking it longer than the critics have. big companies love the regulations their small rivals cannot afford explains how the rulebook gets written by the people it protects.

Verdict: mostly false, with an honest exception. Voluntary exchange creates wealth because both sides expect to gain. The rich who earned it by serving customers took nothing. The rich who got it by lobbying for a law are a government problem, and the cure is less government favoritism, not more.

Myth three: trade is zero-sum, so one side always loses

The strongest version. In every exchange there is a winner and a loser. The businessman profits, so the customer or worker must have been fleeced.

The record. This one fails by a simple test. Ask why anyone makes the trade. If you hand over $4 for a sandwich, you did it because you value the sandwich more than the $4. The seller did it because he values the $4 more than the sandwich. Both of you left better off by your own lights. If trade really were zero-sum, nobody would do it twice.

The best-known statement of the point is David Ricardo's, from 1817, in On the Principles of Political Economy and Taxation. Even a country that is better at making everything gains by trading with a country that is worse at it, because each side does best by specializing in what it does at lower cost. The famous example is English cloth and Portuguese wine. See Comparative advantage explained with Ricardo's wine and English cloth for the arithmetic.

Smith made the household version of the same argument in 1776: it is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The tailor does not make his own shoes. The shoemaker does not make his own clothes. Each buys from the other, and both are better dressed than if each had been stubbornly self-reliant.

Verdict: false. Voluntary trade is positive-sum. There are real losers in the economy, a point I will take up under creative destruction below, but the loss does not come from the trade itself being a robbery. It comes from somebody else doing the job better, which is a different thing.

Myth four: profit is theft from the worker

The strongest version. A worker makes a product worth $100, is paid $60, and the owner pockets $40 he did not earn. This is Marx's idea of surplus value, and it has a seductive simplicity.

The record. Three problems, and they are fatal.

1. The owner is not paid for nothing. He put up the money for the building, the machines and the materials before a single product was sold. He took the risk that nobody would buy. The worker was paid on Friday whether or not the product ever sold. Profit is the reward for bearing that risk, and loss is the penalty. A system that paid owners only when they won would have no one willing to own anything.
2. Value is not made by labor alone. A man digging with his bare hands and a man digging with a steam shovel work equally hard, and one of them moves a hundred times more earth. The difference is capital, somebody's saved and invested money. The old labor theory of value cannot explain why the same hour of work is worth more with a better tool. The Value of a Thing Is Not the Labor in It, and Menger Answered Marx shows how Carl Menger's work in 1871 on subjective value answered the whole structure.
3. Profit is a signal. It tells everyone that customers want more of this thing and that resources should flow here. A loss tells a company it is using up more than it creates. See profit is a signal, not a sin, and what a loss tells a company. A bureaucrat with no profit-and-loss statement has no way to know whether he is creating wealth or burning it.

Verdict: false. Profit is not stolen from labor. It is the return to risk, capital and good judgment, and it is the signal that steers an economy toward what people actually want.

Myth five: Hollywood tells the truth about business

The strongest version. Look at the movies. Businessmen are polluters, schemers and cold-blooded killers in expensive shoes. Surely artists with a sharp eye for human nature have noticed something.

The record. They have noticed that conflict sells tickets, and a corporation makes an easy villain, since it has no face to sue you for libel. That is not an economic analysis. It is a casting decision.

Notice what the movies skip. Where is the film about the small manufacturer who covers payroll out of his own savings during a slow quarter? Where is the movie about the plumber who built a company of twelve people and trained each of them? One of the few Hollywood pictures that treats a businessman as a human being is It's a Wonderful Life (1946), and it is worth noticing that the story's banker is the villain precisely because he is the one who hoards, while the hero runs a building and loan that helps families own homes. See It's a Wonderful Life Is the Most Conservative Film Hollywood Ever Made.

And one more thing about the 1987 film itself. Gekko is not a capitalist. He is a corporate raider, and the plot turns on an insider-trading scheme, which is a crime and ends with the SEC making an arrest. The only reason there is a plot is that the law exists. If you want a lesson from Wall Street, it is that capitalism without the rule of law and the prohibition on fraud turns into the thing its critics say it is. Which is why conservatives insist on both.

Verdict: the movies are entertainment. Take your economics from the record. A film can be a fine night out and a poor guide to a payroll.

Myth six: capitalism has no rules, no morals and no conscience

The strongest version. Markets are a jungle. Leave them alone and the strong eat the weak.

The record. A market is among the most rule-bound things human beings have invented. It needs enforceable contracts, a court system that can punish fraud, a stable currency, property titles that mean something and a government that does not seize the factory when it turns a profit. Where those exist, as in the United States for most of its history, enterprise thrives. Where they do not, you get what you find in places with weak courts and a ruling family that takes a cut of everything.

Moreover, markets sit inside a moral world that makes them function. Friedrich Hayek and Wilhelm Röpke, among others, argued that commerce rests on habits that it does not itself produce: honesty, thrift, promise-keeping, trust. See Wilhelm Röpke Defended Markets and Warned They Need Something Beyond Them. A businessman who cheats once may win. A businessman who cheats as a policy runs out of people who will deal with him. The market is a repeated game, and in a repeated game reputation is capital.

Pope John Paul II's encyclical Centesimus Annus (1991), written after the fall of communism in Europe, gave a qualified yes to the business economy, with the condition that it be set inside a strong moral and legal framework. That is not a conservative invention. It is the settled teaching of people who think about the moral side of economics for a living. See John Paul II's 1991 Encyclical Weighed Capitalism After Communism Fell.

Verdict: false. Capitalism needs rules, and conservatives are the ones saying so. The rules it needs are old ones: do not lie, do not steal, keep your word, and let the courts enforce it.

Myth seven: capitalism leaves the losers with nothing

The strongest version. The factory closes. The buggy-whip maker is out of a job. The market does not care.

The record. Joseph Schumpeter called it creative destruction, and it is real and it hurts. New products kill old ones. A town built around one plant suffers when the plant shuts. A conservative who pretends otherwise is not being serious.

But look at the other column of the ledger. Every product you now take for granted was created by destroying something that came before it. The people who lost their jobs to the automobile were real people with real mortgages, and a country that had protected them from the automobile would have deprived every one of their grandchildren of a car, a suburb and a decent life. See Creative destruction, why the buggy whip makers lost and America won.

The conservative answer to the losers is not to freeze the economy, which just spreads the loss to everybody. It is to make adjustment easier: low taxes, light regulation that lets new employers open fast, a safety net that is local and personal where it can be, and the dignity of work. The great mistake is to treat the buggy-whip maker as a permanent ward instead of a man who can learn something new.

Verdict: half true, and the right answer is mobility, not a freeze.

The Founders would not recognize the cartoon

One more thing, because the screenwriters never mention it. The men who built this country knew exactly what property meant. John Locke, whom they read the way you read a family recipe, argued that a person owns his labor, and that when he mixes it with the earth he makes something his own. See Locke Said Property Begins the Moment Your Labor Mixes With the Earth. The Fifth Amendment says that no person shall be "deprived of life, liberty, or property, without due process of law," and that private property shall not "be taken for public use, without just compensation." Property sits right next to life and liberty in that sentence. The Founders did not think of ownership as a necessary evil. They thought of it as the thing that lets an ordinary man say no to a king.

That is the point the movies cannot see. Private ownership is not a favor to the rich. It is the poor man's protection against the powerful, because a man with a little property of his own, a shop, a farm, a savings account, does not have to ask anyone's permission to live.

The case in brief

1. Capitalism is private ownership, voluntary exchange, open prices and the freedom to keep a profit or take a loss. Greed is not in the definition, and fraud is a crime under it.
2. Adam Smith wrote about the baker's self-interest in 1776 and about human sympathy in 1759, and meant both. A market pays you for serving strangers well.
3. Voluntary trade is positive-sum, profit is the return to risk and capital, and wealth that is created is not wealth that was taken.
4. Wealth taken through fraud or through special favors from government is real, and the cure is the rule of law and less favoritism, not abolishing ownership.
5. Creative destruction has real casualties, and a decent country helps them move forward instead of freezing the economy against change.

What you can do: read the Fifth Amendment aloud to your family at dinner this week, then ask who in your town runs a small business and what one rule makes it harder to keep going.