On October 23, Alan Greenspan told lawmakers that “those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief” at the market melt-down.  (http://www.iht.com/bin/printfriendly.php?id=17206624 )  At issue (in Greenspan’s testimony and in various opinion pieces since) is our whole concept of capitalism: the markets, rational self-interest, the lot.  Many questions are being asked about it.  But in the end, those anxious questions boil down to one: is capitalism, which Adam Smith defined for us as a “self-regulating” mechanism a good thing?

Interests are Passions

That may be the wrong question.  For Adam Smith wrote in a world where, as Albert O. Hirschmann documents in his The Passions and the Interests: Political Arguments for Capitalism before its Triumph, it was understood that interest was just another name for passion.  As Hirschmann explains, beginning with Machiavelli many people began to believe that “one set of passions, hitherto known variously as greed, avarice, or love of lucre, could be usefully employed to oppose and bridle such other passions as ambition, lust for power, or sexual lust” (p. 41).

Of course this dim view of humanity was difficult for most to swallow.  (Even Machiavelli, brilliant as he was, could not sell this idea.  He never did manage to procure employment with the Medici.)  For the notion to take hold, the countervailing passions had to be re-conceptualized as something benign or at the very least innocuous.  The term “interest” did the job because, as Hirschmann explains, it connotes predictability (a valuable asset in an age beset by wars and civil wars) and harmlessness.  As Dr. Johnson famously put it, “There are few ways in which man can be more innocently employed than in getting money.” 

And so, by the seventeenth century passions and interests (which had once been one and the same) were seen as opposites.  Passions were unruly and dangerous while interest was calm, rational, and predictable.  By the seventeenth century, rational self-interest was seen as our better angel.

Forgetting the Legacy

This positive view of interest has stayed with us from Adam Smith to John Meynard Keynes.  Thanks to it, we have come to accept that there is something wonderfully predictable about the business of making money.  If we do not see the money-maker as virtuous, we at least think of him as a rational (i.e., not dangerous) “actor”.

Consider the whole concept of “the law of supply and demand”.  The very phrase presupposes that there is a law governing both. (In fact, the phrase “law of supply and demand” makes the whole business seem pretty impersonal—it takes the people out of the picture.)  Or, to quote the way Robert L. Heilbroner has described an aspect of Keynes’ theory in Worldly Philosophers, a depression can result from a “a strange and passionless tug of war.  There are no greedy landlords, no avaricious capitalists.  There are only perfectly virtuous citizens prudently attempting to save some of their incomes and perfectly virtuous businessmen who are just as prudently making up their minds whether the business situation warrants taking the risk of buying a new machine or building a new plant.  And yet, on the outcome of these two sensible decisions the fate of the economy hangs” (p. 268).

There is no passion involved here, Heilbroner assures us.  (And forgets about fear, even panic that might lead both the citizen and the businessman to spend less.)  But why should he remember?  We are so accustomed to disassociating passion with business; so accustomed to assuming that a businessman acts in his rational (and predictable) self-interest that we have completely forgotten that interests are passions re-named.

Can We Get It Right?

As language changed, so has our perception of the world altered.  We have come to believe that self-interest is rational and forgot that it is short-hand for a countervailing, less-bad passion.  We are still living in Adam Smith’s world; a world-view that Alan Greenspan told us was “wrong”.  Perhaps to get out of our current economic mess, we may need to look beyond that world; to the thinkers who conceptualized capitalism before it became common-place.  Perhaps we need to recall that interest too is a passion.

As David Brooks (who has recently re-discovered what he has called “the behavioral revolution” (http://www.nytimes.com/2008/10/28/opinion/28brooks.html) put it “if you start thinking about our faulty perceptions, the first thing you realize is that markets are not perfectly efficient, people are not always good guardians of their own self-interest…”  People can and do get quite passionate about their money, their livelihood.

And so perhaps the right question to ask is: To what extent can this passion be predicted?