Theory Tipping

Ideoblog is valiantly hoping headlines are not where we learn.

What Greenspan actually said was

I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.

Greenspan was wrong in thinking banks wouldn’t take the risks they did.

So perhaps, this whole incentive thing that is at the root of capitalism, the profit and loss system that incentivizes firms is overrated.

Well, Greenspan’s not the first one to say that. Here’s what another free market guy, Adam Smith, had to say:

The directors of . . . companies … being the managers rather of other people’s money rather than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which [they would] watch over their own. . . .Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

Wrap up.
“The idea that incentives can get out of whack was not exactly invented by Alan Greenspan or Henry Waxman in Congress today. The question has always been whether the market or government is better able to figure out incentives.”