The role of the state
The author, former chief economist at the Asian Development Bank and a senior adviser for international economic affairs to former President Lee Myung-bak, is a professor of economics at Korea University.
Human desire is the driving force of the capitalist economy. Adam Smith, founder of modern economics, advocated selfish desire. In the Wealth of Nation published in 1776, Smith wrote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” In the process of pursuing personal interest, he thought social benefit could be delivered.
The same applies in the 21st century. New technologies that change our lifestyle, personal computers, the internet, smartphones and e-commerce, are products of efforts by Bill Gates, Steve Jobs, Jeff Bezos and the employees at their companies for personal gain and success, not their benevolence or public duty.
But when personal greed is excessive, the economy becomes unstable, and many people suffer. In Oliver Stone’s 1987 film “Wall Street,” protagonist Gordon Gekko said, “Greed — for lack of a better word — is good. Greed is right. Greed works.” Not just in the 1980s, but from the Buttonwood Agreement made by stockbrokers in 1792 till today, the Wall Street and financial markets around the world are full of greedy, unethical crooks like Gekko. Countless financial incidents and financial crisis occurred, resulting major damage.
In the market with incomplete and untransparent information, investors can easily lose money. Canada’s Bre-X, a mine development company in Canada, announced in 1995 that it has discovered the world’s largest gold mine, in Borneo, Indonesia. Investors flocked, and the market value of the company went up by 100,000 percentage in three years. But it turned out to be a fraud, adding gold on other minerals to deceive investors.
Overconfident investors, who believe the key to success in the past would still be valid in the uncertain future, are likely to lose money. Humans have hindsight bias that after they see a result, they think they had known the outcome earlier. “I told you so,” they say. “I knew the stock would go up in the end.”
The bias leads to the misleading idea that they can predict the future. They may be swept up by the mood and invest in the asset or cryptocurrency that others made money from, only to end up losing. It is hard for average investors to tell what’s the appropriate value for a certain asset. Compared to the institutional investors with enormous funding, organizational support and information, individual investors get swayed by wrong information.
In the turbulent time, everyone needs self-control to see the situation objectively and curb excessive desire and confidence. For investment or business to succeed, desire and confident are not enough. Competency and luck are needed. Bill Gates and Steve Jobs are smart and confident, but they were also lucky as they could successfully found Microsoft and Apple. Born in 1955, Gates and Jobs founded their companies at age 20 and 21, and it was easy for them to succeed at the beginning of the personal computer era, according to “Outliers” by Malcom Gladwell.
Desire is a basic human instinct, and it is not easy to control. The state should play the role so that human greed and overconfidence do not mess up the economy. Appropriate regulation and supervision enhance market transparency, punish unlawful acts, protect investors, prevent crisis and promotes economic stability. A state regresses if it responds poorly.
Many public servants in Korea have worked hard during the Covid-19 pandemic, but some civil servants and public agency employees were caught for unlawful real estate speculation. Real estate policy led to a surge in housing prices, and young people who don’t own homes have a dark future. The homeowners who worked all their lives to buy a home got a tax bomb, but public servants pursued unearned income. The state needs to control the greed of public servants.
Millions of young people who are uncertain about the future and frustrated by the reality have been dream of making a killing in cryptocurrency. The state hasn’t designated a government agency in charge and has been hands off despite the investment craze. False information is overflowing, and the price is fluctuating. Before criticizing the investors, market transparency should be enhanced, and proper law and policy to protect good-willed investors should be made and executed. The role of the state is to properly control human greed and prevent market chaos and crisis.
Translation by the Korea JoongAng Daily staff.