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Manus haec inimica tyrannis.

Wednesday, March 3, 2010

A Modest Defense of Gordon Gekko

I recently watched Wall Street again. I must confess, it is one of my favourite movies. True, it has many of the weaknesses of movies made at that time, including some contrived dialogue, a lot of bad music, and very intrusive opening credits (not to mention a very large mobile phone and some very bad hair). But it is a wonderful morality tale, even if, like me, you happen not to agree completely with the moral.

Of course, the movie is perhaps most well-known for Michael Douglas’ portrayal of hyper-capitalist tycoon Gordon Gekko, one of the great cinematic villains. Certainly Oliver Stone intended Gekko to be understood as a villain, and in the commentary to the DVD release of Wall Street he laments the fact that so many viewers failed to appreciate his villainy. To many, Gordon Gekko is a hero.

There are a few obvious reasons for this. For one thing, like any other interesting character, Gekko’s is formed of an almost equal admixture of virtues and vices. Yes, he’s greedy and materialistic. But he’s also brash, driven, clever, and quite charming. He’s a working class kid who made good and sticks it to the Ivy League crowd. I would not myself go so far as to make the case that Gordon Gekko is a hero, but I do think that Stone was too heavy-handed in trying to make him out to be a capitalist bogeyman. I will not try to defend Gekko’s insider trading, his betrayal of his young protégé Bud Fox, nor his stock fraud. Actually the movie is not entirely clear on what exactly this fraud consists of. Others have done a pretty good job of clearing Gekko of any criminal wrongdoing, at least as judged by the somewhat more lax legal and regulatory environment of the 1980s. This is not my area of expertise, so I shall stay away from it.

Aside from his actual criminal activity, the moral case against Gekko seems to be this: he engineers takeovers of businesses in order to liquidate their assets and throw their employees out of work. Furthermore, in a speech put into his mouth towards the end of the movie, he is made to confess, “I create nothing; I own.” In short, he is supposed to be some sort of vampire, getting rich by sucking the blood of creative enterprise.

But this is too crude a picture. Yes, in his notorious speech to the shareholders of Teldar Paper he famously proclaims that “Greed is, for lack of a better term, good!” But for the life of me, I cannot find anything in that speech that is actually wrong. If I have one criticism of it, I would say that he should have replaced the term “greed” with the less provocative “self-interest”, à la Adam Smith.

As to the charge of being a parasitical liquidator, consider this. He proposes to purchase BlueStar Airlines, break it up, and sell off the assets. The land that the hangars sit on will be used for condo development, while the airplanes themselves will be sold off to “some airline in Mexico stupid enough to buy them.” The employees of BlueStar themselves recognize that the airline is being “squeezed by the majors”, indicating that there is already too much competition to make the company viable. Yes, it is proposed to keep the airline going with the help of wage concessions from the unions, but assuming that Gekko has a good eye for profit opportunities, and that he is correct in reckoning that liquidation will be more profitable than keeping the planes in the air, what exactly is wrong with what he is doing?

True, many employees will lose their jobs. But others will eventually get jobs building those condos, etc. (And in fact, BlueStar could probably have afforded to hire more workers if the unions hadn’t been artificially inflating wages and freezing out their non-union brothers and sisters, who would have been willing to work there for less than their unionized counterparts were earning. So who are the real parasites here?)

Many are inclined to believe that Gekko's role in the economy is parasitical, that is, they believe he adds nothing of value to it. He offers no tangible service; he produces no product. This is also commonly the attitude taken towards certain other much-despised economic roles. An example here might be the arbitrageur. An arbitrageur, as the name indicates, is one who engages in arbitrage. That is, he takes advantage of price differences between markets to buy something — whether it be a currency, commodity, or security — at a low price in one market, and then quickly sell it at a higher price in another market. Again, arbitrage seems to many to be a case where the arbitrageur adds nothing of value to the economy, but rather simply sucks profits out of the economic activity of others.

But this attitude is somewhat short-sighted. Arbitrage can serve some valuable purposes in an economy. For one thing, it contributes to the convergence of prices in different markets. The speed at which prices converge is a sign of efficiency in markets. Relatedly, arbitrage performs a signalling role in the economy, transmitting information about markets; heavy arbitrage activity draws attention to the existence of market inefficiencies. Where in the previous paragraph it was said that the arbitrageur sucks up profits from the economic activity of others, we might rather say that he sucks up profits from the inefficient activities of others.

The moral here is that producing goods and services is not the only way to contribute to an economy. The fact is, it is possible for the production of goods and services and the allocation of resources in an economy to be done very inefficiently. The leveraged takeover artists, arbitrageurs, and Gordon Gekkos of the world can correct these shortcomings and make the economy more efficient in the long run. At least that is the theory.

As is common in economics, there are two stories to be told here, a story about that which is seen, and a story about that which is unseen. In the morality tale of Wall Street we are invited to see the employees that will lose their jobs in the buyout and dismantling of BlueStar Airlines. We are not invited to see most of these employees subsequently finding other jobs elsewhere (although, the sad fact is, some of them will not find other jobs, or will find lower-paying ones). Nor are we invited to see the other people who will find jobs in the businesses that will be built up from the cast-off assets of BlueStar.

The fact is that, much like a functioning ecosystem, an economy needs its scavengers and decomposers, those whose role is to destroy non-viable entities so that better and more viable entities can have the opportunity to be born and thrive. The great economist Joseph Schumpeter famously called this process “creative destruction”. Returning to the case of BlueStar, it so happens that valuable resources and assets were being tied up in an enterprise that was no longer making the most efficient use of them. By liquidating the company, those assets were being freed to be allocated to more efficient uses, ones that would ultimately create more value. This is the naked truth behind Gekko’s speech to Teldar’s shareholders, when he says, “I am not a destroyer of companies; I am a liberator of them.”

If Oliver Stone really wanted his character to be seen as a villain, he would have been better-advised to stick to the insider-trading storyline, or to the morality tale about a man who betrays a friend. His commentary on Gekko’s other role in the capitalist system — as creative destroyer — is ill-informed and not to the point.

Gordon Gekko is a great character, but he is only half a villain.

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