What Greed Is and Is Not in Business?

An old saying from Wall Street states that the market is driven by only two emotions: fear and greed. In a situation of high inflation, the latter has recently flooded public discourse, leading to accusations of greed against traders, restaurateurs, landlords, and, inevitably, bankers. The price increases implemented by companies to exploit inflation and enhance their profit margins have even received a new name: greedflation, or ‘inflation of greed‘.

Data shows that rising corporate profits are responsible for nearly half of European inflation over the past two years, as companies have raised prices significantly more than the rising energy costs. According to data presented by the governor of the Croatian National Bank, margins in Croatia have contributed to inflation 3.5 times more than wages.

Due to all of the above, questions have begun to arise regarding how large increases in profit margins are justified. Is every price increase above production costs greed? And what is the boundary between greed and normal profit?

The Foundation of Capitalism

Answers to these questions are quite divided, not only among philosophers and economists, but even economists themselves are debating the justification of current price increases and responses to them. Likewise, the word ‘greed’, despite its negative connotation, does not have a bad connotation for some economists, as they argue that capitalism itself is founded on greed, since its primary motive is profit generation.

– Economic exchange has existed for 5000 years, and the desire for profit drives humanity. Since the Code of Hammurabi, there has been an attempt to find a balance between profitability and social justice, or social benefit. However, ultimately the market will always find a balance and define whether a price increase was excessive, as higher profits will attract competition and level prices. A similar situation is now in tourism. It was expected that tourists would pay any price, but some landlords had to lower prices, and it remains to be seen whether some guests, for example Germans, will decide to come to Croatia next year and thus punish high prices. Therefore, there is no boundary between greed and profit, as ultimately the market will balance prices and profit, “explained economic expert Damir Novotny.

In a competitive market, supply and demand should level prices, so some economists believe that blaming corporate greed for inflation is like blaming gravity for a plane crash.

Companies always strive to charge as much as they can for their products and services. The only reason we do not pay 100 euros for milk is due to greed in another format: competition. Competition forces companies to offer lower prices to outdo their competitors. Greed is tolerated today because the harsh contract of the invisible hand is accepted. It is generally believed that greed can do good, but not that it is inherently good.

The Matter of Correct Justification

In a study published in 2013, a graduate sociology student from Stanford University showed that 61 percent of Americans claim they would support a salary cap for individuals with exceptionally high incomes, regardless of how hard they worked or what they achieved.

Research by Amit Bhattacharjee from the University of Pennsylvania showed that people even consider the act of seeking profit harmful to society. When participants were asked to compare two hypothetical organizations that were identical except for their ‘for-profit’ or ‘non-profit’ status, people perceived for-profit companies as less valuable and socially harmful compared to non-profits. The perception of greed as harmful extends to the act of profiting, which is, of course, the only way capitalist markets can function.

Such high-moral stances seem to be easily changeable. An experiment from Duke University showed that people are more willing to profit at the expense of others when they can more easily rationalize their actions. Participants were asked to imagine themselves in the role of a bank CEO and were given a list of ethically questionable actions that would bring profit to the company. When told that their primary goal was to maximize shareholder value, they were much more willing to engage in those ethically questionable actions, and willingness increased even more when told that their year-end bonuses depended on achieving that goal. Those who were financially educated were even more prone to questionable behavior. The experiment thus showed that many can be greedy when given the right justifications for their behavior.

Wealth Is Not Evil

Nikola Nikšić from the consulting firm Konter for business consulting and economic services believes that greed is evil, but that wealth is not.

– Greed is not a good trait from any perspective, both for individuals and for the forms of organizations in which they live and operate (family, company, state…). It is an excessively pronounced tendency to acquire material goods and privileges. The concept of greed is associated with flaws such as ruthlessness, insatiability, selfishness, egoism, and vanity. Unfortunately, it is considered one of the greatest vices of today and a basis for corruption, “emphasizes Nikšić, who believes there is a fine line between greed and normal profit.

– Profit is a short-term measure of success. The profit that brings direct benefits to some stakeholders in the company’s ecosystem, owners always and very often managers through bonuses and rewards tied to planned profit and profit margins. At the same time, if profit is achieved in a way that causes harm to other stakeholders (employees, customers, suppliers, the budget and local community, investors, the natural environment), such short-term profit will eventually negatively affect organizational excellence, or long-term sustainable, stable, and secure business, “explains Nikšić.

You can read the full text in the new printed and digital edition of Lider.