The real Gordon Gekko

 In the 1987 film, which became a cultural touchstone and won actor Michael Douglas an Oscar, Gekko is a ruthless trader who pioneers risk arbitrage and then moves into real estate (check out his fictional biography at Forbes). Daniel Berger looks at the real-life inspiration for Stone’s film–and asks what lessons it still holds in our crisis-gripped world.

The back story to Stone’s movie was not the leveraged buy-out craze of the 1980s but rather the insider trading scandals of that period. Moreover, the model for Stone’s protagonist, Gordon Gekko, was not a reputable figure (like those mentioned as being responsible for the current financial crisis) but was a man more of a Bernie Madoff type: Ivan Boesky. Boesky was simply a low-life stock trader who was thought to be uncannily adept at stock picking, but who was, in reality, paying people off for inside information and who got caught by the authorities.

Additionally, Gekko’s striking, even iconic remarks about greed and finance were not original to Stone. In fact, Stone (or his researchers) must have learned of them from a speech that Boesky gave at the University of California at Berkeley in 1985. Because of his unexpected success in the market, Boesky –who, in his own irony, had become an observant Jew — was also a philanthropist of Jewish institutions.

But the phrase “greed is good” was not original to Boesky, either. Boesky’s speech-making, like his trading, was also phony–plagiarized from others. Interestingly enough, Boesky’s source for his provocative statement about greed and finance originated from none other than the then much-reputed economist and pundit, the late Milton Freidman (a fact of which Oliver Stone was apparently unaware).

Freidman was the leading advocate in the U.S. of the free market system and market capitalism, believing in an extreme form known as laissez-faire capitalism (which has also become known as free market fundamentalism) and which postulated that markets were both self-regulating and self-correcting and that government intervention in the market system (including government regulation) would cause economic inefficiencies and harm the economy.  In so far as financial markets were concerned, laissez-faire capitalism took the form of the efficient market hypothesis which postulated that the most efficient allocation and use of capital came about by the unfettered operation of financial markets and that open, unregulated markets perfectly established the economic value of financial assets.

According to Freidman, the market and its vaunted efficiencies came about as a result of competition among market participants, so-called “market forces” and sometimes referred to as the “invisible hand” of the market.  Because of the presence of competition, the self-interest of market participants cancelled itself out and was an engine of economic progress.

Freidman argued that not only was economic self-interest not to be feared, but was a force for social good, because the effect of competition was to drive the system toward efficiency.  Naked self-interest is just another term for greed, as Freidman recognized, leading him to conclude that, “greed is good.”

Freidman’s views on capitalism and greed epitomize the current state of an extremely prominent economic philosophy in the U.S.: the laissez-faire, unregulated free market school of political economy. From an economic policy perspective, free market fundamentalist views amount to endorsing a form of economic organization (market capitalism, so called “free enterprise”) based on acknowledged immoral motives and promoting or acquiescing in immoral activities in economic decisions and policy making. Supposedly, for policy reasons, society as a whole is better off with the free enterprise system than it otherwise would be, because — not in spite — of its reliance on the unrestrained exercise of self-interest (i.e. greed) in the market place. The reasoning is that the greatest good for the greatest number will result from the adoption of naked self-interest as the basic driver of the economic system.

The failure of this logic has now been authoritatively acknowledged by none other than Milton Freidman’s intellectual successor and most recent high priest of free enterprise and laissez-faire capitalism, Alan Greenspan. In Congressional testimony last October and in response to the question of what went wrong in financial markets, Greenspan admitted to a “flaw” in his and Friedman’s “greed is good” logic: Namely, Greenspan had believed that self-interest would have prevented market participants — both individuals and their firms — from engaging in the risky, reckless financial speculation which imposed large losses on them and caused the current crisis. Self-interest and competition, far from disciplining the market, resulted in windfalls, either windfall profits or unanticipated, catastrophic losses.

Markets have been proven to work across a wide range of economic conditions, to be relatively efficient and to have produced, at least cyclically, high levels of income and employment. However, they have drastic deficiencies and flaws which render them neither self-regulating nor self-correcting. Markets, particularly financial markets, need to be systematically regulated by the government to prevent excesses and abuses by market participants and to maintain stability.

Once again, we have learned that history will repeat itself, if society is uninformed or deluded enough to make the same mistakes of the past. We have also learned the heavy costs of free market fundamentalism and laissez-faire capitalism. It is, as they say, an expensive history lesson - - which could and should have been avoided.

Daniel Berger is an attorney in the field of complex litigation, including securities and anti-trust litigation, and has a broad-based knowledge concerning the structure and functioning of the US economy and US financial markets.  He practices in Philadelphia.