Column: Corporate scandals demonstrate the problem with capitalism

Published 12:00 am Tuesday, July 9, 2002

First it was Enron, then other companies like TYCO and Xerox, and finally the biggest one of all, WorldCom &045; owner of MCI. Arthur Andersen, one of the largest accounting firms in the world, has had its reputation tarnished and may go out of business. It’s hard to know what words to use to describe those responsible: liars? cheaters? swindlers?

It still isn’t clear how deep the crisis goes. I’ve read that many people &045; both inside and outside Wall Street &045; are apprehensive about more companies &uot;downsizing&uot; their profits for the past few years. On the surface, it seems to have become acceptable for top executives and other managers to exaggerate profit margins by &uot;cooking&uot; the books, by playing fast and loose with the rules that are supposed to govern financial accountability for corporate America.

The criminals will be brought to light, probably, and somebody will be fined or go to jail, eventually. But whatever happens to the perpetrators of these frauds, the thousands of workers who have been fired &045; through no fault of their own &045;

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will still have lost their jobs. They may get the satisfaction of seeing their former bosses punished, but I doubt they will get anything more substantial than that.

These crises and scandals involving major corporations and their accounting practices illustrate the paradox that I see lying at the heart of capitalism.

On the one hand, you don’t have to be an economist to see that a free market system is the most efficient way to organize industry and capital. Corporations, as part of that system, maximize the power of individual investors and limit risk by spreading it out over large groups. This is the way to make economies expand and provide benefits to an ever-increasing number of people.

But on the other hand, you don’t have to be a &uot;liberal&uot; to also see that capitalism can be just as inhumane as the totalitarian systems that once provided a different model for economic activity. The market goes up or down regardless of how it might hurt people or the environment. Corporate behavior, as has been demonstrated time and again, is &uot;amoral&uot; by design; an individual’s own ideas about right and wrong just don’t play a role in corporate decision-making, which has to be judged by &uot;objective information.&uot; So defining what &uot;right and wrong&uot; mean often falls to those who are most concerned about short-term profit and less concerned about long-term consequences &045; either for the company or for society.

As I have listened to and read reports about the current problems in corporate America, I have heard people express their rage at the greed of those at the top of the corporate hierarchy. I have heard claims that these types of problems are inevitable in a free market. But I have also heard defenders of the status quo in the economy, who prefer to think that the problem lies with just a few, extremely greedy and unscrupulous men. The system is just fine, they say.

Now I agree that much of the current situation is the result of unscrupulous people, who manipulated their companies’ financial statements. But this problem also involved decisions made by people who are ethical, who were persuaded or encouraged that the &uot;cooking&uot; of books was perfectly acceptable &045; because everyone else was doing it, too.

So this situation also illustrates how the definition of right and wrong in business needs to come from external sources. Despite what advocates of a totally free market say, the market cannot police itself without causing needless suffering for many people. The state has a legitimate purpose in requiring businesses to comply with regulations of all kinds because only it has the necessary power to get the attention of corporations, their managers and their investors. The trick is in knowing how much regulation and what kind.

Unfortunately, our country’s leaders often show a curious reluctance to learn from mistakes and problems in the past. There were reasons why the government passed anti-monopoly laws and why banking, insurance and the stock market were so tightly regulated. It is not wise to back off from those rules and laws every time the economy starts expanding. When we do, and things inevitably fall apart again, ordinary people end up carrying the brunt of the consequences.

David Behling is a rural Albert Lea resident. His column appears Tuesdays.