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Let's Return to Responsible Capitalism

4 March 2002

The Enron scandal is the result of a profound and malignant mutation that has taken place in American capitalism during recent decades, affecting the capitalist model everywhere.

The scandal has revealed the predatory and corrupting side to the new corporate system, its social irresponsibility and exploitative nature, which affect the lives of every American who works for a large business, every corporate stockholder and every regulatory official and political officeholder in the national government.

The mutation began, as most bad things do, in a theory. This theory turned Adam Smith's observation that a market provides the best mechanism for arbitrating values and establishing the general interest into an essentially utopian justification of business laissez-faire, ignoring the pragmatism, social insight and ethical content of Smith's argument.

The modern version said that if you cease to regulate corporate behavior - "get government out of business" - and if each corporation and individual seeks its own self-interest, an economy of maximized efficiencies will result, to general benefit.

The theory's most powerful appeal to individuals, corporations and politicians obviously was that it rationalized the pursuit of self-interest. That alone should have been a warning. Americans are supposed to know that there is no free lunch; eventually, you pay.

The utopianism of the new theory combined with its blessing of greed to make it irresistible. Promoted in the business schools and press during the 1970s, it underlay the economic doctrine of the Reagan administration. It was installed in Britain by the indomitable Margaret Thatcher and eventually came to dominate public policy choices as well as business practice in most of the advanced industrial states.

Under American pressure, deregulation became the ruling theory in all of the international economic institutions, setting the course and terms of globalization in the non-Western world.

Its practical effect was not only to remove external restraints on corporate conduct but to dismiss internalized ethical inhibitions.

The theory destroyed the kind of capitalism that had been practiced in the United States from the time, early in the 20th century, when Theodore Roosevelt broke up abusive "trusts" and established the Commerce and Labor departments to regulate corporate behavior.

A new form of popular capitalism then emerged, which paid high wages (as Henry Ford argued, so that workers could buy the cars they manufactured) and considered itself obligated to respond to community interest. Public policy regulated natural monopolies and public services. The new American capitalism that Enron exemplifies has failed to produce the economic justice it promised. Its natural tendency has been to produce oligopolies striving to become monopolies. This has happened in airlines, media, communications, banking, aerospace and defense industries and most other major industrial sectors.

It has also produced a huge and morally indefensible transfer of wealth and power from the workers who directly produce wealth to executives and the stockholders who supply capital (usually irresponsibly so; during the run-up in dot-com stocks, the average individual holding in a company like Yahoo was seven days).

It has subordinated both short- and long-term corporate interest to quarterly profit return and the logically absurd stock market demand for constant profit growth, an expectation resembling a belief in fairies. This profit demand corrupted company accounts, prompting a rich variety of dissimulations and lies to the public as well as to the market analysts.

This happened despite the fact that "everyone" in the markets knew what was going on - but thought that it could be kept going on. It further tainted the U.S. accounting profession, already accustomed to double-dipping, consulting for a client while auditing it.

Now virtually no one any longer believes that U.S. company reports are trustworthy or that American corporate profits are what they are claimed to be. According to a Merrill Lynch survey of fund managers, there has been a 20 percent drop in confidence, to under 40 percent. Abroad, the opinion of American business is worse yet.

The system made executives wealthy, while they increased "productivity" by firing employees and working the rest harder. The executives and directors' roles too often were objectively predatory, devoid of responsibility either to society or to long-term company or stockholder interest.

Today those who profited do not even defend the system. They squeal on one another and pass the blame. The former head of Enron, Jeffrey Skilling, says he never really understood how he was making all that money.

The public, however, has grasped that the rules of deregulated market capitalism licensed a system of organized swindle. The anxiety in the U.S. Congress over Enron shows that legislators sense the public outrage, even if the Bush administration seems completely deaf to what has happened.

The drunken party is over. Some of the party-givers and party-goers are now on their way to jail. We need a return to responsible capitalism.

William Pfaff, Paris
Published in the International Herald Tribune 2002 International Herald Tribune

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