Let's Return to Responsible Capitalism, by William Pfaff
Source Dave Anderson
Date 02/03/09/02:06

Published on Monday, March 4, 2002
in the International Herald Tribune

PARIS -- 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

Copyright 2002 International Herald Tribune

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