Posted on 05/18/2002 9:38:54 PM PDT by AM2000
Many people reading about the recent spate of business scandals in the USA may conclude that capitalism is a pretty dreadful system. We have long moaned and groaned about crooked Indian businessmen who inflate profits, hide liabilities, manipulate markets, and break a hundred laws. But the US scandals show that crooked businessmen exist everywhere.
This week, some of the biggest energy companies in the US such as CMS, Dynegy and Reliant admitted that up to 80 per cent of their electricity trades in California were bogus. They indulged in fictitious sales to one another to create the illusion of a boom in revenue. They also indulged in various dirty tricks (some of which could be criminal and lead to prosecution) to exploit loopholes in power regulations (like artificially creating power congestion and then getting paid to relieve it).
This showed there was nothing unique about the peccadilloes of Enron, the seventh biggest company in the world some months ago, that hid huge debts off its balance sheets and overstated profits to create an illusion of prosperity when in fact it was heading for bankruptcy. Enron was abetted by one of the celebrated Big Five of accounting, Arthur Andersen, which is now in the dock for criminal obstruction of justice. The most celebrated giants like General Electric and Boeing stand accused of fudging their accounts to show ever-rising quarterly profits. Microsoft, the biggest of all, is on trial for monopolistic behaviour. Pfizer, the biggest drug company, stands accused of manipulating drug prices, and last year, a cartel of drug companies were fined for trying to rig vitamin prices. Big oil companies are being investigated for rigging petrol prices.
Crooked behaviour is not uniquely Indian or American. It is inherent in human behaviour, and can reach great heights in a capitalist system. Now, market systems have enabled many countries to achieve stunning improvements in living standards that would have been considered impossible a century ago. Businessmen seek to enrich themselves, not society. But competitive, transparent markets force businessmen to compete on a level playing field, because of which the main gains of all their innovation and enterprise go to consumers. For the 500 biggest companies listed in Fortune magazine, net profit averages only 3.3 per cent of sales.
For that very reason, however, businessmen are constantly tempted to find ways to reduce competition and transparency to increase their profits at the expense of customers. This can take legal forms (lobbying, innovative book-keeping, exploiting loopholes) or illegal forms (bribes, fraud, rule-breaking).
No wonder, then, that so many people are utterly disgusted with capitalism and seek alternatives. No wonder they find the profit motive a morally unacceptable basis for ordering an economic system. When the main actors of such a system are self-serving, manipulative and greedy; when they fudge facts, make false claims and promises, bend the law in various ways and indulge in outright crimes, how the outcome be at all satisfactory? Answer: for the same reason that self-serving, manipulative and greedy politicians produce a satisfactory outcome called democracy.
The argument for a market system is exactly the same as for democracy. Winston Churchill once said that democracy is a very flawed system, but all the others are so much worse. The same is true of capitalism: it is a very flawed system but the others are so much worse. Enron hid its liabilities and exaggerated its assets. But do not all political parties hide their political liabilities and exaggerate their political assets? Many crooked business promoters promise investors the moon in order to raise money. But do not politicians also promise the moon to get votes?
Companies fudge their books and make inflated claims to mislead gullible investors. But do not politicians make inflated claims to mislead gullible voters? Businessmen claim to represent the national interest while feathering their nest (by, for instance, demanding high import barriers in the holy name of swadeshi). But politicians in a democracy also claim to represent the national interest while feathering their own nests. Businessmen indulge in bribery. So do politicians. Businessmen revel in black money. So do politicians. Businessmen hire hoodlums to beat up workers or ruin a rival’s business. Politicians too hire hoodlums to capture polling booths and sabotage rivals’ rallies. Businessmen intimidate and buy up rivals to reduce competition. Politicians too use intimidation and money to buy defectors.
There are many criminals in business. There are many criminals in politics too. The use of money, muscle and influence to sabotage rivals and competition is a feature of democracy no less than of capitalism. Why, despite all this, do we regard democracy as the best political system? Because it is grounded in choice for the ordinary man, and freedom to choose is a paramount virtue that makes other freedoms possible. In democracies, the ruler is chosen by ordinary citizens and voted out by them too.
Politicians do their best to subvert free choice through the use of money, manipulation and muscle. Yet the freedom to choose empowers ordinary citizens so much that, despite a thousand flaws, democracy turns out to be more desirable and beneficial than the most well-meaning autocracy.
Democracy creates a market for political goods. Capitalism creates a market for material goods. In both cases, the freedom to choose gives the ordinary man in the street greater power than the biggest political or economic giant. By shifting his vote, the ordinary citizen can oust the most entrenched politician, and by shifting his custom he can bankrupt the most entrenched company.
Lenin was logically consistent in refusing to allow freedom of choice in either political or material goods. What I find amusing is the notion of many democratic socialists that the people must be free to choose their own rulers, but cannot be allowed to choose what goods to buy; that political licensing is abominable but industrial licensing is moral. There lies the road to serfdom.
I propose a toast to our beautiful, if imperfect world!
This is precisely why Communism is always doomed to failure. Communism can only succeed in a society populated solely by saints.
In reality, Communism attracts just as many crooks as capitalism but with one difference. Under Communism, the crooks are the only ones with the guns.
Any other system is, by definition, inimacal to that spirit.
Yes, I know he actually said that about democracy, but capitalism fits, also.
An interesting choice of words ... There's a Nobel prize winning author -- Fredrich Hayek -- that won the Nobel prize in Economics after writing "The Road to Serfdom," which carries the same theme I see in this piece.
Hint: it's the one that most effectively decentralizes and distributes power, and most effectively allocates resources, rewards constructive action, and discourages destructive or useless action.
This guy is within a hair of the truth, but he's not quite there. Capitalism does NOT lead to corruption. It is big government that leads to corrpution. When an overregulating, oppressive government wields too much power over a free market, the market responds as always by allocating its resources in a rational fashion. I.e., when bribing a government official, whether it be overt or covert (e.g., campaign donations), is more profitable than reinvesting in infrastructure or lowering prices to increase demand, then that is what will happen. The market always makes rational choices. It is the citizens through their choice of government that to various degrees fail capitalism.
This is why we must decrease the size of government, despite what the bleeding-heart types say. The ONLY type of campaign-finance reform that will work is reducing the amount of influence that the bureaucrats have to peddle. Supply-side campaign-finance reform, if you will. But no, we keep increasing the government in a self-defeating effort to address the 'evils' of capitalism. Sigh.
Well said, Sir. And if it weren't only 10:30 in the morning where I am right now, I would open a bottle of Bulgarian Gorchitsa to toast your point and your screen name.
Then, you are against zoning regulations? I can buy the house next door to you, and put in a hog farm?
I am not sure that the US has less corruption, in total dollar terms, than other nations. It is just that the USA produces so much more that the corruption seems small percentage wise.
I am just think out loud here...
I am not advocating anarchy. Zoning regulations are fine to the extent that the regulations are responsive to the people that are affected by them (i.e., that they reflect an actual agreement of the people who live in the 'zone'). On the other hand, if we had a system like the EU, where your zone would be controlled by Brussells even if you lived in, say, Krakow, I could easily bribe my way into putting a pig farm next to your home and you couldn't do a damned thing about it except move. After all, the Commissioner decided that it is for the benefit of the people despite your personal inconvenience, fellow citizen. What are you going to do? Vote against the Commissioner. Ha!
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