Capitalism on the
Hot Seat
by Llewellyn H. Rockwell,
Jr.
The opponents
of capitalism believe they have found a one-word refutation of its merits:
Enron. Speaking at the World Economic Forum, for example, George Carey, the
Archbishop of Canterbury, said that this one word introduces a "big question
mark over capitalism" and demonstrates that it must "operate within
boundaries," by which of course he means the State.
Are we
supposed to believe that before Enron, Mr. Carey was all for corporate
capitalism?
His comments
introduce a big question mark over how closely he reads the business pages.
The failure of Enron illustrates many things: that government-mandated audits
of publicly held corporations have not achieved their aims, that
government-business partnerships are prone to corruption, that some firms
disproportionately benefitted from the Fed-fueled economic boom and are now
paying the price.
Or if you
believe Enron is a criminal matter, you might even say that its collapse
illustrates that the human population has its share of gangsters, hucksters,
and con men, and that some of them are drawn to the world of corporate
finance, where they thrive in boom times.
What it does
not illustrate is the downside of the market economy, which is about both
profits and losses, thank goodness. That the market permits and accommodates
business failure is a virtue of the capitalist economy, one not found in the
public sector. The free market, when it’s not being distorted by government
intervention, includes mechanisms that punish firms that cook the books and
exaggerate their productive power.
Wild
overvaluations do not last in the private sector, whereas government failures
can go on for decades. Imagine if government agencies were privately owned and
traded, and their bonds included a default premium. Their collapse would make
Enron look like slow motion. How long would you hold on to your HUD stock, for
example? Like all government agencies, its books have been in complete
disorder for decades.
As bad as the
failure of Enron is, at least we know that it failed. The market was in a
position to make a judgment about its operations. We owe this to the fact that
private businesses, whether or not their stocks trade, are accountable to
their customers and to financial realities. Congress can storm around and
decry the evils of Enron’s management, but the only reason anyone knows
anything about it is that Enron had to function in a free market – unlike
Congress. We can regret the collapse while remembering that it is far better
that unviable operations fail than survive.
In socialist
economies and in the public sector generally, unprofitable industries not only
survive; they are never exposed as unprofitable in the first place. The
scandal of Enron is infinitesimal compared to institutions like Amtrack, the
Post Office, or the Department of Defense, which can blow through billions and
trillions without providing adequate service. They get away with it only
because they can use coercion instead of persuasion to profit from the rest of
us.
It’s
apparently true that Enron fudged its books, invented profits that didn’t
exist, and hid losses by creating far-flung subsidiaries. But such shenanigans
can’t be compared to the nonsense at the federal level, where there is no such
thing as profit and loss, and where it takes an expert to discover basics such
as how much the budget is growing relative to revenue. If Enron’s finances
were tainted by corruption, every line in the federal budget represents a
special interest seeking something for nothing.
Nonetheless,
the very word Enron has become a slogan for rabid anti-capitalists who hope to
turn the political mood – for government, against private enterprise – into a
far-reaching agenda. What that means is more laws designed to prevent
contingencies that they will inevitably end up encouraging.
Consider, for
example, the law that requires audits of public companies. It ended up
cartelizing the accounting industry and creating a false sense of security on
the part of the investment community. In other words, the law created the
conditions that permitted Enron to get away with its shenanigans longer than
the unfettered market would have allowed.
So far, all
the reform proposals would do more of the same. One idea would prohibit
auditors from moonlighting as consultants. But exactly when and where
conflicts of interest are likely to appear can only be settled by market
convention through trial and error. Government, the king of conflict of
interest, certainly can’t do it by arbitrarily deciding what kind of contracts
corporations can draw up with consulting companies.
There’s also
the inevitable demand for more financial transparency. But here again, just
how open corporations ought to be with their books is a question for the
market process to resolve. Corporations whose stock is traded around the world
have every incentive to strike the right balance, and stockholders who are not
lulled into a false sense of security by government regulation will have
reason to keep careful watch.
One of the
stupidest proposals would have protected Enron employees but would harm
virtually every other employee of a major corporation: the idea of limiting
how much an employee can own of his employer’s stock. For decades,
left-liberals have pushed employee stock ownership on grounds that it muddies
the waters between wage earners and owners. Now, suddenly, these same people
turn on a dime and regard employee stock ownership as a corporate trick to
keep bankrupt companies afloat. For these people, everything must be either
mandated or prohibited, with nothing left to the choice and responsibility of
individuals.
No government institution is in a position to
investigate Enron, much less legislate to prevent another.
February 7,
2002
Llewellyn H. Rockwell,
Jr. [send him mail],
is president of the Ludwig von Mises
Institute in Auburn, Alabama, and editor of LewRockwell.com.
Copyright ©
2002 Mises Institute
