Is the American brand of capitalism sick? Socialists and other opponents of the free market order are bound to assume so following revelations that American communications giant WorldCom hid nearly $4.0 billion of costs, a fact which now threatens the firm with bankruptcy. The story comes hard on the heels of the demise of Enron, GlobalCrossing, Tyco, and accountancy firm Arthur Anderson.The situation is a mess.
First off, what has happened in nearly all the cases mentioned above is fraud, albeit fraud on a scale to make one’s eyes water. In a capitalist system run by fallible, gullible and weak human beings, such fraud is going to happen occasionally, human nature being what it is. The law must take its course and the malefactors in these cases must be punished severely, and seen to be punished severely. Already the chill winds of the market are exerting their effect. Investors increasingly demand a premium for holding U.S. stocks and especially those in the technology sector, which has been at the centre of these recent shenanigans. The shakeout will be brutal for some, while those of us with stock portfolios are bound to suffer as well.
Such sagas tend to follow a pattern: rampant gains in a market, followed by a sharp drop; gradual revelations of corporate wrong-doing; shock among the public over the scandal, and then calls for a new set of rules or new watchdog to prevent things going wrong again. Except that they do go wrong again and the cycle is repeated. Similar scandals have happened before and will recur. The system is not fail-safe, which is why ordinary investors must never assume that just because there are rules or watchdogs, they therefore don’t need to be careful about their investments.
More generally, opponents of the market who cite present-day cases as proof of capitalism’s weakness overlook a key point. Namely, fraud is not peculiar to capitalism or indeed business as a whole. Finance ministers perpetrate precisely the kind of accounting chicanery of which a number of these U.S. firms stand accused. Think, for example, about the financial fiddling in which European governments engaged prior to the launch of the euro. If politicians were subject to the same rules on accounting honesty as businessmen, a good number of our political masters would be behind bars.
Finally, as Rand Simberg pointed out, the bulk of these offences happened during the 1990s, when a certain Bill Clinton was President, or so I recall. Makes it kind of hard for the left to taint George W. Bush with this, though that won’t stop them trying.
