A Word That's Too Dirty Even for Wall Street

This Week: A Word That's Too Dirty Even for Wall Street

U.S. Treasury Secretary Timothy Geither stated flatly last week that “capitalism will be different” and that American companies would reset the way they work.

The ideological roots of capitalism were codified by Adam Smith back in the 18th century. A simple distillation of Smith’s ideas would go something like this: In a free and open market society, every niche market will eventually be filled by necessity—because of a profit motive. If that guy is selling apples, then I guess I will sell oranges. Smith went on to state that the need for a large governmental system would be minimized since prices would set themselves, resources would be utilized with thrift and new ideas would be prized and harnessed accordingly.

For the first 140 years of America’s history, that sort of capitalism and a democratic government made for an inventive, hard-working and free-willed society. We made the best of everything and our average citizens were hard-working and full of enterprise because of a realized reward at the end of a hard day's work. One could come to America and simply become anything or anyone that one wanted to be (unless you were a slave or Irish, but that is a whole different essay). Sometime in the 1950s, when all of our men from World War II had settled nicely into their well-deserved office jobs in a thriving post-war economy, corporate America and its underlying greed started to rear its ugly, fat face.

More and more of the economy came to be dominated by corporate entities instead of family farms, small businesses and private companies. One of the downsides of that type of ownership is that corporations are by definition amoral actors. Their responsibility is to the shareholder—profit must be their only consideration. Aiming for profits is all well and good—that’s what drives small businesses, too. But the corporate charter divorces that aim from any other considerations that might affect decision-making at a family or private company (like the effects their decisions have on their community). Decisions being made by corporate executives at AIG and various banks were bad for society, but they were basically the right decisions for the corporations, as they were big money-makers. You could even argue that it would, in fact, have been irresponsible on the part of those executives not to exploit regulatory loopholes and innovative business models that could yield such huge profits. But when the gap between those two ends—corporate good and societal good—becomes wide enough to cause the kind of crisis we’re now in, you have a problem.

We are glad to see people like Bernie Madoff personally punished for their greed, manipulation and insider know-how. Markets, on the other hand, do not care about who did what or how long a jail sentence is. Markets only seek stability and then they move on. Markets will not seek to address underlying issues on their own. After all, those executives who put us in this mess may have been laid off, but they still have their fat bank accounts. And the imperiled corporations are getting our tax money to stay afloat. It’s a win-win for insiders. But it’s not fair to the rest of us.

For markets to function as Adam Smith discussed, regulation is absolutely necessary: How else can you insure the quality of information that allows markets to operate in a rational way, for instance? How else can you avoid fraudulent assertions by a corporation about its own financial health? How else can you keep corporations from over-reaching when their sole responsibility is to create profits, consequences be damned? You can’t. Despite the way “regulation” has been hurled around like a bad word in recent years, a properly functioning market is a regulated market. As the current crisis has shown, the openness Smith lauded—and which is necessary for markets to work correctly—is not something businesses are inclined to foster on their own; insiders stand to gain too much from a lack of transparency. Openness must be forced upon them via regulation.

The machinations of American capitalism may well be getting re-tooled. Ceilings on corporate salaries and new federal watchdog groups could help stem drunken, reckless financial greed. And that’s a good thing. Many of the talking heads right now would not admit it publicly, but it’s possible that the markets may indeed be stabilizing. Why would the commentators admit it—how could the situation be improving if their solutions to the problem have not yet been implemented? As I have stated from my first column here months ago, turn the volume down when FOX News, Bloomberg, CNBC and MSNBC are airing.

Market capitalism isn't perfect, but it’s the best system yet devised and has created the best standard of living for the most number of people in the societies built on it. But for it to survive, it must be regulated, it must be fair and it must be ethical. Transparency and fairness are two principles that must be made priorities as we work our way out of the mess we’re in. With those principles, the markets can hum efficiently to all of our benefit, as they should; without them, we will inevitably face another crisis like the one we are going through now.

Previously: Don't Believe the Hype: The Recession is Not Over