According to Federal Reserve chairman Alan Greenspan, “infectious greed” is to blame for the scandals engulfing firms like Enron, WorldCom and Global Crossing. On this view, which virtually all public voices now embrace, businessmen are a breed of predators, eager to lie, cheat and steal in pursuit of profit. In other words, the extent to which people are motivated by making money is the extent to which they are motivated to be crooks. And it is only through government controls, therefore, that society can be protected against the inherent corruptness of capitalist profit-seeking.
In fact, the opposite is true. Engaging in fraud undercuts a company’s value — as the market is amply demonstrating. What money-making requires is honesty and integrity. And the “greedier” a businessman is, the more committed he must be to scrupulous practices.
The fundamental principle of business is trade: the voluntary exchange of value for value, to mutual advantage. To succeed, companies vie with one another to ensure that what they offer — be it cars, tomato soup or bookkeeping — is of consistently high quality. A company whose product is defective, or which seeks to cheat its customers, loses its business. Consider the fate of Arthur Anderson, Enron’s accounting firm. This spring, although Arthur Anderson’s wrongdoing had not even been established, its major clients swiftly took their business elsewhere. Today, Arthur Anderson is effectively defunct.
The need for straight-dealing is inescapable, even in a company’s own bookkeeping. Companies routinely have to raise capital and must therefore meticulously guard their credit ratings. A corporation’s stock price and financial reports indicate its current worth and its ability to create wealth in the future. By earning a reputation for objective accounting statements, a company secures the trust of bankers and stockholders.
Any stain on its credit rating — or even the suspicion of wrongdoing — could mean overnight bankruptcy. Late last year Enron was accused of trying to inflate its worth by hiding $27 billion of liabilities. As the rumors of malfeasance emerged, Enron’s stock price plummeted, as did its ability to borrow money.
To create wealth means to create goods and services which offer a value to the buyer — and that requires an unremitting dedication to improving the product and to giving the customer exactly what he believes he is paying for. Introducing a new car, for instance, requires about $2 billion dollars of R&D, years’ worth of engineering studies — and considerable risk of failure if the product does not match the market’s demands. It is only the manufacturer’s quest for profits that has transformed the automobile from a luxury to an affordable necessity of every family. Today’s cars are cheaper, safer and better equipped because manufacturers know that the way to make money is by offering us ever-enhanced vehicles — not by fleecing us through shoddy goods.
Far from being too “greedy,” too many of America’s CEOs are not greedy enough. They are pragmatic corner-cutters, who fail to recognize that there is far more wealth to be achieved by a consistent, long-range policy of honesty — by creating a quality product and maintaining the company’s reputation over many years — than by squeezing out some range-of-the-moment advantage.
The antibusiness lobby is clamoring for more regulations to protect consumers and investors. But the laws necessary to prove fraud and to punish the guilty already exist, and should be objectively applied. New regulations won’t deter the dishonest few — but will hamstring the innocent. For instance, one proposed regulation would have CEOs personally certify the accuracy of everything on their financial statements. Imagine the potential for innocent, inconsequential errors on the statements of large corporations. Companies would have to expend far more time and money on their accounting than would be necessary were they assumed innocent until proven guilty. That effort earns them nothing; it merely shields them from the predations of zealous bureaucrats.
Nearly four decades ago, an astute economist got it right when he observed that “it is precisely the ’greed’ of the businessman or, more appropriately, his profit-seeking, which is the unexcelled protector of the consumer.” That economist, writing in Ayn Rand’s Capitalism: The Unknown Ideal, was . . . Alan Greenspan.