An enterprising manager walks into Steve Jobs’s office and lays out his plan for Apple‘s future. “It’s simple,” he says. “Step one, stop giving employees bonuses. Step two, save money by doing away with our Quality Assurance process. Step three, pad our earnings in order to drive up our stock price. What do you think?”
Talk about an indecent proposal. In reality, that kind of plan would get a manager fired. But believe it or not, this reflects the conventional view of how profit-seeking businessmen think.
Health insurance companies make money by denying patients needed tests. Doctors make money by giving them unnecessary ones. Speculators make money by recklessly bidding up the price of stupid investments. Short sellers make money by driving down the price of sound ones. Lie, cheat, steal, roll the dice and cut corners: People think that’s the easy path to business success.
In his pitch for Dodd-Frank, President Obama complained that in “the absence of sound oversight, responsible businesses are forced to compete against unscrupulous and underhanded businesses, who are unencumbered by any restriction on activities that . . . take advantage of middle-class families, or, as we’ve seen, threaten to bring down the entire financial system.” In Obama’s view — a view many Americans share — being “unscrupulous and underhanded” is a competitive advantage.
Is it any wonder, then, that laws and regulations shackling businessmen are increasing by the day? If lying, cheating and stealing really are the road to riches, then businessmen can’t be trusted and economic freedom can’t be tolerated.
But it’s not true. In a truly free market, the fly-by-night shysters who try to make a killing get killed — by the government, which outlaws force and fraud, and by the market, which shuns any company that fails to create genuine value.
Just take a look at WorldCom. CEO Bernard Ebbers had spent nearly twenty years growing WorldCom into a telecom leader. But when the company ran into financial difficulties in the early ’00s, Ebbers hid its troubles through fraudulent accounting. After the $11 billion fraud was exposed, Ebbers was sentenced to twenty-five years in prison and WorldCom went belly-up.
Think about your own line of work. Think of the time, energy and money your organization pours into research and development, quality control, motivating employees and searching for innovative ways to meet its customers’ needs. Can you succeed via dishonesty and corner-cutting? We’ve spoken to businessmen all over the world and they all say the same thing: “Oh, you couldn’t get very far in my industry that way. But those other industries . . .”
They’re wrong. The only way to profit in a free market over the long run is via production and mutually beneficial trade. Henry Ford grew rich by building us cars. Walt Disney grew rich by bringing us delight. Robert Noyce grew rich by inventing the integrated circuit and making modern computers possible. Sam Walton grew rich by selling us virtually everything dirt cheap. The profit motive doesn’t drive people to cut corners but to create value.
And it is with the long run that most profit-seekers are concerned. In 1982, when children in Chicago started dying from Tylenol that had been deliberately tainted with cyanide, Johnson & Johnson immediately pulled over thirty million bottles from stores. Short term, the recall was costly, but the profit motive led Johnson & Johnson to ignore the short-term costs and make a decision that ultimately saved the Tylenol brand. This is the norm under capitalism — the Madoffs are a rare and fleeting exception.
In today’s semi-capitalist, mixed economy, however, Obama is right that a lot of charlatans are lining their pockets. But he’s wrong that government’s the solution: it’s the problem.
Take housing. Thirty years ago, when the housing market was much freer, lenders knew they couldn’t make money doling out bad loans. So they meticulously examined the credit history of potential borrowers and asked for substantial down payments.
Government intervention in the market changed all that. Thanks to Washington’s affordable housing crusade, unscrupulous mortgage bankers could make easy money by lending to anyone with a pulse and selling worthless paper to government-backed behemoths Fannie Mae and Freddie Mac.
But in a truly free market, profit-seekers have no more motive to resort to chicanery and crime than do teachers or doctors. The path to profit isn’t plunder — it’s productivity.