Thinking Things Over
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Robert L. Bartley is editor and vice president of The Wall Street Journal, where he has guided editorial opinion for over 25 years. He is responsible for the editorials, op-ed articles and Leisure & Arts criticism. He also directs the editorial pages of The Asian Wall Street Journal, The Wall Street Journal Europe and the Online Journal. Mr. Bartley joined the Journal in 1962 and served as a staff reporter in the Chicago and Philadelphia bureaus before joining the editorial-page staff in New York in 1964. He was appointed editor of the editorial page in 1972, editor of the Journal in 1979 and a vice president in 1983. He won a Pulitzer Prize for editorial writing in 1980. Mr. Bartley holds a bachelor's degree in journalism from Iowa State University and a master's degree in political science from the University of Wisconsin. He has received honorary degrees from Macalester College, Babson College and Adelphi University. Mr. Bartley invites comments to edit.page@wsj.com1. Please put BARTLEY in the "Subject" field. |
Not even the most ardent advocates of capitalism claim it can abolish pride, greed and the rest of the seven deadly sins. Sinners do get flushed out by recession, however, and we find that Enron, a darling of the mid-1999 to mid-2000 blowout, was a house of cards. Maybe, though the jury is not yet even impaneled, a crime.
Such spectacles are occasion not only to pursue the miscreants but also to keep the larger picture in mind. For all of human failing, capitalism as an economic system has emerged triumphant from the long trials of the 20th century, providing the developed world once unimaginable prosperity and, not so incidentally, historically unprecedented personal freedom.
As we try to prevent another Enron, it will pay to keep in mind that the success secret of capitalist economies is decentralized decision-making. When a multitude of buyers and sellers meet in a marketplace, the vagaries of human judgment even out, facts prevail and true values are reached. Over the centuries since the first money-changers, this principle has been applied to wider and wider economic spheres, reaching its highest expression in today's international financial markets, directing the investment of capital around the world.
The Money Changer and
His Wife
by Claeszon Marinus von Reymerswaele, 1539
Capital markets are particularly good at funding innovation, providing investment in promising ventures where government technology priming consistently picks losers. Market-driven economies also have great recuperative power; far from buckling from the shocks it has received over the last year, the U.S. economy has stabilized and is probably already recovering. Too, advanced capitalism has developed mechanisms, pension systems and mutual funds in particular, for sharing the bounty through a deep middle class. Peter Drucker has observed that with shares of big corporations predominantly held in pension funds, workers do own the means of production, just as Karl Marx wanted.
Results can of course be disrupted by market imperfections, for example when one buyer or seller knows things others do not. Perhaps also by the passion of the crowd, though as history unwinds "bubbles" and "panics" often turn out to have rational explanations after all. Whatever the exceptions, though, year in and year out market-determined decisions outperform even the best-informed and most brilliant individual mind.
A capitalist economy does not arise spontaneously from the anarchy of piracy and war. Government plays an absolutely essential role in establishing a rule of law, protecting property rights, enforcing contracts and providing sound money. But it is also true that over history the greatest threat to property is government itself, acting through immoderate taxation, stifling regulation and even outright seizure.
These minefields suggest some care in designing arrangements to head off human folly; the system works because people are allowed to fail, indeed to make fools of themselves. It will not be an advance if we charter some group of brilliant and well-informed mandarins to head off human folly. In reality, worse, the mandarins would soon be marching to the tune of some or another batch of politicians feeding this or that narrow constituency.
How then to curb the seven deadly sins? Surely the law plays a part, and as we learn about the inner workings of Enron venality seems more and more likely. If it comes time to indict, I hope prosecutors will not rest with a safe case turning on some never-before-enforced provision Congress in its wisdom has declared a felony. To satisfy what's on everyone's mind, they need to see whether they can make the case that top executives set out to steal from their shareholders.
What is particularly disturbing about Enron, though, is that failures run far beyond individual executives. Directors suspending their ethical guidelines to allow self-dealing partnerships. Accountants and lawyers studiously looking the other way, even to the point of personal jeopardy. Wall Street analysts failing in their principal duty of correctly evaluating share prices. This systemic failure is being blamed on "conflicts of interest," an explanation that strikes me as, well, jejune.
The systemic failure is not a matter of economic arrangements, but of the societal collapse of standards and morality over the last three decades or so. As a society we seem increasingly incapable of sitting in judgment of each other -- certainly not on the behavior of prominent entertainers, sports figures or presidents. We have a legal profession that tolerates and even promotes abuse of the legal system in class action suits -- in the current Microsoft claims settlement enriching lawyers while not even trying to give a cent to supposedly injured plaintiffs. What kind of behavior can an "I'm OK, you're OK" society expect from its professionals or business leaders?
Since accountants are bearing the first wave of recrimination, a few special words: They're vulnerable because their exercise is so artificial. The "earnings per share" figures they grind out and argue over have only a vague relation to economic success and market value. Another of Peter Drucker's insights is that "profit" is best defined as that portion of cash flow the government has decided to tax. Dividends are not a tax-deductible cost, for example, though in economic terms they are interest on the capital shareholders have advanced.
Thus any good economic principles course will distinguish between accounting profits and economic profits. On the latter, mainstream economists take one of two views: Some follow Frank Knight, seeing profits as the reward for bearing uncertainty. Others follow Joseph Schumpeter, seeing profits as the reward for innovation -- the monopoly return to an original product, quickly vanishing as imitators arrive. One way to look at Enron's problem is that its economic profits went away, and it sought to substitute accounting profits.
It's fine to close this particular barn door, to crack down on obscure financial footnotes, to have more rules against conflict of interest. But the seven deadly sins do not ultimately turn on economic arrangements. The real answer to Enron is likely to be found in, say, the little sermons on vice and virtue that make William J. Bennett so tiresome to our I'm OK, you're OK sophisticates.
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