Ways & Means
Capitalism’s Limits
The lessons of Enron and other crises
By Carl Pope
More noted as an economist, John Kenneth Galbraith is also
a prophet. In 1966, Galbraith told my college class that once
leadership passed to those who had not lived through the
Depression, the safeguards installed in its wake would be
dismantled. Scandal, crisis, and economic collapses were
sure to follow. "Democratic capitalism," Galbraith said, "has
institutional flaws but only personal memories."
Just as Galbraith predicted, since the early 1980s we have
weakened regulators’ power over markets, deregulated
electricity, de-emphasized enforcement of environmental
standards, and diminished the authority of state public
utility commissions. Enormous economic dislocation has
followed. Among the most recent results were price gouging
in California, the collapse of Enron, and the resignation of
the EPA’s chief of enforcement.
Those unwilling to concede that the corruption is pervasive
generally blame rogue buccaneers at a handful of
companies. "I really think the public does not share the
judgment that there is somehow some political malfeasance
here," White House Press Secretary Ari Fleischer suggested
hopefully. Treasury Secretary Paul O’Neill even held up the
Enron collapse as "part of the genius of capitalism."
But in an essay in the Nation, corporate critic William Greider
fully grasped the Galbraith lesson: "Enron makes visible a
more profound scandal—the failure of market orthodoxy
itself," he wrote. "The rot in America’s financial system is
structural and systemic. It consists of lying, cheating, and
stealing on a grand scale."
Greider’s analysis was echoed by no less an authority than
Paul Volcker, former head of the Federal Reserve Board.
"The crisis in the accounting and auditing professions is not
a matter of the failure of a single company," Volcker warned
Congress. "You’ve got a problem with attitude here which
goes to the heart of the accounting firms themselves."
The putrefaction in the financial world extends to
government as well. Just ask Eric Schaeffer, the widely
respected chief of enforcement for the EPA who served
since 1990 under both Democratic and Republican
administrations. Schaeffer resigned in February, lamenting
that he was "fighting a White House that seems determined
to weaken the rules we are trying to enforce."
We’ve proven Galbraith right; we’ve forgotten the lesson of
the Great Depression: Capitalism needs limits. This is not a
new idea. It goes back to James Madison’s concept of
checks and balances and the bedrock assumption of the
Constitution that no single faction or interest could be
trusted to remain honest. Even though Madison could not
have conceived of the modern multinational corporation,
that same assumption applies.
The recent fervor for deregulation overcame decades of
caution with a quasi-religious faith that the marketplace can
police itself. According to free-market theology, "command
and control" rules can be replaced by "market-based"
mechanisms that will keep corporate accounting honest,
electrical prices fair and reasonable, the air fit to breathe,
and employees’ retirement plans safely invested. This
anti-regulatory gospel, preached from pulpits like the
University of Chicago, taught a generation of lawyers and
managers that profit is not only the bottom line, it is the
only line.
A fine example was once leaked to me in the form of an oil
company’s "decision tree" regarding the illegal pumping of
natural gas from public lands. In the best business-school
fashion, managers were asked to quantify the odds—and
dollar costs—of such outcomes as "government fails to
discover the unpaid royalties," "Department of Justice
decides not to prosecute," "judge decides to suspend the
fine," "employees serve time in jail." It ended with a "return
on investment" calculation, where the investment in
question was lying to the government and stealing from the
public.
In the field of environmental enforcement, the Bush
administration has been practicing unilateral disarmament.
"We are unable to fill key staff positions," charged Eric
Schaeffer in his letter of resignation. "Proposed budget cuts
would leave us desperately short of the resources needed
to deal with the large, sophisticated corporate defendants
we face." Not surprisingly, civil cases prosecuted by the EPA
declined by 10 percent in the first year of the Bush
administration, and criminal fines were down by 25 percent.
Nevertheless, EPA Administrator Christie Whitman laughs off
lawsuits filed against her agency by environmental groups,
even though, in the Sierra Club’s case, 80 percent of them
are successful. "They don’t change anything we do," she
says. So we have the nation’s highest environmental official
saying that even when federal judges rule that her agency
has been breaking the law, it doesn’t matter. What kind of
signal does that send to businesses considering whether to
ignore court orders?
There is a different kind of signal we can, and should, be
sending. Calling Teddy Roosevelt "our greatest
environmental president," Schaeffer then quoted him:
"Compliance with the law is demanded as a right, not asked
as a favor."
Capitalism needs limits, and it’s up to us to set them.
Personal memories of the Great Depression guided the last
round of economic checks and balances, which led the
United States to enormous prosperity and to the birth of
the environmental age. Personal memories of the California
energy crisis, Enron, and the EPA should be more than
enough to spur a new generation of essential regulatory
safeguards.
Carl Pope is the executive director of the Sierra Club. He can
be reached by e-mail at carl.pope@sierraclub.org. |
