When a giant private firm such as Masterbond or Enron crashes into bankruptcy, critics of capitalism rejoice. With a new stick they can flail away again at the world’s all-time most successful system for creating and sustaining growth, jobs and prosperity. You see, they crow, it doesn’t work; it’ll all end in tears; you’ll be sorry you didn’t listen to our wise recommendations for ever-increasing taxation and government intervention, ownership and control.
Yet, far from highlighting a general problem, the Masterbonds and Enrons demonstrate capitalism’s virtues. And many of the suggested remedies clearly demonstrate anti-capitalism’s vices. It is not government regulation and bureaucratic control that provides us with the greatest protection from inept and dishonest firms. It is market agents such as investment analysts, financial journalists, investors, competitors and the like. These market agents keep companies under surveillance and warn the public about problems sooner and more effectively than any costly government agency. Government regulations and regulators counteract the efficiency of markets by giving people a false sense of security allowing errant firms more time to wreak destruction than they might otherwise have had.
Governments should give more attention to providing effective and accessible courts and police to prosecute fraud and theft. If they carried out these functions more efficiently they would avoid most of the problems they seek to address through regulation and the creation of ever more government agencies.
Small companies that are badly run go under all the time in great numbers. So do large companies less often only because there are far fewer of them and they are subjected to more sophisticated market-driven imperatives. Paradoxically, misinformed socialists, who profess disdain for big business, argue that they should be protected from bankruptcy. Proponents of the market, on the other hand, are of the view that Enron-type collapses have a salutary effect on all concerned. A competitive market system needs to ensure that, big or small, you can win and you can fail.
What must be stressed is that common crime, such as corporate fraud and theft, is not a part of the market. The market minimises white collar crime, exposing and punishing those who are guilty of such dishonesty.
It is a great tribute to the market system that an Enron or Masterbond failure creates such surprise and fuss when it happens. Some pundits even talk excitedly about ‘market failure’. However, an Enron failure is one more powerful piece of evidence of market success. By not allowing such firms to survive, the market forces them to release resources and create market and employment opportunities for more able current and future participants.
Unfortunately, this can’t happen in state operations. They never fail no matter how badly they perform. Or more accurately, they keep failing forever but are never liquidated because they are propped up by money taken from taxpayers. Yet nobody ever talks about government failure, presumably because it’s the norm. In most government systems, failure is so endemic and constant that people don’t even bother to complain. There are delays and hold-ups and black-outs and an endless array of failures. Many individuals in government are doing their best, though that is not obligatory. The problem lies not with the individuals, but is an inherent part of the system. It’s just the nature of government.
Critics of capitalism love to quote California’s state-rate-capped electricity utilities and Britain’s capital-investment-constrained Railtrack as examples of failures of the capitalist system. What they choose to ignore is that it was identifiable state intervention that crippled and finally destroyed those firms. Thus badly handled privatisation and misguided regulation is not blamed on the true culprits, the responsible government agencies..
In debates over the merits of private and state-owned firms there is a strange tendency to use different standards in evaluating their performance. Excellent performance from private firms is taken for granted, as is the requirement that they be subjected to open competition, the only system for discovering whether firms are providing consumers with the best available goods and services at the best prices, and for eliminating those that are not. For some reason public enterprises are not expected to perform well or to compete in open markets. On the contrary, they are granted statutory monopoly protection, which allows them to perform inefficiently and badly with no threat of bankruptcy, and to provide consumers with poor services at high prices.
The disappearance of Enron and its ilk are a boon to consumers. What South Africas and the worlds consumers need is to have a similar form of creative destruction discipline imposed on state-owned firms. The results may make the Enron collapse look like a Sunday-school picnic.
Author: Leon Louw is the Executive Director of the Free Market Foundation. This article may be reprinted without prior consent but with acknowledgement. The patrons, council and members of the Foundation do not necessarily agree with the views expressed in the article.
FMF Article of the Week\7 November 2002
