Regulation and Ethical Values

Hoisted from comments the way Brad DeLong does it…

This was posted by JMOHR

I know that I will be accused of being dogmatic, partisan and attacking the capitalist religion. However:

1. The risk of loss (moral hazard) is a factor both in the market and criminal spheres. The greater the reward for inappropriate action, the greater the risk that someone will indulge in such action.

2. CEO compensation packages and bonuses (as well as those for many of the top executives) have increased to such an extent that it has greatly increased the reward for undertaking actions that are unethical or illegal in order to recoup the reward. This is enhanced by golden parachute packages that ensure financial security even if the individual is fired.

3. The types of actions that are taken by these individuals and their subordinates often causes losses to the corporation and to society far in excess of the reward gained by the individual participant.

4. Business tends to be amoral. This creates an attitude the ignores broader societal concerns and social imperatives. This culminates in an attitude of “nothing personal, it is just business..” This may be good for corporate profits. It is not necessarily good for the needs of society in general.

5. The amoral nature of business leads to an attitude of stretching the law or regulations to the greatest extent possible. The results in two significant problems. First, as incentives grow, the tendency to step over the line grows. This is especially so in an environment when the complexity of the law results in an inherent advantage to large companies that can afford protracted litigation. Second, transactional costs for all business grows significantly when greater oversight and laundry lists of rule must be developed to combat illegal activities.

This is not a rant against capitalism. I was part of a large aerospace company as senior counsel with responsibility for managing D&O liability, government contracts, EH&S, corporate security, ITAR and other such areas. Competition and innovative thought did a lot of good. However, I also saw a lot of damage done (especially those who could really boost their bonus) by gaming the system. The corporation often fought against regulation and “doing the right thing” while many times spending significant amount to face grand juries, fight civil suits and otherwise make up for the stretching of the law or ethics by that person who was going after that extra $100k bonus. We, who had to clean up, usually spent much more.

It is, as usual, a matter of balance. The atmosphere that brought Enron and the other scandals of that era bespoke too much laxity in regulation and a lack of moral and ethical values on the part of too many corporate executives. The current scandals involving no bid contracts and fraud in Iraq bespeaks of too cozy an arrangement between government officials and corporations. It just needs to be brought back into balance.

I have retired and own my own business now. I have had to get on some of my employees for being to accommodating to our customers. You have to remind them that we were in business to make money and not just to be nice. I am sick and tired of the attitude of some conservatives that the free market must be totally unregulated as well as used to tackle all problems. No market is free. Even Adam Smith knew that certain problems were not susceptible to resolution by markets. Not all capitalists are evil and the government cannot intervene and solve all problems. We would accomplish far more if we recognized the good and bad in each approach and work towards practical resolutions.

This was a comment posted by JMOHR.