Corporate Ethics Red Herring

With the mounting of accounting scandals among major US corporate giants, Appointed President Bush gave a speech to Wall Street on July 9th arguing that “America’s greatest economic need is higher ethical standards.” (Never mind rampant poverty in the cities, the 40+ million Americans without health insurance, and falling wages coupled with rising insecurity in most segments of American labor markets.) Echoing the sentiments of representatives from both major parties Bush has focused attention on a few individuals, repeating the familiar and predictable refrain: it’s only a few bad apples.

This classic bourgeois response–an obsessive focus on individuals and personal ethics–diverts attention from more fundamental problems in the structure of the US economy. The current scandals sweeping the business community reflect tendencies and contradictions which are endemic to capitalism generally but especially acute in its American version. Consider the following structural analysis.

In his speech Bush called for the reaffirmation of “the basic principles and rules that make capitalism work: truthful books and honest people, and well–enforced laws against fraud and corruption.” However, as any economics or business school professor will tell you, the first and most fundamental principle of capitalism is to “maximize profits.” Actually, the market theory of neoclassical economics only says that one should “maximize utility,” which is a fancy way of saying that you should be efficient in pursuing happiness and that you should trade what you have and don’t want for things that you want and don’t have. The important distinction is between markets per se and capitalism, because while capitalists and their apologists couch their arguments in the “free market” of neoclassical economic theory, the capitalist markets of reality work much differently than the free markets of the theory.

And it is in the incentives of capitalist structures, and the actions, routines and relations that capitalist culture legitimates, that we find the seeds of the current “corporate abuses” and the current crisis. Before discussing this causal logic in detail a further note on the distinction between capitalism and the “free market” is necessary. In economic theory what it means to have a “free market” is that there is perfect competition, which means two fanciful things. First, everyone has complete information about all of their options and the outcomes of all potential courses of action. Second, and more importantly for our purposes, it means that there is no power in the <market–i.e>., there are no monopolies or oligopolies but an infinite amount of small buyers and sellers. Getting back to reality, we have capitalism, which can be defined as a tendency toward monopoly in the market (thus, in direct contrast to the concept of the “free” market). Think of Exxon-Mobile, Wal-Mart, Ford, GM, GE, Disney, AOL-Time Warner, etc. These corporations have massive market power. Indeed, Exxon-Mobile, GM and Ford have revenues greater than the national budgets of all but a few of the world’s nearly 200 countries.

The capitalist firm did not even exist in classical economic theory. Indeed, it wasn’t until the 1970s that economists began to seriously examine the firm. Now that the firm has a solid place in (neoclassical) economic theory, we have a second fundamental principle of capitalism, much more fundamental to the workings of the system than “truthful books and honesty,” as Bush put it: when maximizing profit everything, including workers, is a “factor of production.” In other words, as quickly as profit is elevated to sacrosanct status, everything else–from product quality to the workforce to responsibility itself–becomes a cost, to be reduced, displaced or avoided if possible. Profits over people; profits over environment; profits over community; (fake) profits, even, over shareholders. It is a contradictory system indeed. Only a fool would believe that a lecture in ethics would trump the incentives of profit over everything else.

We are taught, of course, that competition creates incentives for innovation and entrepreneurialism. Perhaps there is some truth to this. But recall the reality of monolithic multinational corporations. Their power in the market severely distorts market incentives from those of the textbook free market. And consider the property and patent laws–both massive governmental interventions in the so-called free market–upon which capitalist market economies are founded. While it is argued that patents create incentives for innovation, as economist Dean Baker has argued, “an enormous amount of innovative work takes place by scientists employed in universities, foundations or the government, where the hope of windfalls from patents would be close to zero.” Pharmaceutical companies, for example, charge prices on patented drugs hundreds of times what they would otherwise be, arguing that this is necessary to fund research for new drugs. Yet, rather than researching new drugs for ailments without cures, much of what takes place in R&D in the pharmaceutical industry is copycat research: developing slightly different (so as to bypass an existing patent) but functionally similar versions of existing highly profitable drugs.

Patents in the pharmaceutical industry, in Baker’s words, lead to a “monopoly [which] in effect transfers income from consumers to pharmaceutical companies.” The more general point is that the structures of the US capitalist market economy–from those discussed above to labor law, industrial relations, and American-style capitalist culture (especially short-termism in financial markets)–generate specific types of incentives that place profits not only over people but also over ethics. The economy is structured in its very essence to privilege wealthy individuals and corporate profits. Just as the US economy systematically generates low-wage, dead-end jobs (and hence poverty) so it structurally generates the corporate leaders who will seek profits and personal rewards by any means, whether by polluting rivers, busting unions, sweating teenage girls in developing countries, or accounting tricks.

The organizations and institutions that constitute the US economy shape it in particular ways that not only transfer wealth from the poor to the rich but also encourage and legitimate actions in which the only goal is profit (and sometimes it just makes more sense to cook the books). Concern yourself with the workforce or the environment, indeed, customers, investors or ethics, only insofar as enforced and monitored regulations make you (and note that most regulations on capital have not been monitored or enforced since before the Reagan years).

Bush tries to convince us that the problem is that “Too many corporations seem disconnected from the values of our country.” For all the talk of honesty, fair play or whatever else, the values inscribed in our economic institutions are singular: profit. Contra Bush, the scary thing is that the corporations are right on par with the core values of capitalist America. Again, Bush tries to convince us otherwise: “Our society rewards hard work and honest ambition.” He forgot to mention that the median weekly wage fell 12% in real (inflation-adjusted) terms from 1973 to 2000. I leave it to the millions of hard working and honestly ambitious American workers at or below the median to assess Bush’s assertion about the relationship between hard work and rewards. In any case, the current “corporate abuses” making headlines are symptoms of much deeper, structural problems in the way we produce goods and services.

Matt Vidal is pursuing his doctorate at the University of Wisconsin in Madison.

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Matt Vidal is Senior Lecturer in Work and Organizations at King’s College London, Department of Management. He is editor-in-chief of Work in Progress, a public sociology blog of American Sociological Association, where this article first ran. You can follow Matt on Twitter @ChukkerV.