Well, corrupt activity by corporate executives is on the way out now. Congress is passing new legislation to put tighter clamps on business. That’ll solve the problem.
If you’re so naïve as to believe that, you should consult the timeless wisdom of the great labor leader Samuel Gompers. He was the longtime president of the American Federation of Labor in the late 1800s and early 1900s. Gompers was also a Constitutionalist who advocated sharply limited government. Laws, he maintained, promise more than they can deliver. Accordingly, he believed the fewer laws the better.
In 1915 he wrote,
Many conscientious and zealous persons think that every evil, every mistake, every unwise practice, can be straightway corrected by law. There is among some critics of prevailing conditions a belief that legislation is a short-cut to securing any desired reform—merely enact a law and the thing is done. Now enacting a law and securing the realization of the purpose the law is aimed to secure are two vastly different matters.
A law merely imposes restrictions under which persons must operate. It does not ban anyone from continuing to pursue ends that may be affected by the law. The highly motivated study the law to ascertain the forms of conduct that may still be permitted. Cynics describe this process as “searching for loopholes.” Frequently some may be found and exploited.
Consider the quarter-century-long string of laws aimed at limiting contributions to political campaigns and requiring disclosure of donors and donations. But candidates for the higher public offices still need hoards of money to underwrite their efforts, and supporters are happy to help—and sometimes in the most ingenious ways.
Currently in Michigan we have a controversy animating the Democratic gubernatorial primary race. The St. Clair County Democratic Party is placing ads that favor one candidate and criticize past actions of another. These commercials are considered “issue ads” and fall outside the scope of present laws. The sponsor need not disclose the expenditures of the ad campaign nor even the identity of the donors financing it. Laws promote inventiveness.
Laws also run the risk of doing more harm than good. In the wake of the WorldCom debacle, quick-fix legislation rushed through by Congress may impose new shackles on honest companies that should be freed to create additional wealth rather than further hindered from doing so.
Again the words of Gompers are wise across the years: “To enact a law with the hope and for the purpose of educating the people is to proceed by indirection and to waste energy. It is better to begin work for securing ideals by directing activity first for fundamentals.”
The fundamentals are these: Publicly held companies need to tap into capital markets to finance efficiencies and expansion. As custodians of funds provided by others, they have a self-interest in using that money wisely. In order to secure these funds, they must build trust.
Now the general trust has been breached. A widely overlooked element in the collapse of that trust is government itself and laws that have empowered it.
The 1990s stock market experience bears a strong parallel to the euphoric boom of the 1920s except in one respect—the Securities and Exchange Commission (SEC) did not exist until 1934. Investor recklessness in the late 1990s, in distinction to its counterpart 70 years earlier, was built on a base of purported governmental “protection.” After all, if pipedream business projections were a pack of lies, government regulators would clamp down on the crooks, so ostensibly there could be some degree of sanity in the soaring markets.
Unfortunately the SEC can never possess an adequately large staff to fully police businesses any more than police departments can be big enough to nab all highway speeders.
Today, despite all the laws, Arthur Anderson is a late-night talk-show joke, WorldCom a shambles, Enron a wreck. In a freer market with fewer laws, swindlers would still run loose in pursuit of short-term gain but would eventually receive their deserts because of their violation of trust. Corporations would have to plead with the cautious for the privilege of securing investment funds and to employ scrupulously honest business practices to prove their worthiness. The shysters, as through all of history, would still be able to appeal to the greedy.
An overload of laws obscures one of the least-appreciated principles of the free market: Ultimately the strongest product that any business can offer is its record of integrity.