Marketplace or Morality Play?

The cry for justice following the debacles of Enron, Global Crossing, WorldCom, and other recent major business failures has been tiringly familiar: Expand government power. More laws need to be passed. The scoundrels must be stopped. Their greed knows no bounds. Only government has the force to impose the proper controls.

This attitude reveals an astonishing lack of understanding with regard to how economies work. The marketplace imposes a much stricter morality on those who participate in it than government ever can. Government can only create laws and try to enforce them. Consumer behavior carries a cudgel that is far more potent.

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After all, in the marketplace, the seller is in business not merely to offer a product or service but to offer value. Fair dealings with the customer are part of the value of a product or service. A business prospers when it is built on the continuing presentation of value resting on a foundation of integrity and character.

Not all businesses operate that way. Most of us have said, "I’ll never buy that product again," or "I won’t shop there any more." Why? Because the price we paid or refused to pay, either in money or in suffering inconvenience or disrespect, turned out to exceed the value of what we otherwise would have bought. We felt cheated. Businesses that perform consistently in this way lose so many customers that they suffer. The marketplace punishes deficiencies in integrity and character.

It disciplines consumers also. Sellers do not want to be rooked by cheats and deadbeats—thus the need for a private credit-reporting industry. The market is a stern moralist toward both sides.

This principle casts the current public lust for the scalps of disgraced corporate high-flyers in an ironic light. After all, these chieftains’ greed was abetted by too many Main Street investors who recklessly threw their money into the stock market—consumers, essentially, whose own character defect enabled that of the higher-ups.

Investing in financial instruments carries inherent risk. We transfer our money to strangers. We expect them to increase it—but how well can we know them? We make a judgment, and we take our chances. Prudence suggests we would do best to seek modest returns under conservative strategies.

The latter 1990s blew prudence away. Conservative investments such as CDs and money market accounts took a back seat to high-yielding stocks. We could put forth our money, not have to do a lick of work with it, and watch it come back doubled or tripled or more. Greed trumped caution.

But the signs of trouble were visible for those who wished to perceive them. How objective is a firm that sells both financial-verification and consultant services to its clients? How impartial is a firm that wants to both rate corporations’ stocks and get their investment-banking business? We could discern through corporate annual reports that executives were receiving stratospheric levels of compensation through the chummy connivance of their boards of directors.

Never, at any point along the way, were we prevented from pulling our money from the stock market and putting it into CDs at 5 percent. But we didn’t. Why do that when greed can get us 10 or 20 times that much?

The marketplace chastens like a Puritan schoolmaster.

Rank-and-file cupidity also drove the stock market in the 1920s before its downfall in 1929. Calls for an orgy of government meddling—like we’re hearing today—resulted in the New Deal 1930s and the Securities and Exchange Commission (SEC). Did the SEC’s regulations prevent market meltdown? Neither will a new round of government controls.

Now the commission is seeking to force "transparency" in corporate financial reporting.

But, as anybody knows who has ever driven 36 miles per hour or faster in a 35-mile-per-hour zone, regulations and laws can be circumvented by those with the will to do so. At the same time, such regulations will have a strangling effect on honest businesses that seek to abide by them. The time and effort honest entrepreneurs waste complying with a whole new set of regulations is time and effort not applied to the creation of new wealth.

What’s the real answer? Think about it: An integrity vacuum now exists in the marketplace. Investors want to know who, within the great welter of corporations, operates with honesty, character and integrity.

The private sector already rates the financial soundness of insurance companies. It rates corporations for the relative reliability of their bonds. Why not start a new business that rates corporations for their integrity and character? Assemble a crack staff and exhaustively investigate each company’s corporate culture and behavior for its ethical underpinnings. Issue integrity certificates to those who pass a stiff standard. Create an integrity index.

And if you do so with integrity, guess what? The marketplace will reward you.


Daniel Hager is an adjunct scholar with the Mackinac Center for Public Policy and the author of several Viewpoint commentaries.