Adam Smith’s Message

We learned a couple of hundred years ago from Adam Smith’s The Theory of the Moral Sentiments that capitalism requires a moral and ethical center if it is to function effectively to the benefit of all involved. Many have read (or pretend to read) The Wealth of Nations, but many more should read Smith’s earlier book on the moral base necessary for markets to properly operate and thrive.

Nearly thirty years ago, I came to an appreciation of this through the great Irving Kristol. Mr. Kristol’s writings often emphasized the importance of capitalism’s moral compass. Not surprisingly, his wife, (the brilliant historian Gertrude Himmelfarb), often wrote about the importance of morality in society, culture and the economy—including her great book called, The De-Moralization of Society: From Victorian Virtues to Modern Values. Bea Himmelfarb admires the Victorians in English history as an example of a moral society.

These thoughts come to mind as I peruse the accounts in today’s papers of the convicted Enron crooks Ken Lay and Jeffrey Skilling. Of course, we all knew they were crooks, well before yesterday’s decision—and therefore a disgrace to modern American capitalism. So, in this sense, there’s no particularly new news in the jury’s decision.

Interestingly, the stock markets rallied yesterday, as they did the day before, and as they are today (as of this posting).

On the whole, the state of American capitalism is pretty darn good.

Under assault ever since FDR’s mistaken central planning of the New Deal 1930’s, when a number of socialist type alphabet agencies attempted to control America’s industrial and farming sectors, people soon realized that the whole experiment was a dismal failure. Unemployment ran 20-25 percent up until World War II, when Roosevelt started unleashing business to produce wartime goods that ultimately resurrected the economy.

Long before, the Supreme Court had thrown out many of the counter-productive government planning as unconstitutional. But still, the American welfare state grew mightily in the 1960’s and 1970’s, as liberal Keynesians pushed for their version of socialism—one which completely self-destructed in the 1970’s during the wealth-destroying, big government stagflation administered by LBJ, Nixon, Ford and Carter.

Providentially, Ronald Reagan changed all that with his economic revolution launched in the 1980’s. Reagan’s bold initiative fired up the U.S. economy by slashing tax rates, deregulating industries, and rescuing the dollar through disinflation.

Since then, as the forces of entrepreneurial capitalism were unleashed for the first time since the post Civil War period, the American economic system again became the envy of the world. Since the early 1980’s, over 46 million new jobs have been created, while inflation adjusted gross domestic product increased $6.2 trillion, or 120 percent.

As deregulated stock markets democratized the American financial system, a great new Investor Class grew up. Over the ensuing decades, roughly 20 million investors evolved into over 100 million share buyers, and they got rich in the process.

Since 1982, according to the Federal Reserve, stock market wealth owned by family households appreciated by over $9 trillion dollars, or nearly 900 percent. During this period, the Wilshire 5000 Index of virtually all actively traded companies, appreciated by nearly 800 percent.

This Investor Class has also become the nation’s most powerful voting block. In recent elections, nearly 2 out of every 3 voters were also stockowners (and yes, they are voting for capitalism) meaning votes for lower tax rates, limited government, greater opportunities for entrepreneurship, and a general distaste for any and all policies that smack of central planning and government economic controls.

The great failure of the Democratic Party during this entire period has been its consistent antipathy towards the Investor Class. Though I can’t prove it, I’m willing to bet that the cultural characteristics of hard work, thrift, personal responsibility and law-abiding behavior, go hand-in-hand with demand for lower tax rates and entrepreneurial activity.

George W. Bush, who calls this the “ownership class,” is a lineal descendant of Reagan. The self-help virtue of ownership is held in much higher political and cultural esteem than the vice of government dependent welfarism.

And of course, the investor culture has at its core, the very same ethical foundation that Adam Smith wrote about in 1759, which includes the rule of law that was so badly violated by Messrs. Lay, Skilling and Fastow, along with some other rotten apples like Tyco’s Dennis Kozlowski, WorldCom’s Bernard Ebbers, and Adelphia’s John Rigas.

These selfish crooks disregarded morality and the law, and in so doing, temporarily demoralized the stock market and American capitalism. They’re the kind of people who would be celebrated by totalitarian socialists like a Marx, Engel, Lenin, Stalin, Mao, Castro, Saddam Hussein or Iran’s Ahmadinejad, people of that ilk—enemies of America and our incredibly successful market based system of market capitalism.

Government prosecutors deserve three cheers for busting these anti-Americans as they work to reimpose the rule of law and remoralize our economic system.

Much more important than the misbegotten congressional regularity scheme called Sarbanes-Oxley, is the Justice Department’s excellent work to simply enforce laws already on the books. Hopefully, the thought of a 25-year jail sentence will concentrate the corporate mind with sufficient intensity to disincentivize future corporate crooks, wherever they may be.

There are approximately 5.5 million businesses in this country, according to the Commerce Department’s national accounts and tax returns administered by the IRS. So these notorious crooks on today’s front pages really do amount to a small basket of bad apples.

But the G-Men have more work to do. A new state of corporate fraud and insider self-dealing has sprung up recently in a number of technology and other companies where CEOs have engaged in the practice of backdating stock option grants and other related forms of anti-shareholder compensation chicanery. The biggest demoralizing miscreant right now appears to be William McGuire, CEO of United Health Group and McGuire's $1.6 billion in unexercised stock options.

And in Washington, book cooking at the government company, Fanny Mae, has still not been properly punished. Clearly, there is still more work to do on the enforcement front, so necessary to plug some of the small glitches that will always be present in our huge free-market system.

But as I stated earlier, on the whole, the state of American capitalism is pretty darn good.

And, looking down from his perch in heaven, Adam Smith would be very proud.