Supporters of capitalism must help expose blundering firms

Allister Heath
CORPORATE blunders are like buses: they arrive all at once. The latest involve G4S, which doesn’t know whether it will be able to hire enough guards for the Olympics, forcing the army to step in. The O2 mobile network suffered some outages yesterday. Britvic recalled some of its drinks. All of this follows the Libor price fixing scandal, which has engulfed Barclays and many others; the news that HSBC is about to be hit by a massive fine in the US for not doing enough to comply with money laundering rules; JP Morgan’s major trading loss; and GlaxoSmithkline’s $3bn fine.

Clearly, it is not just banks that mess up. Some of these stories – especially the Libor madness – were caused by despicable behaviour; it is vital that the UK cracks down pitilessly on corporate wrongdoing. In other cases – such as G4S, O2 and Britvic – errors or bad luck seem to be the problem. It is vital that government contracts be properly designed to ensure that any failure to deliver is met by steep fines; G4S must pay for its errors. More broadly, there is in fact no evidence that there has been an increase in corporate malfeasance or corporate errors – but the problems that go unnoticed during bubble years, when everybody is drunk on cheap money, always emerge in the aftermath of a recession. Scrutiny is always more rigorous when the times are tough.

Despite all of these depressing failings, it is important not to lose faith in capitalism – and also to remember why those of us who support the free market do so. The case for capitalism is not based on the assumption that humans are flawless or that markets are “perfect”. Anybody who believes that has spent too much time constructing meaningless mathematical models. The real argument is simply that proper, real, unsubsidised and undistorted capitalism is less bad than any other system at harnessing human beings and giving them the motivation and ability to do great things. The forces inherent within competitive capitalism are better at weeding out wasteful and incompetent companies and better at rewarding good ones. That is why it is key that new resolution procedures are adopted as soon as possible to allow banks to go bust and be wound down in a controlled manner, with bonds converted into equity, to protect taxpayers and depositors and to ensure all firms and their management face the full discipline of the market.

Companies are collections of human beings; and humans can be ignorant, greedy and weak. They certainly make plenty of mistakes – in fact, tens of thousands of companies get it so wrong that they go bankrupt every year. That is a sign of the system’s strength, not of its weakness. Capitalism works because it deals with failure better than communism. Angry mobile phone customers can change network. Crucially, the market economy relies on a strict enforcement of the rule of law. Anybody lying or cheating needs to be punished; that is the state’s job. Corporate crime is no proof that capitalism doesn’t work, merely a reminder that policing is an essential part of it.

Supporters of capitalism need to be unambiguous in their condemnation of corporate malfeasance. They should back a real crackdown on white collar crime. They must help expose incompetence. They need to advocate ending corporate welfare and state guarantees that encourage excessive risk, especially in finance. They need to slam government contractors that fail to deliver, and make sure that proper safeguards are put in contracts. But the fact that some firms have disgraced themselves is no reason to give up on the system that has delivered prosperity for billions.