Fraud does not prove anything but fraud

The recent wave of corporate fraud, starting with Enron, has made many commentators raise on their hind legs and decry capitalism as unable to establish honesty.

This is difficult to justify as a serious position, and reflects more a hatred of voluntary trade than a genuine economical concern. Indeed, corporate fraud does not magically nullify all the economic data that proves the superiority of economical freedom (not capitalism, since the United States is not capitalist) in terms of progress and equality.

The second reason why this argument cannot be taken seriously is because it displays a gross lack of dialectical thinking. If private individuals have a motivation to effect fraud, how much more true this is for politicians, who are not accountable to anyone ! As a recent Star Tribune article rightly points out, fraud in government is not only widespread, but unstoppable :

“The financial statements of many federal agencies are in such dismal shape that the General Accounting Office (GAO) — the investigative arm of Congress that audits federal accounts — has been unable to provide an opinion on the government’s finances for the past five years.


The government commonly accepts liability for programs like flood insurance, but doesn’t record it as a cost, further skewing its financial picture, Frenzel said.

If a corporation had a known liability and didn’t put it on its books, “someone would probably be sent off to jail,” he said.

Additionally, many federal agencies are fraught with waste, fraud and abuse, according to a financial management report issued by the Office of Management and Budget (OMB) in May.”

The article goes on to talk about some examples of waste, including the lack of security that leads to theft of electronic material, and the role of the Social Security ponzi scheme in shifting revenue and debt around.

What the instances of fraud in the corporate world do show is that transparency is as important there as it is in the government. The fact that Enron, and the other culprits, were caught, shows that the system is working, not that there is a problem. The attitude that accountability is wrong makes one think of the Creationists who blame scientists for Pitldown Man, even though it is the scientists of the time who exposed it as a fraud.

One notion which goes against accountability and transparency is the notion of corporate persons. It is a very anti-capitalist measure which, at a fundamental level, reifies a collective entity : but which, at the more concrete level, permits people to hide behind a facade of corporatism. The same phenomenon is true in politics. If politicians – even the president – were held directly accountable for their actions ! As it is, not only do we know that fraud and waste is widespread, but we can’t even know to what extent.

Roger Donway, an Objectivist commentator, has contended that Enron’s fall was grounded in bad philosophical principles, in an article entitled “The Collapse of a Postmodern Corporation”. I would encourage everyone to read that article.

Philosophy is not just talk, it’s also right living, something that is necessary for every individual. You can have the best capitalist system in the world and still fails, if everyone fails to do the right thing. A humbling lesson.