by Phil Mullan
The exposure of what is reputed to be America's biggest-ever accounting
fraud at the telecom giant WorldCom adds to a long list of US corporate
calamities over the past six months.
There seems to be a new scandal every week, always trumped by an even bigger
one before long: Enron, Arthur Andersen, Tyco, Global Crossing, ImClone,
WorldCom, Xerox. US Incorporated appears to be in a deep crisis.
It is true that recessions discover what the accountants missed (or
ignored) - but this time, things are different. The strange thing about
today's 'crisis of capitalism' is that it is unfolding just as the USA is
exhibiting signs of economic growth (albeit limited ones) following the
recession of 2001.
Indeed, some now doubt whether the USA suffered a recession at all, or claim
that it must have been one of the mildest recessions ever. The technical
definition of a recession is two successive quarters of negative growth -
something that has not afflicted the US economy over the past year. The
disjuncture between a flat but durable real economy and the spate of
corporate scandals distressing a weak stockmarket gives a clue to what is
really going on in US capitalism.
Over the past 30 years, and more markedly in the past 10, the real economy
has receded into the background, while a new finance economy has come to the
fore. Industry has tended to relocate to parts of the old third world, while
services have filled the gap in the West.
These economic changes also reflect cultural and social shifts. Unabashed
economic growth has lost its virtue in the face of environmentalism, with
the business world adopting socially responsible and ethical agendas. Even
in the straight world of economics, where production and tangibles were once
central, indices of happiness, creativity and other non-material values have
taken centre stage. Just consider the recent impact made in the USA by
Richard Florida's book The Rise of the Creative Class: and How It's
Transforming Work, Leisure, Community and Everyday Life.
In business, the combined effect of material shifts and our anti-growth
climate is that finance has come to replace the 'dirty' process of actually
making things. Until recently, this was talked up as a New Economy of
innovation, knowledge and information technology. The reality was that
financial activity and transactions played a more central role in the
day-to-day life of business, which was often unrelated to real economic
activity.
Of course production didn't come to a standstill. Society cannot survive on
the intangible 'feelgoods' of ideas and creativity - it needs to consume
goods and services produced. But production did lose more than its
intellectual credibility in the 1990s. It also lost its dynamic, and we
moved into a world of restrained economic drift disguised by the froth of
finance. Deals and debt drove the 1990s economy, not production and
productivity. One prominent feature was the way company share prices raced
far ahead of actual earnings potential.
The problem is that a financial world so divorced from real activity is
inherently unstable, and has a tendency to implode.
So it was in the East Asian financial crisis of 1997 and 1998, when young
but strong economies were overwhelmed by enormous flows of speculative
finance. After that crash, the easy money then shifted to drive the internet
and IT economy. But in a culture that is both obsessed by technology yet
seems to have lost the strategic ability to use technology for productive
ends, even the famed dotcom bubble was more a financial one than a real one.
And in March 2000, that bubble burst too.
What we are witnessing in corporate America today is the further unravelling
of this financial boom. While unproven internet companies with few revenues
were the first to crumble, now we are seeing the wider ramifications
focused, though not exclusively, on the technology, media and
telecommunications (TMT) sector.
Much of the WorldCom debate is focused on who did (or hid) what, but there
is nothing unprecedented about capitalist scandal, fraud, corruption or
'creative accounting'. The names Michael Milken, BCCI, Polly Peck, Robert
Maxwell and Barings spring to mind. What is different this time around is
that more of American business - and British and European companies are by
no means immune - got caught up in the new finance economy, where deal
making and financial engineering almost becomes the business end instead of
the means.
Many businesses now see short-term performance and share price levels, which
are given the more respectable title of 'shareholder value', as the key
criteria of success. Unsurprisingly, many CEOs, company boards and their
financial advisers and auditors are encouraged to embrace the sort of
'aggressive management of earnings', which in extreme cases led to the
accounting shenanigans at WorldCom, Xerox and elsewhere.
As one pack of financial cards falls after another, US capitalism will
experience a cleansing of the most exposed and insubstantial parts of the
financialised economy. To a certain extent, this process substitutes for the
'purifying' role that economic recessions played in the past. In past
recessions, capital would be destroyed, unemployment would rise, the weaker
companies would go under, and survivors would emerge stronger.
Given the torpidity of real production during the 1990s, the pressures
normally required to bring about recession were muted and limited - hence
the absence during last year's mini-recessions of capital destruction and
rising unemployment. Today's corporate implosions play a similar role to
recessions, but only in the limited areas that they are required. For
example, we have already seen the collapse in the value of network assets in
the ground, as several big telecom companies that over-invested in them
during the late 1990s, spurred the availability of easy money, now find
themselves in, or close to, bankruptcy.
But recent events are unlikely to reinvigorate capitalism the way
traditional recessions did. The excess liquidity will simply find something
else to latch on to. Maybe property prices will be the next bubble to expand
and burst? The finance economy is likely to survive, but in new forms. More
importantly, the kind of reaction we have seen to the perception of a great
corporate crisis in America will only further subdue real economic activity.
Many have already turned recent events into another morality tale of
American capitalism, claiming that American executives are getting their
comeuppance for being so excessive and greedy. Rarely has such a critique of
rampant capitalism been so far wide of the mark. Today's corporate
executives, with a few exceptions, are notable for their relative restraint
and limited ambition. They have been reluctant to engage in genuine
strategic expansion, notwithstanding the penchant for continuously
rearranging the financial deckchairs.
Commentators worry about the negative effects of investors losing trust in
companies and of consumers becoming less confident. But even more
constraining is the crisis of confidence within business itself. Every
recent crisis has been blown out of proportion, not least by the business
world itself, and has become a further drain on corporate confidence, with
business always expecting worse to come.
>From the Russian debt default of 1998 to the dotcom collapses to the 11
September terrorist attacks to the economic crisis in Argentina and now
Brazil, there has been a deepening sense of uncertainty within business. The
common response to each of these crises has been a further embracing of risk
aversion. Now, every time another company is revealed to be in trouble, the
business mood becomes more conservative and less ambitious.
The clamour from within business is for more caution, cost-tightening and
regulation - and for less investment in future growth. Companies will scale
back their plans, while financial institutions will be less willing to lend
to fund 'risky' investments. As BusinessWeek commented at the end of June
2002, shaky CEO confidence has curbed outlays on equipment and expansion:
the 'nearly daily revelations of corporate accounting scandals.[is]
prompting chief executives to concentrate on cost-cutting and accounting
rather than equipment expenditure and expansion' (1).
The WorldCom, Tyco and Enron affairs are not expressions of a capitalist
crisis driven by economic fundamentals. In some ways, they are even worse
than traditional crises. The old boom, bust and recovery cycle is being
replaced by a protracted era of languid productive activity and the waste of
economic potential, punctuated by the latest financial disruption.
More of the same is not a beguiling prospect.
Reprinted from : http://www.spiked-online.com/Articles/00000006D95E.htm
----- Original Message ----- From: Ian Murray <seamus2001 at attbi.com> To: <lbo-talk at lists.panix.com> Sent: Saturday, July 20, 2002 6:34 PM Subject: Walden Bello
>
> [From the latest issue of Focus on Trade, #79]
> CAPITALIST CRISIS AND CORPORATE CRIME
> By Walden Bello*