In response to the recent discoveries of dishonest practices at Enron and other companies, both houses of Congress have worked themselves up to a state of hysteria. They have written a slew of new business regulations, which are expected to be signed into law very soon, without holding extensive hearings, without having conducted serious legal research and without even having clearly identified the extent and causes of the current problems.

Congress should have started by asking itself the following question: Why, despite a never-ending slew of new business regulations over the past 100 years–does business dishonesty still occur?

The answer usually given is that such dishonesty is caused by selfish greed that was intensified by the booming 1990s economy. This answer is hopelessly superficial. The fact that a businessman feels like cheating does not make it good for him. In reality, it is not in the self-interest of businessmen to be dishonest. The end result of dishonesty, as many executives have discovered, is loss of their jobs and possibly the bankruptcy of their companies, personal disgrace and destruction of their reputations, lawsuits and even jail time.

Now let’s consider the real reasons for business dishonesty.

The primary cause is philosophical. For more than 100 years our intellectuals, specifically our college professors, have been teaching students, including, future businessmen, that no absolute principles or standards exist, that you cannot be certain of anything, that the future is unknowable, that it is okay to try anything without thinking, that the truth is simply that which works at the moment, and that which works is what makes you feel better right now. In other words, there is nothing really wrong with dishonesty. The name of this vicious philosophy is pragmatism, founded by American philosopher John Dewey. Anyone who questions this philosophy is mocked as a dogmatic, narrow-minded, preachy moralist. Pragmatism is an open invitation to fraud–after all, you might get away with it and the money makes you feel good. Not all business students succumb to pragmatism; the better ones reject what they have been taught but more and more are falling prey to it, because they do not know of any alternative, and it has become more deeply ingrained in the culture over time. It should come as no surprise that crime in general, not just business crime, has increased markedly in recent decades.

A secondary cause lies in the perversity of business regulation itself. First, some laws are aimed at penalizing not the guilty but the innocent; for example, antitrust laws penalize the most successful businessmen simply for achieving market dominance.

Second, the sheer volume of business laws and regulations today is so massive that no businessman could obey them all; thus, cheating on some regulations is literally a requirement of business survival.

Third, there are so many regulations aimed at businessmen, primarily at activities that the government has no moral right to regulate, that it has neglected its proper function, namely, to detect and punish fraud.

Fourth, fraud laws themselves are often not clearly defined. It is apparent, for example, that Enron executives were guilty of some form of fraud. Much of it was tied to their use of special purpose entities (SPEs) that they designed to move company debt and risk off the books and thereby mislead stockholders. However, SPEs themselves are legal under current laws. Fraud laws did not specify that SPE risk and debt should be reported to stockholders. In sum, the government is spending too much time and effort persecuting the innocent and too little time and effort stopping real fraud. In such a nightmarish business climate–the inevitable outcome of a mixed economy–who will be most at home? Why, of course, the pragmatist. His focus will be not on running an honest business but seeing how much he can get away with before everything comes crashing down.

To prevent future business fraud we need two things. First, we need a philosophical renaissance that replaces pragmatism with an objective system of morality that identifies what virtue is and how one should practice it. Only two, radically different, types of moral absolutism exist today: religion, that involves a morality based on faith–which fewer and fewer people are willing to accept today as a means of proof–and Ayn Rand’s philosophy of Objectivism that is based on reason. Both advocate the virtue of honesty (though for very different reasons). Second, we need the government to properly define and enforce antifraud laws–and nothing more. If we do these two things, we can avoid congressional hysteria and endless and oppressive new laws that do not touch at the root of the problem we are faced with.

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Edwin A Locke

Edwin A. Locke is a senior writer for the Ayn Rand Institute. He is author of The Prime Movers.

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