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Invisible-Hand Business Ethics

March 28, 2002



DURING the 1990s' "will-this-ever-stop?" economic boom, the guiding star for policymakers was Adam Smith and his invisible hand of market wisdom. Let the computer chips fall where they may.

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But now, post-recession and post-Enron, does that wisdom hold up?

Congress seems not to think so. It was itching to pass a stimulus package despite high consumer confidence and a quick recovery. And now it wants to tighten business rules because of Enron and Arthur Andersen.

Not so fast, warned Federal Reserve Chairman Alan Greenspan on Tuesday, in Smithian style. The markets are already making a course correction on business ethics.

"We have to be careful ... not to look to a significant expansion of regulation as the solution to current problems," he said. Rather, investors with good-sense invisible hands are more attuned to companies of quality and sound accounting, reflected in more-realistic valuations of stock prices.

Simply adding more accounting regulations would defy the wisdom that, as the central-bank chief said, "regulation has, over the years, proven only partially successful in dissuading individuals from playing with the rules of accounting."

Market, not congressional, discipline has chastised the unchaste executive who practiced deception by pumping up stock values in the short term, and it has given pause to investors scouting for lotterylike instant gains without asking questions.

And any employee who counted heavily on company stock for a 401(k) retirement plan has had a quick lesson in portfolio diversity. Congress can't teach that.

Have more faith in fundamentals, Mr. Greenspan seems to be saying, especially the fundamental common sense of people to make choices that contribute to a common good.

Some rule-tinkering is needed – such as treating stock options for employees as a business expense – to improve information for investors. More information, not more regulation, should be the guiding star for Congress as it mulls its options.

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