WHAT HAPPENED TO BUSINESS PRUDENCE?

February 10, 2009

More than 200 years ago, Adam Smith determined that economic self-interest advanced the wider commercial good as if led by an invisible hand.  Such a self-seeker, he added, "frequently promotes (the interest) of society more effectually than when he really intends to promote it." 

But what happens when it's government that defines profit opportunities, and a country's culture deprecates commercial self-interest to the point that business leaders who "do good" are praised over those who "make good"?  What happens when the invisible hand is replaced by the grip of regulation, subsidies and "social" responsibility?  The current financial crisis provides the answer, says Robert L. Bradley Jr., CEO of the Institute for Energy Research.

For decades, government has intervened in the mortgage market, in the name of the "public interest," says Bradley:

  • There was the creation of Fannie Mae and Freddie Mac, the Home Mortgage Disclosure Act of 1975 and the Community Reinvestment Act of 1977, the Financial Institutions Reform Recovery and Enforcement Act of 1989 and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.
  • There was the demand in 2000 by HUD that Fannie Mae dedicate 50 percent of its business to low- and moderate-income families.
  • And there was President George W. Bush pushing homeownership for all as the way to prosperity.

Through laws and administrative regulation, Stan Liebowitz and other free-market scholars have shown, governments have pushed private businesses to go far beyond prudent, self-interested profit-making.  But did anyone bother to ask whether such do-goodism might be at odds with old-fashioned prudence, or whether, in the final analysis, it might be bad for its intended beneficiaries?  Did new-model business leaders dare to think there could be unintended consequences from the post-'60s creed of corporate social responsibility?

Government regulation and political correctness are at the root of recent organizational failures that, in turn, have resulted in massive taxpayer-financed bailouts. New government intervention is trying to address the problems created by prior intervention -- and futilely, it appears, notes Bradley.

Source: Robert L. Bradley Jr., "What Happened To Business Prudence?" Investor's Business Daily, February 9, 2009.

 

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