corruption culture

Economic Ideology and the Rise of the Firm as a Criminal Enterprise

Abstract

Over the last 50 years, the institutions, ideology, nature, and power of firms in the United States have been radically transformed. Neoclassical economics has led that transformation, supplying an ideology that justified a dramatic increase in top executive compensation while dismantling the mechanisms that produced personal accountability tied to anything but relatively short term shifts in share prices. Yet, alongside the rise of the corporation, from the time of Adam Smith forward, has been concern that the separation of ownership and control creates opportunities to use the corporation as a “weapon” of fraud, and with the return of global financial crises, there has been renewed concern that finance has once again become an agent of crime that threatens the economic order.

This article compares economic and criminological approaches to the corporation. Both approaches focus on incentives and assume that rational actors are responsive to changes such as the dramatic growth in executive financial compensation and the evisceration of other forms of corporate accountability. Both approaches study the separation of ownership and control, and the temptations that come from the ability to speculate with other people’s money. Yet, neoclassical economists assume that markets will police fraud and that fraud therefore need not be a serious subject of study while criminologists posit that the policies that neoclassic economists have championed have created “criminogenic environments” that encourage the use of firms as instruments of fraud.

Criminologists call the use of seemingly legitimate firms to manipulate financial markets “control fraud,” that is, fraud by the persons in charge, most typically starting with the Chief Executive Officer (CEO). Modern executive and professional compensation has transformed the CEO and the independent professionals, such as accountants, who once served as sources of external discipline. Today’s CEO can disguise losses, eliminate underwriting, lay off needed workers and take other measures that boost share prices at the expense of a company’s long term viability. Moreover, if enough executives increase their companies’ apparent profitability (and their own bonuses) in doing so, the result creates a “Gresham’s dynamic” in which bad ethics drives good ethics from the industry and the professions. In these criminogenic environments, control frauds become so pervasive that prosecution becomes extremely difficult and markets do respond—with extremely destructive boom and bust financial cycles.

Full paper below…

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4closureFraud.org

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Economic Ideology and the Rise of the Firm as a Criminal Enterprise