Is compliance anti-capitalistic?

In 1990, the dawning of what in retrospect can now be seen as an “age of compliance,” the senior partner in the law firm where I worked penned a note of dissent in an op-ed piece he published in the Wall Street Journal.  “Be a good corporate citizen,” he wrote, adding that by this he meant that companies should “fight the feds.” Although I saw great promise in the then-new notion of corporate compliance programs, I could also envision, as he did, the dangers in going overboard.

I still can.  Indeed, that is why – whether in my writing or advisory work – I promote a notion of “Goldilocks compliance.”

But a different issue is whether compliance should be seen broadly as anti-capitalistic.  This seems to be the gist of an argument against the Sunshine Act by libertarian commentator John Stossel who recently asked:  “[W]ithout government regulation, what prevents greedy doctors and greedy medical device makers or drug companies from colluding? ” His answer: “Market competition. Other scientists will try to replicate dramatic findings and debunk false claims and sloppy scientists. Companies worry about scandal, lawsuits, the FDA and recalls. They can’t get rich unless their reputation is good.”

I wish it were that easy, but also believe that the market in question is not as efficient as is suggested.   Rather, this seems to be an area of significant market failures – primarily “information deficiency” (but also public costs), meaning that information needed by patients, health care providers and manufacturers of pharmaceutical and medical device products has not always been readily available/understandable for the markets to work their magic. Indeed, the many prosecutions of life science companies for fraud are by definition cases of information deficiency, and the very purpose of the Sunshine Act is, at least in part, to remedy  deficiencies of this sort.  Also relevant here is the notion of moral hazard, and specifically the fact that for various reasons those who create COI risks in life science companies may not be the same individuals who bear the brunt of prosecution, scandal, etc., further diminishing the efficacy of the market in question.

Additionally, I don’t think that it in the interest of libertarians to broadly reject the notion of using a market failure analysis to help frame approaches to law or ethics (although I hasten to add that in his recent piece Mr. Stossel did not say that he was in fact doing this).   In that connection, I believe that part of the reason that public debt has reached the scandalous point that it has has to do with various conflicts of interest and other market failures, as discussed in this earlier post.  More broadly, there is nothing inherently politically left wing (let alone anti-capitalistic) about considering the impact of market failures.   Rather, a market failure analysis treats capitalism – appropriately – as an economic phenomenon, and not a theological imperative.

On the other hand,  care must always be taken that a market failure analysis doesn’t lead to compliance/ethics overkill.  To twist the words of Einstein a bit, market-failure-based interventions (whether legal or ethical) should be undertaken to the extent necessary, but not more so. At least as a general matter, I believe that Mr. Stossel and I would agree on this.

Finally, compliance generally and mitigation of  conflicts of interest in particular are not the only areas where business ethics can bump up against capitalism. For a look at this important and fascinating (at least to me) area through a broader lens I encourage you to read this recent post on “Three stories about capitalism”  by Jonathan Haidt on the Ethical Systems web site.

(For more on:

–  market failures and conflicts of interest generally see this post;

–  the Sunshine Act see this guest post by Bill Sacks and a recent post from another blog about how “[t]he federal government has made financial disclosure very easy with the Sunshine Act.”

– the many ways that COIs in fact corrupt the behavior of business people, including well meaning professionals, see the various posts collected here; 

– moral hazard, and its meaning for ethics and compliance,  see posts collected here.)