Stockholm, 24 Agustus 2002

Bismillaahirrahmaanirrahiim.
Assalamu'alaikum wr wbr.

CAPITALISM INC. IS CORRUPT
Hizb ut-Tahrir
London - GREAT BRITAIN.
 

THE WAVE OF FINANCIAL SCANDALS UNEARTHED IN CORPORATE AMERICA IS A SIGN OF STRUCTURAL FLAWS WITHIN CAPITALISM ITSELF

The wave of financial scandals unearthed in Corporate America is a sign of structural flaws within Capitalism itself and the value system of Liberal democracies. Reform of a system by definition, can only work if the foundations are sound, when the foundations are themselves questionable is it not time to examine the alternatives?

Capitalism's jittery track record

Following the collapse of the Soviet Union and the tearing down of the Iron Curtain of Communism, many heralded the triumph of the Capitalist way of life. Francis Fukuyama went so far as to claim that history, as we knew it had ended, with the final ascendancy of Liberal democracies and its associated values. "(But) the century that began full of

self-confidence in the ultimate triumph of Western liberal democracy seems at its close to be returning full circle to where it started: not to an "end of ideology" or a convergence between capitalism and socialism, as earlier predicted, but to an unabashed victory of economic and political liberalism." Yet 13 years on from these bold assertions we have witnessed a decade in which the application of Capitalism has inflicted serious damage.

The Capitalist experiment in the former Soviet Union failed abjectly in the 1990s and was found wanting in its restructuring of the economies of the former eastern bloc. Conditions at times were said to be worse than those endured during the worst years of Communism. However, this failure has been hidden behind the belief that Mafia styled oligarchs ruined the system accompanied by a culture of bureaucratic rigidity and weak

judicial systems.

Aswe witnessed the collapse of the Tiger economies of the Far East in 1997, misery was inflicted upon the lives of millions in Thailand, Malaysia and Indonesia. Whilst the initial successes of the Tiger economies were attributed to liberal values and the Capitalist economic system, its failure was excused away by references to the culture of

nepotism, corruption and cronyism in these lands.

Closer to home, as the late 1990s Dot Com stock bubble burst, the crisis was explained away as being attributable to industry specific factors while the fundamental tenets of the Capitalist economy remained valid.

In recent months the world has witnessed a wave of accounting scandals engulfing Corporate America. Scandals such as the $3.8billion gaping hole in WorldCom's accounts which incidentally has now led to the biggest corporate bankruptcy in history. Other examples include Rank Xerox overstating its profits by $1.4billion over 5 years, Merck the giant pharmaceutical company overstating its revenues and its costs-by some $14billion over 3 years, not to mention the collapse of the Energy giant Enron. Most of the explanations for the crisis have lacked a larger conceptual framework and seem to focus on the peripheral issues. An attitude which produces statements such as the oft-repeated one, that the crisis is the result of a few rotten apples.

'Value-less' Capitalism to blame?

But how many more crises must occur and scandals unearthed, before someone discusses the most pertinent question; is not Capitalism itself the cause of these problems? Is not the system and its participants geared to produce the scenarios we have witnessed over the last few months? Is it a case of a few rotten apples or is the whole Apple Cart

itself corrupt? In which case, the discussion about reform is a misnomer. Endless reform cannot fix an inherently corrupt system.

The whole philosophy that underpins Western Capitalism is geared towards the concept of self-fulfilment and material benefit. As long as everyone is looking after his or her own interests the society will be sound. Values, ethics, and morals become irrelevant as each individual has his or her own conception of what this is. This concept underpinned Adam Smith's term the 'invisible hand', where people by seeking their own self-interest would ensure that the society itself will become prosperous.

When the major participants bring this outlook of life to the economy can anyone expect a scenario other than that which is currently being witnessed? In profiling the major players; the boardroom directors, auditors, shareholders, stock analysts, supposedly hawkish regulators and the altruistic politicians who are charged with resolving these

crises, each instance points towards institutionalised corruption and malpractice that is inspired by the very values that are held to be sacrosanct.

• The directors are statutorily charged with delivering an increasing level of shareholder value through generating a higher share price and dividend growth. The drives for exponential growth, higher stock prices and market capitalisation have meant that age-old values that should underpin business; accountability, responsibility, ethics and a moral code fall by the way side. The fictional Wall Street character Gordon Gekko best summarised their outlook when he famously stated that 'greed is good'. Gekko's oft - repeated mantra can be traced back to the philosophy of famed liberal thinkers such as Friedrich Von Hayek who argued that "To be controlled in our economic pursuits means to be.controlled in everything." Or to the liberal values of Robert Nozick who stated that "there is no justified sacrifice of some of us for others." The corporate culture and the ensuing malaise are no doubt the products of the value system (or lack of it) that Liberal secular beliefs inspire and which are the very bedrock of corporate capitalism. It is little wonder that people identify a 'Corporation' as being an ingenious device for obtaining individual profit without individual responsibility.
• Auditors who were meant to be casting a watchful eye on behalf of shareholders and the public, ended up collaborating with directors in their fraudulent activities. This is because the Big 5 audit giants are themselves huge corporations whose bottom line is also their most important concern. The lure of consultancy dollars is incentive enough for them to sign off accounts as 'true and fair' when in reality the financial reporting of their clients were far from accurate.
• The shareholders themselves are driven with an insatiable appetite for higher and higher returns on their investments. Entranced by increased gains on the surging stock market they are more or less willing to turn a blind eye as companies lie to them, as long as their wealth keeps increasing. In this regard they are egged on by the mushrooming media channels that cheer the market on, creating an atmosphere where anything but exponential growth is seen as a sign of corporate timidity and weakness.
• Stock analysts who are meant to provide an objective assessment to the public on the corporate health of those companies they are reporting on, are more interested in their own financial wealth. The analysts working for investment banks were either promoting companies who were large fee paying clients of their banks or they were personally receiving perks from the very same companies they were recommending to the public. One case in the UK highlights this practice where shares in many companies were bought before promoting them as good investments in newspaper columns.
• The regulators are selected from the same backgrounds that are now under scrutiny. Witness the background of the Chairman of the main regulator in the USA, the Securities and Exchange Commission (SEC) Harvey Pitt. He made his career as a lawyer representing the accounting industry, lobbying hard against tightening of any rules that harmed the profession. As a result Pitt has had to excuse himself from many of the SEC decisions this year due to conflict of interests, with at least 10 of his former clients currently under SEC investigation. Two other appointees to the 5 man SEC also come from accountancy firms. Imbued in the corporate values that inspired the American Industrialist Cornelius Vanderbilt to remark "The public be damned", can we expect regulators of the same ilk to be acting in the public's best interest when their backgrounds and future appointments lie with the same companies they seek currently to regulate?

Special condemnation can be made for the politicians charged with finding solutions to these problems. This is because the hold, which corporations have over the political systems in western democracies can only produce scenarios where rights and wrongs come associated with the size of a company's political donation. The billions that are poured into the political process corrupt the system that should be based on a social contract that should protect the right of all, especially those who are the most vulnerable. Where the politician's role requires individuals to be selfless in serving the public they put their own selfish interests first rather than those of their constituents.President Bush's questionable business background with Harken Energy and Vice president Dick Cheney's role as Chief Executive of Halliburton should come as no surprise.

The capitalist system therefore, like the communist system before it, has proved devastating for mankind. It joins the failed systems of the past such as empires, dynasties, monarchies feudalism and fascism in its complete inability to solve mankind's affairs. As the Quran states in its third chapter

'Many were the ways of life that have passed away before you, travel through the earth and see what was the end of those who rejected the truth' (3:137)

Examining the Options

When those at the helm of capitalism produce scenarios where governments can debauch currencies, wherein companies can invent figures, where corporate directors deceive shareholders, and auditors collude in the fraud - can reform really work? The world renowned British publication 'The Economist' thinks it can, it advocates more disclosure, more empowerment for non-executive directors and seeks greater shareholder scrutiny. But these solutions have been tried before after previous scandals such as Maxwell, BCCI and Barings Bank. Indeed many of the solutions the Economist is advocating are already in place as a result of the Cadbury and Hampel Corporate Governance reports which were produced after the aforementioned scandals. Independent audit committees

with non-executive director involvement are already in place yet this did not stop Enron or WorldCom from collapsing. Greater disclosure will add nothing to the transparency of financial results, as US accounting rules are and remain the most prescriptive in the world already.

Consequently when an attitude of corruption pervades a system, when the integrity of the major participants of an economy is compromised, when hundreds of millions see their retirement savings wiped out, the time should come for those men and women of responsibility, the intellectuals, the academics and like - minded individuals, to look for

serious alternatives. The least that should be demanded is a discussion on the very basis of capitalism and the viability of alternate models rather than on the suggestion of further tired and discredited reform packages.

Islam produces a harmony in society wherein investors and businessmen can pursue the goal of higher profits yet maintain ethics, accountability and equity so that equilibrium in society is not predisposed towards materialism. The Shariah law sets the benchmark of

values that an economy's participants must aspire and adhere to and does not leave this to subjective interpretations. The axiom around which actions are based is accountability to the Shariah Law. Hence individuals, corporations and the state must seek legitimacy for their actions by reference to an arbitrating criterion that is not subject to persuasion or sway by powerful elements within society. As a result, those that can lobby the most or make the most persuasive case financially do not influence law making. Shariah law institutionalises the roles, rights and responsibilities of the players within the economy

producing a situation that protects the rights of the individual investor, the worker and the wider society at large. Also the institutionalised separation of state and business within an Islamic State (as opposed to a capitalist system) ensures that those who do

engage in corruption are then severely punished for their acts.

An invitation to Intellectual discourse with Hizb ut-Tahrir

Hizb ut-Tahrir, the Islamic political Party has been engaged for almost 50 years in the work of establishing the Islamic Political system. At the heart of our work is the presentation of Islam as a system of life for the whole of humanity, a system that was implemented for over fourteen centuries over Muslims and Non-Muslims alike. Within this context we invite a debate upon what we see as the fundamental failures of not just American capitalism but all forms of capitalism (European, East Asian) and in our view the only viable alternative ideology; Islam. In particular a discourse on Islam's views pertaining to the basis of a true economic system, company structures, a sound monetary standard, ethics in business, labour laws and trade policy.

We view the Islamic system as a challenge to Francis Fukuyama's statement from the End of History; "The triumph of the West, of the Western idea, is evident first of all in the total exhaustion of viable systematic alternatives to Western liberalism."

Wassalam.

Hizb ut-Tahrir, Britain

25 Jumada al-U'la 1423 Hijri,
5th August 2002

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