With resources that often exceed those of government agencies, corporations increasingly resort to deception and manipulation to maximize their profits, thereby undermining the public interest. Rebuilding trust in democratic institutions depends on our ability to see through corporate-friendly narratives.
STANFORD – In oppressive regimes, where speaking the truth can result in punishment, rulers often convince citizens to believe in falsehoods. And yet free speech and democratic institutions are no guarantee that policies will be guided by truth, much less that citizens will be satisfied with the status quo. The widespread belief in many Western democracies that the economic, political, and legal systems are unfairly “rigged” is evidence of that. But while today’s public discontent is justified, it tends to lack focus, enabling populists and demagogues to divert attention away from the real issues and possible solutions.
In our current system of democratic capitalism, corporations control the bulk of economic activity. Backed by favorable legal frameworks and armed with resources that often exceed those of government agencies, corporations and their leaders increasingly resort to deception and manipulation to secure additional rights and privileges, thereby undermining democratic institutions’ capacity to serve the public interest. Consequently, public trust has declined, exacerbating democratic erosion.
In an influential 1970 essay, Milton Friedman famously argued that the social responsibility of managers is to “make as much money as possible while conforming to the basic rules of society.” In practice, this means that corporate managers should concentrate on maximizing profits (as measured by accounting metrics) and their company’s share prices.
Had society’s rules protected all those affected by corporations, and had businesses adhered to these rules and operated in “an open and free competition without deception and fraud,” as Friedman envisioned, then managers following his dictum might have produced positive outcomes for society. In the real world, however, rules often prove inadequate, markets are not inherently competitive, and “freedom” is often invoked to grant power to some while denying basic rights and freedoms to others.
Friedman also criticized corporate leaders who advocate “corporate social responsibility,” warning that “pontificating executives” could result in the “iron fist of government bureaucrats” regulating prices and wages. But Friedman overlooked the crucial role of government “bureaucrats” in protecting the public interest, investing in infrastructure, and ensuring the proper functioning of markets by enforcing property rights, contracts, and other laws. In doing so, he presented a misleading dichotomy.
Similarly, today’s debate about “stakeholder capitalism,” derided by some as “woke capitalism,” overlooks the critical role of effective governments and legal systems. For example, most countries have laws against slavery, child labor, and drunk driving. It is the responsibility of governments and judiciaries to reflect our collective desire for such laws by enacting and enforcing them. If democratic governments fail to do so or seem weak and corrupt, we should investigate the underlying causes and address them, rather than abandon democracy altogether.
At a time when democracy is under threat, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided. Subscribe now and save $50 on a new subscription.
Subscribe Now
James Madison, the US Constitution’s principal architect, wrote in 1788, “If men were angels, no government would be necessary.” Given that government officials are also fallible, he argued, it is crucial to establish both internal and external controls. “In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself,” Madison explained. With this in mind, the Constitution imposes significant constraints on government power.
Making Executives Accountable
Both capitalism and democracy depend on trustworthy institutions, within government as well as in the private sector. For these institutions to merit trust, they must be transparent and have robust governance and accountability mechanisms to prevent abuses of power. In a healthy democracy, corporate managers and wealthy elites should not disproportionately influence legislation and law enforcement for their own benefit at the expense of the general public. No one should be unfairly penalized, nor should anyone be allowed to cause significant harm or break the law with impunity.
But in the United States’ “broken legal system,” as District Judge Jed Rakoff notes in his eponymously titled 2021 book, “the innocent plead guilty and the guilty go free.” Corporate executives, who frequently evade accountability despite repeated misconduct and even criminal behavior under their watch, are a prime example.
The US opioid crisis underscores the dangers of weak regulation and executive impunity. Beginning in 1996, when it first brought OxyContin to market, Purdue Pharma downplayed the painkiller’s addictive potential. The US Food and Drug Administration (FDA) allowed Purdue to disseminate misleading information to doctors and patients, even as the company adopted aggressive marketing strategies that incentivized doctors to prescribe OxyContin in high doses. Despite mounting evidence of their role in fueling the addiction crisis, Purdue and other opioid manufacturers continued their efforts to create new markets for their products.
Purdue Pharma was a private company whose shares were owned by the Sackler family. According to Barry Meier’s 2018 book Pain Killer: An Empire of Deceit and the Origin of America’s Opioid Crisis and Patrick Radden Keefe’s 2021 book Empire of Pain: The Secret History of the Sackler Dynasty, several family members were deeply involved in developing the company’s marketing strategy, especially its efforts to downplay and shift attention from the addiction risks associated with OxyContin. The Sacklers became enormously rich, channeling more than $10 billion to their family trusts as the devastating costs of the opioid crisis were coming to light.
Confronted with thousands of lawsuits, Purdue Pharma ultimately filed for bankruptcy in September 2019. Although individual members of the Sackler family faced numerous civil lawsuits, none filed for personal bankruptcy. In fact, in 2021, a judge approved a controversial settlement granting the Sackler family immunity from future litigation. This settlement was later overturned by an appellate court and is currently under review by the US Supreme Court. But even if the victims are allowed to sue the Sacklers, accessing the billions held by the family outside the US remains a significant challenge.
To be sure, many other corporations, including drug manufacturers, distributors, and pharmacies, profited from the opioid crisis. Books such as Gerald Posner’s Pharma: Greed, Lies, and the Poisoning of America, and Sari Horwitz and Scott Higham’s American Cartel: Inside the Battle to Bring Down the Opioid Industry paint a grim picture, highlighting the failure of government institutions to prevent the crisis, respond in a timely manner, or ensure accountability. The fines these corporations paid were far smaller than the profits they had made, and their management rarely faced any consequences. By contrast, street-level drug dealers routinely face long prison sentences, and some “pill-mill” doctors who prescribed massive quantities of opioids have been sentenced to prison.
One notable exception is Insys, which bribed doctors and committed insurance fraud to boost prescriptions of Subsys, an extremely addictive fentanyl-based painkiller intended for end-of-life care. Insys became the first – and, so far, only – opioid manufacturer whose executives, including its founder, were charged with racketeering conspiracy and sentenced to prison. As an in-depth investigation by Frontline and the Financial Times revealed, Wall Street investors had enthusiastically supported the company while its stock value climbed, turning a blind eye to its unethical practices and the enormous harm they caused.
Deceiving consumers and regulators and distributing unsafe products are pervasive practices in the US health-care system. In his book Sickening: How Big Pharma Broke American Health Care and How We Can Repair It, Harvard physician John Abramson explains how pharmaceutical companies and medical-device manufacturers distort and manipulate the information available to doctors and patients by controlling the data, design, and dissemination of medical research. By exploiting legal and regulatory loopholes, asserting control over research, and leveraging the trust of doctors and patients, these companies maximize profits while delivering poor health outcomes and boosting health-care costs.
Corporate Wrongdoing Takes a Village
Recklessness, deception, and inadequate regulations are more likely to persist when the damage is not immediately apparent, the victims and perpetrators are dispersed, and the issues are poorly understood. As I explained in a recent commentary, this is especially true in the banking sector. In the updated and expanded edition of our book The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It, Martin Hellwig and I examine how and why banking regulations fail and bailouts persist. These outcomes, we argue, ultimately erode democracy and undermine the rule of law.
Rule-breaking, which has become pervasive in banking in the aftermath of the 2007-09 global financial crisis, extends beyond reckless borrowing and failure to comply with bailout agreements. The “cum-ex scandal,” in which banks and other institutions used fraudulent tactics to siphon billions of euros from several European governments, and the “London Whale” episode, which caused JPMorgan Chase to lose $6.2 billion in derivatives trading due to inadequate internal risk controls and regulatory violations, are cases in point. So is the accounting fraud that whistleblowers at Deutsche Bank exposed, eventually resulting in a $55 million fine, and HSBC’s extensive money-laundering scheme, which helped drug lords, rogue governments, and corrupt leaders funnel their illicit gains into the legitimate financial system.
As the Purdue example shows, the problem goes beyond banking. In what has since become known as the “Dieselgate” scandal, Volkswagen and other car manufacturers marketed cars that were billed as energy-efficient but were in fact equipped with software designed to cheat emissions tests. Boeing misled US regulators and shareholders about the pilot-training requirements for its 737 MAX model, leading to two plane crashes that claimed the lives of 346 people in 2018 and 2019. And as former Facebook executive Frances Haugen revealed in 2021, Big Tech platforms had long been aware of the threats their algorithms pose to democracies worldwide.
Corporate wrongdoing does not exist in a vacuum. It relies on enablers who avoid challenging those responsible. These enablers include auditors who neglect to alert investors to potential fraud; highly paid private lawyers who help companies and executives find and exploit legal loopholes; politicians who foster mutually beneficial relationships with favored corporations and their leaders; and regulators who are reluctant to exercise their authority or inform the public about their legal constraints. As Rakoff notes, federal judges who do not speak up against injustices within the legal system contribute to these problems.
In her book Big Dirty Money: Making White Collar Criminals Pay, legal scholar Jennifer Taub describes what she refers to as “the shocking injustice and unseen cost of white-collar crime” in the US. The situation is not much better in other developed democracies. In Germany, for example, the prosecutor who tried to hold the perpetrators of the brazen cum-ex fraud accountable resigned in April 2024, citing the lenient treatment of white-collar criminals by the German judiciary.
Academic experts and media outlets that fail to hold the powerful to account and instead produce corporate-friendly narratives also play a crucial role in perpetuating bad rules and harmful practices. In our book’s final chapter, we quote the early-twentieth-century German economist Walter Eucken, who observed that economic power struggles are not waged “by people who are infinitely progress-minded” but by “people who have developed sophisticated and brutal techniques of fighting for power.” He noted that those who pursue power often claim their actions promote the common good, highlighting the dangers of narrative manipulation and deception. Consequently, he asserted that scholars must remain “extremely skeptical” of official narratives.
A healthy democracy depends on citizens who believe in distributed power, informed debate, and compromise, underpinned by robust legal and regulatory frameworks and key institutions such as a free press, an elected legislature, and independent courts. Moreover, democratic governance requires an engaged citizenry committed to the pursuit of truth. As Adam Smith wrote in The Wealth of Nations, “commerce and manufactures … can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government.”
In a 2021 essay, I argued that the forces of capitalism have undermined trust in democratic governance and its ability to deliver justice. Restoring this trust and ensuring the trustworthiness of public institutions requires comprehending the underlying problems that have led to our current predicament. Although this challenge may seem daunting, educating citizens to be skeptical of those who claim to be “progress-minded” could amplify their collective power and bring about necessary change.
To have unlimited access to our content including in-depth commentaries, book reviews, exclusive interviews, PS OnPoint and PS The Big Picture, please subscribe
STANFORD – In oppressive regimes, where speaking the truth can result in punishment, rulers often convince citizens to believe in falsehoods. And yet free speech and democratic institutions are no guarantee that policies will be guided by truth, much less that citizens will be satisfied with the status quo. The widespread belief in many Western democracies that the economic, political, and legal systems are unfairly “rigged” is evidence of that. But while today’s public discontent is justified, it tends to lack focus, enabling populists and demagogues to divert attention away from the real issues and possible solutions.
In our current system of democratic capitalism, corporations control the bulk of economic activity. Backed by favorable legal frameworks and armed with resources that often exceed those of government agencies, corporations and their leaders increasingly resort to deception and manipulation to secure additional rights and privileges, thereby undermining democratic institutions’ capacity to serve the public interest. Consequently, public trust has declined, exacerbating democratic erosion.
In an influential 1970 essay, Milton Friedman famously argued that the social responsibility of managers is to “make as much money as possible while conforming to the basic rules of society.” In practice, this means that corporate managers should concentrate on maximizing profits (as measured by accounting metrics) and their company’s share prices.
Had society’s rules protected all those affected by corporations, and had businesses adhered to these rules and operated in “an open and free competition without deception and fraud,” as Friedman envisioned, then managers following his dictum might have produced positive outcomes for society. In the real world, however, rules often prove inadequate, markets are not inherently competitive, and “freedom” is often invoked to grant power to some while denying basic rights and freedoms to others.
Friedman also criticized corporate leaders who advocate “corporate social responsibility,” warning that “pontificating executives” could result in the “iron fist of government bureaucrats” regulating prices and wages. But Friedman overlooked the crucial role of government “bureaucrats” in protecting the public interest, investing in infrastructure, and ensuring the proper functioning of markets by enforcing property rights, contracts, and other laws. In doing so, he presented a misleading dichotomy.
Similarly, today’s debate about “stakeholder capitalism,” derided by some as “woke capitalism,” overlooks the critical role of effective governments and legal systems. For example, most countries have laws against slavery, child labor, and drunk driving. It is the responsibility of governments and judiciaries to reflect our collective desire for such laws by enacting and enforcing them. If democratic governments fail to do so or seem weak and corrupt, we should investigate the underlying causes and address them, rather than abandon democracy altogether.
HOLIDAY SALE: PS for less than $0.7 per week
At a time when democracy is under threat, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided. Subscribe now and save $50 on a new subscription.
Subscribe Now
James Madison, the US Constitution’s principal architect, wrote in 1788, “If men were angels, no government would be necessary.” Given that government officials are also fallible, he argued, it is crucial to establish both internal and external controls. “In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself,” Madison explained. With this in mind, the Constitution imposes significant constraints on government power.
Making Executives Accountable
Both capitalism and democracy depend on trustworthy institutions, within government as well as in the private sector. For these institutions to merit trust, they must be transparent and have robust governance and accountability mechanisms to prevent abuses of power. In a healthy democracy, corporate managers and wealthy elites should not disproportionately influence legislation and law enforcement for their own benefit at the expense of the general public. No one should be unfairly penalized, nor should anyone be allowed to cause significant harm or break the law with impunity.
But in the United States’ “broken legal system,” as District Judge Jed Rakoff notes in his eponymously titled 2021 book, “the innocent plead guilty and the guilty go free.” Corporate executives, who frequently evade accountability despite repeated misconduct and even criminal behavior under their watch, are a prime example.
The US opioid crisis underscores the dangers of weak regulation and executive impunity. Beginning in 1996, when it first brought OxyContin to market, Purdue Pharma downplayed the painkiller’s addictive potential. The US Food and Drug Administration (FDA) allowed Purdue to disseminate misleading information to doctors and patients, even as the company adopted aggressive marketing strategies that incentivized doctors to prescribe OxyContin in high doses. Despite mounting evidence of their role in fueling the addiction crisis, Purdue and other opioid manufacturers continued their efforts to create new markets for their products.
Purdue Pharma was a private company whose shares were owned by the Sackler family. According to Barry Meier’s 2018 book Pain Killer: An Empire of Deceit and the Origin of America’s Opioid Crisis and Patrick Radden Keefe’s 2021 book Empire of Pain: The Secret History of the Sackler Dynasty, several family members were deeply involved in developing the company’s marketing strategy, especially its efforts to downplay and shift attention from the addiction risks associated with OxyContin. The Sacklers became enormously rich, channeling more than $10 billion to their family trusts as the devastating costs of the opioid crisis were coming to light.
Confronted with thousands of lawsuits, Purdue Pharma ultimately filed for bankruptcy in September 2019. Although individual members of the Sackler family faced numerous civil lawsuits, none filed for personal bankruptcy. In fact, in 2021, a judge approved a controversial settlement granting the Sackler family immunity from future litigation. This settlement was later overturned by an appellate court and is currently under review by the US Supreme Court. But even if the victims are allowed to sue the Sacklers, accessing the billions held by the family outside the US remains a significant challenge.
To be sure, many other corporations, including drug manufacturers, distributors, and pharmacies, profited from the opioid crisis. Books such as Gerald Posner’s Pharma: Greed, Lies, and the Poisoning of America, and Sari Horwitz and Scott Higham’s American Cartel: Inside the Battle to Bring Down the Opioid Industry paint a grim picture, highlighting the failure of government institutions to prevent the crisis, respond in a timely manner, or ensure accountability. The fines these corporations paid were far smaller than the profits they had made, and their management rarely faced any consequences. By contrast, street-level drug dealers routinely face long prison sentences, and some “pill-mill” doctors who prescribed massive quantities of opioids have been sentenced to prison.
One notable exception is Insys, which bribed doctors and committed insurance fraud to boost prescriptions of Subsys, an extremely addictive fentanyl-based painkiller intended for end-of-life care. Insys became the first – and, so far, only – opioid manufacturer whose executives, including its founder, were charged with racketeering conspiracy and sentenced to prison. As an in-depth investigation by Frontline and the Financial Times revealed, Wall Street investors had enthusiastically supported the company while its stock value climbed, turning a blind eye to its unethical practices and the enormous harm they caused.
Deceiving consumers and regulators and distributing unsafe products are pervasive practices in the US health-care system. In his book Sickening: How Big Pharma Broke American Health Care and How We Can Repair It, Harvard physician John Abramson explains how pharmaceutical companies and medical-device manufacturers distort and manipulate the information available to doctors and patients by controlling the data, design, and dissemination of medical research. By exploiting legal and regulatory loopholes, asserting control over research, and leveraging the trust of doctors and patients, these companies maximize profits while delivering poor health outcomes and boosting health-care costs.
Corporate Wrongdoing Takes a Village
Recklessness, deception, and inadequate regulations are more likely to persist when the damage is not immediately apparent, the victims and perpetrators are dispersed, and the issues are poorly understood. As I explained in a recent commentary, this is especially true in the banking sector. In the updated and expanded edition of our book The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It, Martin Hellwig and I examine how and why banking regulations fail and bailouts persist. These outcomes, we argue, ultimately erode democracy and undermine the rule of law.
Rule-breaking, which has become pervasive in banking in the aftermath of the 2007-09 global financial crisis, extends beyond reckless borrowing and failure to comply with bailout agreements. The “cum-ex scandal,” in which banks and other institutions used fraudulent tactics to siphon billions of euros from several European governments, and the “London Whale” episode, which caused JPMorgan Chase to lose $6.2 billion in derivatives trading due to inadequate internal risk controls and regulatory violations, are cases in point. So is the accounting fraud that whistleblowers at Deutsche Bank exposed, eventually resulting in a $55 million fine, and HSBC’s extensive money-laundering scheme, which helped drug lords, rogue governments, and corrupt leaders funnel their illicit gains into the legitimate financial system.
As the Purdue example shows, the problem goes beyond banking. In what has since become known as the “Dieselgate” scandal, Volkswagen and other car manufacturers marketed cars that were billed as energy-efficient but were in fact equipped with software designed to cheat emissions tests. Boeing misled US regulators and shareholders about the pilot-training requirements for its 737 MAX model, leading to two plane crashes that claimed the lives of 346 people in 2018 and 2019. And as former Facebook executive Frances Haugen revealed in 2021, Big Tech platforms had long been aware of the threats their algorithms pose to democracies worldwide.
Corporate wrongdoing does not exist in a vacuum. It relies on enablers who avoid challenging those responsible. These enablers include auditors who neglect to alert investors to potential fraud; highly paid private lawyers who help companies and executives find and exploit legal loopholes; politicians who foster mutually beneficial relationships with favored corporations and their leaders; and regulators who are reluctant to exercise their authority or inform the public about their legal constraints. As Rakoff notes, federal judges who do not speak up against injustices within the legal system contribute to these problems.
In her book Big Dirty Money: Making White Collar Criminals Pay, legal scholar Jennifer Taub describes what she refers to as “the shocking injustice and unseen cost of white-collar crime” in the US. The situation is not much better in other developed democracies. In Germany, for example, the prosecutor who tried to hold the perpetrators of the brazen cum-ex fraud accountable resigned in April 2024, citing the lenient treatment of white-collar criminals by the German judiciary.
Academic experts and media outlets that fail to hold the powerful to account and instead produce corporate-friendly narratives also play a crucial role in perpetuating bad rules and harmful practices. In our book’s final chapter, we quote the early-twentieth-century German economist Walter Eucken, who observed that economic power struggles are not waged “by people who are infinitely progress-minded” but by “people who have developed sophisticated and brutal techniques of fighting for power.” He noted that those who pursue power often claim their actions promote the common good, highlighting the dangers of narrative manipulation and deception. Consequently, he asserted that scholars must remain “extremely skeptical” of official narratives.
A healthy democracy depends on citizens who believe in distributed power, informed debate, and compromise, underpinned by robust legal and regulatory frameworks and key institutions such as a free press, an elected legislature, and independent courts. Moreover, democratic governance requires an engaged citizenry committed to the pursuit of truth. As Adam Smith wrote in The Wealth of Nations, “commerce and manufactures … can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government.”
In a 2021 essay, I argued that the forces of capitalism have undermined trust in democratic governance and its ability to deliver justice. Restoring this trust and ensuring the trustworthiness of public institutions requires comprehending the underlying problems that have led to our current predicament. Although this challenge may seem daunting, educating citizens to be skeptical of those who claim to be “progress-minded” could amplify their collective power and bring about necessary change.