VW makes the case for a moral capitalism

What a mess. Many of you won’t like my title – surely the catastrophic failures and deceits at VW make the case against rather than for capitalism? Not so and here is why.

At the root of the problem with VW is dishonesty. Now, of course, that dishonesty might have been driven by sales targets, or a brand identity to be the ‘greenest’ car manufacturer, but the essence of the problem is that somewhere in the mix VW and its management engaged in deception, a deception which is, of course, indefensible.

However, we do learn from this episode (which has yet to run its course) a few lessons which help make the case for a moral, entrepreneurial capitalism.

  • – Regulation failed

Surely not, I hear you say, it was the regulators who were deceived. Indeed they were, but they didn’t know about it. The discovery that VW was using underhand methods to pass emission testing was made by a not-for-profit, non-governmental organisation that put some vehicles to the test in order to gather evidence to persuade Europe to adopt the USA’s more stringent nitrous oxide limits. From this source the Environmental Protection Agency launched its own investigations.

I can see more regulators and more regulations emerging from this. But they didn’t work first time around – closing the stable door after the horse had bolted.

  • – The market will judge VW

Actually most people do want greener technology, not least in automobile engines. Indeed, a significant part of VW’s brand was that it was a market leader in the development of such technology. VW’s market share was driven by those that wanted both fuel efficiency and lower emissions. VW’s collapse of reputation will be severely damaging to its brand in the market place; and, indeed, as a publicly quoted company, to its share price (which has already wiped ‎€15 Bn off its market cap.). Not ultimately because of fines by regulators, but because its customers will lose confidence in the brand and especially in the green technology claims.

  • – Innovation in the car market will be encouraged

Manufacturers will need to develop ‘clean diesel’ technology, fuel efficient and greener engines, more investment in cheaper hybrids and electric vehicles. They will have to do so not because government says so, but because consumers want a better, greener, more environmentally responsible deal.

  • – The senior executive has been held publicly to account

Can you imagine if VW had been owned by the government? Ok, I know the state government of Lower Saxony has 20% of the voting rights, but if VW had been a state-owned, nationalised industry? Does anyone really imagine that the senior executive would be held to account? If the regulators are also the owners, then there is no incentive at all for transparency. Corporate structures are complex, as indeed is the situation when boards are not aware of what is being carried out in their name. However, the existence of a supervisory board, over and above the executive board, did at least provide a means for public contrition and the holding to account of the chief executive, but many not have known, but certainly carried the responsibility.

The problem is essentially a moral one; dishonesty.

Odd then really. A capitalist scandal makes the case for capitalism.

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Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.