The Enron collapse- a case *for* not against free markets

I'm a believer in free markets. No.. scratch those words. Belief is something you have in an uncertain concept, like "I believe in global warming".

Instead let me say, I appreciate, understand and endorse the proven superiority of free markets. No situation or scenario exists where government control, regulation, or ownership of an enterprise can be said to be superior to the free market alternative.

Having said that, that doesn't mean that there aren't a lot of total ignoramuses in the world, with a 5-second attention span who can readily list some news item or company name as if it were proof positive that free markets cause suffering, exploit consumers, are greedy and reckless, trash the environment and/or don't care about society. In fact, this set of beliefs is so widespread, it forms its own ideology and mass movement - hence the anti-globalisation crowd.

This crowd is angry, passionate, but has the shortest attention span possible. Rather than writing an essay, article or book to justify their beliefs, they resort on shallow catch-phrases and expect the words "Nike !!", "McDonalds!!", "Halliburton!!" or "Enron !!!!" to win over opponents.

My objective is to tackle this ignorant mob of anti-globalisation activists head on. Actually, a lot of their rage and anger is justified at some of the abysmal outcomes and failures, but it is misdirected against capitalism and free enterprise. Contrast this mob with it's opponents. Whilst a large, often youthful, ideological and activist movement exists as fierce critics of capitalism, a much smaller but wiser scattering of writers, economists and historians remain to defend capitalism, and of course this doesn't occur through mass rallies, angry posters and bumper stickers and strong PR instruments, but through subtle teachings, texts and articles built upon years of understanding and careful study.

If only the angry anti-globalisation crowd were fully equipped with basic economic knowledge and looked at some of the details in each scenario that enrages them, they would be out in the streets protesting against governments, bureacracy and regulation and demanding a reduction in tariffs, quotas, taxes, regulations and government ownership.

I will debunk the American example of Enron, the most publicised and prominent scandal used as ammunition by the anti-globalisation and anti-capitalist left.

It is typically interpreted by the majority of people as being an example of corporate fraud, corruption and greed, which could have been averted by government intervention, regulation and ownership. An article in 2002 from the Von Mises institute refutes each of these myths, and shows that often, the opposite is the case:

The story goes as such: Enron was able to gain political favors by supplying campaign money to politicians from both major parties, thereby blinding these otherwise public-spirited people from performing their duties to the people.

Part of this story is true; Enron has given vast sums of cash to both Republicans and Democrats. While Democrats are presently attempting to link Enron and its chairman, Kenneth Lay, to President George Bush and Vice President Richard Cheney, they conveniently seem to have forgotten that Enron in 1997 contributed $100,000 to the Democratic Party immediately after President Bill Clinton directly intervened to help Enron gain a $3-billion project in India.

The problem here is that the politicians have it backward. The energy business, including oil and electricity, has been thoroughly politicized for about a century. Producers of electricity, despite what mainstream economists like Paul Krugman tell us, have been and continue to be heavily regulated, both by state and federal agencies. Electricity production has undergone some changes in its regulatory structure in recent years, but to call this process "deregulation" (especially in California, which launched a crazy quilt of reregulation that led to the recent energy crisis there) does violence to the language.

Producers of electric power are regulated in every sense of the word, from the fuel they use to the prices they can charge customers. Furthermore, the process is subject to the whims of regulators and politicians, and that makes it very difficult to plan for the long term, as the stroke of a politician's pen (like that of California Governor Gray Davis) can wipe out a lifetime of profitable investments.

Another widespread misunderstanding is that Enron supposedly was an example, even the embodiment of pure capitalism (unregulated and free from interference). Instead it was the absolute embodiment of crony capitalism:

One of the things that characterized the Enron enterprise was its freewheeling ways in financial markets. There is nothing in economic theory that declares free markets are only possible when entrepreneurs wallow in irresponsibility.

However, the Enron mess demonstrates that the marriage of reckless entrepreneurs and irresponsible government is always a recipe for disaster. During the late 1990s, the Fed engaged in unprecedented credit expansion. Of course, the flip side of credit is debt, and there can be no doubt that the freewheeling Fed also set the table for Enron's shenanigans.

The final blow to the "Enron represents free markets" myth is the action that Lay took as it became obvious Enron could not cook its books any longer. Lay phoned the U.S. Department of the Treasury to ask for help. (To its credit, the Bush administration did not attempt to bail out the rogue firm.)

There is no doubt that the Enron debacle is a disgrace, both to the executives who made these unconscionable decisions and to the federal and state governments that made that firm seem as though it was invulnerable to market realities. It is "crony capitalism" at its worst. Let us remember, however, that it was the politicians who corrupted capitalism, not the other way around.

Given that Enron was the perfect example of crony capitalism (along with the UN oil for food scandal), it should dispel any foolish and naive belief that a "partnership" or a harmonious and beneficial relationship should form between government regulators and bureaucrats, and large corporations where society, consumers and shareholders alike, will be best off.

This misplaced ideal is at the heart of social democratic doctrine. Social-democrats pay lip service and grudgingly admit that there is a role for private enterprise in a society, and free markets. After a century of mass starvation and death at the hands of communist ideology, you would expect no less.

But, they are quick to assert that firms, especially the larger ones, develop some kind of monopoly, or power over the populace and engage in acts of exploitation and harmful selfishness if they are left unchecked and unregulated. They do not even pause for breath before demanding that government regulators should have the ultimate say on the what/how/where and when a business can operate. All businesses must then operate within some regulatory framework.

Doctors, dentists, plumbers, electricians, drivers, pilots, forklift operators, builders, accountants, lawyers, architects all need to be licensed/certified/accredited by the state. They must operate in a sea of regulations relating to- equal opportunity, gender, sexuality, anti-discrimination, workplace safety, superannuation, payroll taxes, annual leave, public holidays, sick leave, company taxes, environmental impact statements, accounting and reports .. and more.

So instead of private enterprises simply being exposed to a range of complex and dynamic market forces, resources and costs, prices and constraints, opportunities and risks. They now have to wrestle with a straight-jacket of regulations and laws imposed by politicians. This situation alone, means that operating a business profitably and succesfully involves either

• Sitting by and hoping that through good luck, the regulations will leave you alone to run your business in peace (rarely succesful)
  
• Actively trying to lobby politicians, forming interest groups, engaging in massive PR efforts, funding political parties, to try and ensure that legislation and regulation will not harm your business, and in fact, often protect and promote your business.
  

The 2nd approach is very common, and the standard approach for all large corporations. But some of them take it to extremes. The greater the regulation in the industry, the greater the efforts by the business to lobby and grease palms and sway regulators. When it reaches this degree, its usually referred to as crony capitalism. Its kind of like paying off the mafia boss to leave you alone, or to beat up your competition. Thats what Enron was all about.

When things turn sour and such a partnership between the mafia boss and the business reveal abuses of customers, irresponsibility and dishonesty towards shareholders, and not providing the service its customers demand, how come the pundits respond to such a scenario by saying the mafia boss should have more control over the business ?

Yes, Enron was reckless. But it still managed to weave its way sneakily through the existing regulatory regime imposed by government. It complied with the existing financial regulations when it cooked the books. And there was very little room for competitors to step in and challenge Enron, because the mafia boss was protecting them in a heavily regulated market. In an unregulated market, frauds and failures like Enron get liquidated quickly and people move on.