David R. Henderson  

A Relook at Enron

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But the historian must look deeper. Was Enron really a free-market, capitalistic company even when its apparent self-interest lay elsewhere? Or were profit centers dependent on tax subsidies, advantageous regulation, or checks written on the U.S. Treasury? Was Enron passive or active in seeking and receiving special government favor?

As it turns out, Enron was a political colossus with a unique range of rent-seeking and subsidy-receiving operations. Ken Lay's announced visions for the company--to become the world's first natural-gas major, then the world's leading energy company, and, finally, the world's leading company--relied on more than free-market entrepreneurship. They were premised on employing political means to catch up with, and outdistance, far larger and more-established corporations.

This is from the September Feature Article, released this morning, titled "Enron: The Perils of Interventionism." It's by Robert Bradley, Jr., a 16-year Enron employee.

When you read the piece, I think most of you will find yourselves, when you see how closely Enron was intertwined with the government, saying "I didn't know that."

COMMENTS (10 to date)

I don't disagree with what Bradley says about Enron being a crony capitalist par excellence, but they also bought into the 1990s mania for 'first mover advantage' and 'lock-in', where you were supposed to give away your products to gain an 'installed base' from which you could later extract monopoly profits. A theory of market-failure first promoted by Paul David and Brian Arthur, and swallowed by Paul Krugman (among others).

Stan Liebowitz wrote a very amusing book detailing the mania, Re-Thinking the Network Economy. That mistake played a large role in Enron's subsequent failure.

david writes:

The political economy of contentious deregulation is that the process will always be taken over by rent-seekers exploiting the need of political actors for marginal coalition support. Governments should probably not deregulate at all until they have a sufficiently large majority to push it all the way through - larger in a presidential system than a parliamentary one, in fact.

The deregulators don't even get thanked by new generations of deregulators after the fact - see the contracting out of plant construction - compared to previously completely nationalized construction - being argued after-the-fact to be 'government intervention'...?

@Patrick R. Sullivan - reminds me of Web 2.0's 'freemium' business models. Hopefully there, the socially-driven network effect is real.

Daublin writes:

I didn't know all of that, either.

On the larger issue, I am surprised and disheartened if people really use Enron as some sort of argument against the free market. It was a large venture that failed. I don't see how we can prevent that; if you make a venture so safe that it can't fail, then it's not really a "venture" any more.

MikeP writes:

Apart from any crony capitalism involved, Enron was clearly all hype from the beginning.

Skimming a fraction of a percent off the energy they were moving around while calling the price of the energy they moved "revenue" made them look far larger and more important than they actually were. The markets finally figured this out and hammered them for it.

Ken B writes:

Enron -- you did build that!

Ari Tai writes:

And much of the silliness started with V.P. Gore telling these same folks that they could take a carbon trading scheme to the bank. "You can depend on it!" he said. They took that wager and underwrote it with arbitraging any energy market where the consumer side was decontrolled and production was not. California being the archetype and ripe-for-the-plucking.

Disaster was bound to follow.

At least Enron was allowed to fail. Much bigger failures await us today - all that we're doing is winding up a spring that when it finally snaps will do far more damage than if we simply celebrated failure as what it is - an expression of the first democratic vote - that of the citizen voting with their pocketbook - followed by their feet.

Imagine where we’d be today if we’d allowed CITI to fail and a judge to manage its breakup (as well as the other mortgage speculators). It’s sobering to listen to Kovacevich on how far we’ve drifted from free markets.


txslr writes:

Well, yes. But Enron was really no different than almost any other corporation in this way. People on all sides tend to anthropomorphize corporations, imagining them to be good or bad, or ascribing to them opinions or thoughts. In reality corporations are more like machines that seek returns on equity capital.

They are lumbering machines, and they generate enormous amounts of waste heat and leakage as they thump about. They will all take actions to improve their chances of return, and since they are machines one can’t expect them to exercise much in the way of morality as they do so. If governments tinker with the landscape on which corporations maneuver, and if they allow corporations input to how the new landscape is to be designed, corporate machines will try to tailor it to afford greater returns. It’s in their nature.

As a freshly scrubbed, brand new employee of a large oil company I discovered that my employer had been invited to join a lobbying effort that, it was believed, had a very good chance of getting the Jones Act repealed. I was gob smacked to learn that my employer had not only turned down the invitation, but had joined the other side, effectively scuttling (hee-hee) that effort. But, a careful analysis of the shipping market told them that a repeal of the act would put them in a worse competitive situation, so they joined the other side.

You really can’t expect any more.

dmh00000 writes:

Dr. Bradley, while l completely agree with your findings in the Enron story, l don't believe they would have been given serious consideration had this been written 6 months prior to Enron's implosion. Had the narrative set forth in your comments been laid out 6mos, 1yr, or 3yrs prior to Enron's collapse, the company would have spent millions in professional fees to counter each charge point by point. Moreover, the economist(s) associated with such a story would have been sufficiently discredited by equally reputable economists whose paid mission was to keep the Enron fantasy alive until the timer on the ticking time bomb could no longer be pushed back further.

When people believe they are operating in a truly capitalist economy (which most people in this country believe), it's not hard to convince others that the economy's most successful company must embody the very best elements of capitalism.

Rob Bradley writes:

Yes, dmh, any dissent would be been squashed during Enron's life. First, Jeff Skilling would have said: 'You just don't get it.' And Ken Lay, the master of the conflict of interest, and having all outside bases covered, would have nudged the right people to cream me.

As a postmodern corporation with a 'shared narrative,' and many academics and intellectuals in tow, Enron was a mighty company.

If this starts to sound like something out of an Ayn Rand novel, that's right. Ken Lay was the epitome of the 'second hander' in action.

Objectivism helped me finally understand what Enron was all about, and it was an Objectivist (Roger Donway) who recognized it before I did. (All this is in book 1, Capitalism at Work).

Rob Bradley writes:

I should add that today's WSJ op-ed "Corporate Cronyism Harms America." is by a corporate leader who is the very opposite of Ken Lay.

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