On December 11, 2001, a little more than a week after Enron declared bankruptcy, a triumphant Paul Krugman proclaimed in the pages of The New York Times that the energy company had been an experiment
testing the libertarian credo, that the great expansion in government’s role between the two world wars was unwarranted. [It was] supposed to demonstrate that government activism is unnecessary, and that radical laissez-faire works. The Enron experiment was, in essence, about doing away with regulation – regulation of prices, regulation of financial trade . . . but the great economic lesson of the 20th century was that to work, a market system needs a little help from the government, regulations to pre- vent abuses, active monetary policy to fight recessions. The debacles in Houston demonstrate that this great lesson has not lost its relevance.
The popular literature that came out after the dust had settled often came to similar conclusions: the Enron fraud proved the failure of capitalism and deregulation; the free market system had faced its battle of Waterloo. Such conclusions have emerged even in detailed accounts that have since been published of Enron’s legal misdeeds.
Some of Enron’s executives were certainly engaged in fraudulent behavior and committed illegal actions. CFO Andrew Fastow craftily concealed Enron’s substantial losses by creating shell companies to absorb them and leave Enron itself with an illusory paper profit, while CEO Ken Lay enticed investors with a series of misleading public statements predicting higher stock prices and offering lies about the company’s health. But these facts hardly discredit the free market system. If Enron truly represented an experiment that could prove or disprove the value of free markets, it must first be established that free-market principles and practices led to fraud and eventually to bankruptcy. Krugman assumes this to be true and rushes on with his indictment, but establishing the connection between Enron and U the libertarian credo” is necessary before one can determine what broad economic lessons the Enron case should teach. This is much more complicated and time consuming than Krugman would wish.
Robert L. Bradley, Jr., understands the need for a thorough understand- ing of Enron’s actions. (He is an expert on the economics of oil and natural gas development, a subject of obvious relevance to the issue.) He also understands the need for a thorough understand- ing of the theories and principles that undergird a free-market system. He has undertaken to provide both types of understanding in his projected trilogy, “Political Capitalism.” The first book of this ambitious study – and the only one published so far – “Capitalism at Work,” lays out the philosophy, economic thought, and history that have contributed to the development of free- market ideology.
Bradley avoids the failure of Krugman and others to distinguish between the way in which an impartial market behaves and the way in which the partial actors within it are supposed to behave. In the first part of his book, he shows what the ethics of Adam Smith, Samuel Smiles, and Ayn Rand contribute to the discussion of free mar- kets. He thus sets the stage for a discussion, later in the trilogy, of Enron’s brilliant but amoral business practices. His intention is to expose the”pretense that genius trumps execution”: the idea that assembling a room of the smartest men in the industry will provide long- term growth and success, even if those individuals cannot make principled and consistent decisions as well as imaginative and clever ones.
The next section of the book elaborates Bradley’s key concept of “Political Capitalism – “a socioeconomic system in which legislation and ensuing regulation are inspired and influenced primarily by organized business interests.” Bradley reviews this nation’s long record of flirtations with Political Capitalism, providing a context for understanding how Enron believed that it could succeed – and how it did succeed, for a time – by violating the rules of the marketplace. Besides duping its shareholders, Enron made money from government constrictions of the market. The state of California deregulated part of the energy market, in such a way as to give Enron a share of electricity sales at prices protected from sufficient com- petition. The sad results were blamed on deregulation, when it fact Enron was profiting from a marketplace distorted by the state.
In the third part of his book, Bradley examines the theories behind resource depletion, with a focus on Enron’s economic sector, energy. Thomas Malthus, whose work earned economics the derisive nickname “the dismal science,” first sparked the debate over resource depletion in the early 1800s; and Malthusianism, the view that the human population will outrun its resources, has been popular ever since. Bradley traces the debates of the past two centuries and unravels the myth of the “population bomb,” helping the reader understand how poor economic theory has assisted government in increasing its authority over the energy market. Again, Bradley prepares a path he can follow in his later books, which promise to show how Enron operated within this intellectual and institutional framework to curry political favors.
Unfortunately, readers hoping that Bradley will convincingly and decisively sever the equation of Enron and “free markets” will have to wait for the rest of the trilogy. “Capitalism at Work” touches only tangentially on Enron, where it happens to relate to the theory, philosophy, and history that are the main focuses of the book. Little detail is offered on Enron itself. The details, Bradley assures us, will be forthcoming.
Few readers will be happy to be put off in this way. Nevertheless, by laying a solid groundwork for understanding the theory and ethics of a free market system, Bradley is correcting, slowly but thoroughly, a great many mistakes of other people. Without an under- standing of free-market theory, it is foolish to use the Enron case either to indict or support the free market.
And certainly the history of “political capitalism” or “political entrepreneurship” is important to know. The state has a disastrous record at promoting economic development. Examples abound. President Washington supported a government-operated fur company – on the ground that it would be helpful in defending the United States against English encroachment in the Northwest Territory. Even with its government backing, however, that company lost out to John Jacob Astor’s innovative American Fur Company, which captured the Indian trade and expanded its business to the shores of the Pacific and beyond.
When a steamship industry became possible in the 1840s, Congress gave a subsidy to Edward Collins to build four steamships and route them back and forth from New York to Liverpool. Supposedly, under Collins’ leadership, passengers, freight, and mail would be delivered efficiently. But Collins was awkward and often incompetent. Two of his ships sank in the Atlantic Ocean. Yet Congress continued to fund him. Finally, Cornelius Vanderbilt started a competing company, using his own money for his own ships. He cut the costs of passenger traffic and never had an accident. Congress responded by increasing Collins’ subsidy so as to compensate him for his lost business to Vanderbilt. Eventually the subsidies stopped, but not before $11 million (almost 20% of the U.S. national debt) had been awarded to inefficient steam- ship companies.
After the Civil War, the United States gave large loans (which turned into subsidies) and much acreage to three transcontinental railroad companies. With the cash in hand, these roads had no strong incentives to build their lines efficiently. Like Collins, they went bankrupt. Large sections of their lines had to be rebuilt and sometimes even relocated because of shoddy construction. But the privately funded Great Northern Railroad, which operated on a shoestring budget, succeeded.
A final noteworthy example is the airplane industry. The Wright Brothers built and flew the first successful air- plane by using their own money. But before they did so, the federal government funded Samuel Langley, the head of the Smithsonian Institution, to build and launch the first aircraft. Nine days before the Wright Brothers flew their plane at Kitty Hawk, North Carolina, Langley crashed his subsidized air- plane into the Potomac River outside of Washington, DC.
Besides government subsidies; of course, the greatest source of interference with the market is government regulation; and the two often work together to corrupt business. The message of “Capitalism at Work” is that “complex rules for a complex world have proved less a cure than an enabler for corporate malfeasance. [Enron] is yet another case of unintended consequences from government intervention, a major theme of political economy.” The chief lesson of Bradley’s book is not that Enron showed “a market system needs a little help from the government [and] regulations to prevent abuses,” as Krugman asserted upon Enron’s fall, but rather that Enron shows how abusive that help from the government can be.