Enron: A Powerful Blow to Market Fundamentalists
By Robert Kuttner
The deepening Enron Corp. (ENE ) scandal should hose away an entire world view about how capitalism is supposed to work. But will the right lessons be drawn? As a political scandal, Enron threatens the Bush Administration. No corporation was closer to the Bush family and its Republican allies. No corporation was more political in gaming the system to get the rules written in its favor. The White House damage-control machinery contends that if the President did not try to rescue Enron on the way down, his hands are clean. The real scandal, of course, is how the GOP and its broader world view helped Enron rig the rules on the way up.
The deeper scandal here is ideological. Enron epitomized an entire philosophy about the supposed self-cleansing nature of markets. Republicans are the more devout practitioners of this ideology, but both parties are implicated.
Enron, as a trading enterprise, claimed to be the quintessence of a pure free market. In practice, it was up to its ears in cronyism, influence-peddling, rigging the rules to favor insiders, and undermining the transparency on which efficient markets depend. Transparency, in turn, demands regulation in the public interest.
There is no getting around the need for regulation, since capitalism itself requires rules that govern everything from rights to financial and intellectual property to constraints on opportunistic practices that undermine the efficiency of a market system. If you think capitalism can operate in the absence of vigorous, competent, and public-minded government, look at Moscow or Buenos Aires. And government requires politics not corrupted by bribery. For it is democratic politics that elects the officials who make and enforce efficient rules--or don't.
But for three decades now, the dominant strain of economics from the University of Chicago has been teaching gullible undergraduates and journalists that there is no such thing as the public interest. Efficient outcomes are just the aggregation of selfish private interests, and government's main job is to get out of the way. Well, after Enron, these theorists should learn some other useful trade.
Even conservatives who reject other forms of government intervention grudgingly concede the need for a Securities & Exchange Commission. Entrepreneurs and traders are not saints. Deregulation is no cure-all, because decisions about which rules to waive are every bit as politicized as the decisions to regulate. We've seen the corruption of deregulation in every imperfect-market realm from electricity to banking to copyright law to airlines, hospitals, and telecom. None of these is an absolutely efficient free market; each one requires rules. And in all of these realms, whether they are regulated or deregulated, corporations seek to game the system and rig the rules.
But Enron took the prize. It not only cooked its books. It used its extensive political influence to cook the regulatory system itself. When a public-minded chairman of the Federal Energy Regulatory Commission stood in Enron's way, Chairman Kenneth L. Lay paid a call and the offender disappeared. Wendy Gramm went from being head of the Commodity Futures Trading Corp. under Bush I to the Enron board. Her husband, Senator Phil Gramm (R-Tex.), helpfully ensured legislation allowing Enron to evade policing either from the CFTC or the SEC.
At the SEC, Arthur Levitt spent eight years trying to toughen regulation so that corporations would keep honest books and auditors would not also be retained as business strategists and spin-doctors. For this public service to capitalism, Levitt was widely vilified. His successor, Harvey Pitt, came directly from lobbying for the accounting firms who were against Levitt's proposed rules.
The difference between the Enron scandal and the superficially similar Long-Term Capital Management affair is that LTCM essentially operated beneath everyone's radar. Enron, by contrast, worked to take out the radar stations. The Houston company systematically used its ample political connections to rig the rules--on trading, audits, disclosure, and the mechanics of energy markets. The other difference is that LTCM's dupes were ostensibly sophisticated consenting adults. In the Enron case, a lot of innocent people got badly hurt.
None of this is new--only the particulars are different. The last time we learned the broad lesson that capitalism is not self-regulating, it took a Great Depression that was followed by a reformist Democratic Administration. This time, there are no catastrophic wider effects (yet), and the incumbent Republican Administration still champions the ideology of laissez-faire and the politics of cronyism. But Enron is to the menace of market fundamentalism what September 11 was to the peril of global terror--a very costly wake-up call. Our political leaders should pay as much attention to this assault on the very heart of capitalism as they paid to the other one.
Robert Kuttner is co-editor of The American Prospect and author of Everything for Sale.