The opponents of capitalism believe they have found a one-word refutation of its merits: Enron. Speaking at the World Economic Forum, for example, George Carey, the Archbishop of Canterbury, said that this one word introduces a "big question mark over capitalism" and demonstrates that it must "operate within boundaries," by which of course he means the State.
Are we supposed to believe that before Enron, Mr. Carey was all for corporate capitalism?
His comments introduce a big question mark over how closely he reads the business pages. The failure of Enron illustrates many things: that government-mandated audits of publicly held corporations have not achieved their aims, that government-business partnerships are prone to corruption, that some firms disproportionately benefitted from the Fed-fueled economic boom and are now paying the price.
Or if you believe Enron is a criminal matter, you might even say that its collapse illustrates that the human population has its share of gangsters, hucksters, and con men, and that some of them are drawn to the world of corporate finance, where they thrive in boom times.
What it does not illustrate is the downside of the market economy, which is about both profits and losses, thank goodness. That the market permits and accommodates business failure is a virtue of the capitalist economy, one not found in the public sector. The free market, when it’s not being distorted by government intervention, includes mechanisms that punish firms that cook the books and exaggerate their productive power.
Wild overvaluations do not last in the private sector, whereas government failures can go on for decades. Imagine if government agencies were privately owned and traded, and their bonds included a default premium. Their collapse would make Enron look like slow motion. How long would you hold on to your HUD stock, for example? Like all government agencies, its books have been in complete disorder for decades.
As bad as the failure of Enron is, at least we know that it failed. The market was in a position to make a judgment about its operations. We owe this to the fact that private businesses, whether or not their stocks trade, are accountable to their customers and to financial realities. Congress can storm around and decry the evils of Enron’s management, but the only reason anyone knows anything about it is that Enron had to function in a free market — unlike Congress. We can regret the collapse while remembering that it is far better that unviable operations fail than survive.
In socialist economies and in the public sector generally, unprofitable industries not only survive; they are never exposed as unprofitable in the first place. The scandal of Enron is infinitesimal compared to institutions like Amtrack, the Post Office, or the Department of Defense, which can blow through billions and trillions without providing adequate service. They get away with it only because they can use coercion instead of persuasion to profit from the rest of us.
It’s apparently true that Enron fudged its books, invented profits that didn’t exist, and hid losses by creating far-flung subsidiaries. But such shenanigans can’t be compared to the nonsense at the federal level, where there is no such thing as profit and loss, and where it takes an expert to discover basics such as how much the budget is growing relative to revenue. If Enron’s finances were tainted by corruption, every line in the federal budget represents a special interest seeking something for nothing.
Nonetheless, the very word Enron has become a slogan for rabid anti-capitalists who hope to turn the political mood — for government, against private enterprise — into a far-reaching agenda. What that means is more laws designed to prevent contingencies that they will inevitably end up encouraging.
Consider, for example, the law that requires audits of public companies. It ended up cartelizing the accounting industry and creating a false sense of security on the part of the investment community. In other words, the law created the conditions that permitted Enron to get away with its shenanigans longer than the unfettered market would have allowed.
So far, all the reform proposals would do more of the same. One idea would prohibit auditors from moonlighting as consultants. But exactly when and where conflicts of interest are likely to appear can only be settled by market convention through trial and error. Government, the king of conflict of interest, certainly can’t do it by arbitrarily deciding what kind of contracts corporations can draw up with consulting companies.
There’s also the inevitable demand for more financial transparency. But here again, just how open corporations ought to be with their books is a question for the market process to resolve. Corporations whose stock is traded around the world have every incentive to strike the right balance, and stockholders who are not lulled into a false sense of security by government regulation will have reason to keep careful watch.
One of the stupidest proposals would have protected Enron employees but would harm virtually every other employee of a major corporation: the idea of limiting how much an employee can own of his employer’s stock. For decades, left-liberals have pushed employee stock ownership on grounds that it muddies the waters between wage earners and owners. Now, suddenly, these same people turn on a dime and regard employee stock ownership as a corporate trick to keep bankrupt companies afloat. For these people, everything must be either mandated or prohibited, with nothing left to the choice and responsibility of individuals.
No government institution is in a position to investigate Enron, much less legislate to prevent another.