Reading the commentaries and opinions of various people on the collapse of Enron was a salutary lesson to me in how prejudice and ignorance so easily taints one’s conclusions about the world around them. To wit, I am referring to those critics of capitalism who are gleefully telling us how the loss of Enron jobs and retirement funds is a proof of the failure of the capitalist system. Or, as they often try to drum into us, capitalism equals greed equals capitalism.
Well, I think reality check time has arrived and we ought to remind ourselves of a basic but simple fact concerning the human condition. This saga is not a proof of the failure of the capitalist system; it is a proof of the failure of the human tendency to greed. As US treasury secretary Paul O’Neill said, the collapse of energy giant Enron is “part of the genius of capitalism." You take a risk and you may reap greater rewards or you lose your shirt. If you can’t stand the heat in the kitchen, you get to keep the shirt but don’t expect the cashmere coat to wear on top.
I am not focussing here on the dubious practises of the executives and accountants related to Enron, we’ll leave them to the judicial processes of the land. I want to simply comment that those who demand that the government bail out the 401K pension holders are wrong.
A look at those pension funds reveals they were top heavy in Enron shares. Sixty two percent of an employee fund could consist of Enron shares. Enron matched individual contributions with equivalent company shares, individuals had full control over their investment decisions and many choose to top up further with their own shares purchased at discount prices. They choose to ride the trend of a grossly over-inflated stock as the price soared to over $85 and “irrational exuberance” had its hypnotic way. Personal funds ballooned into six and seven figure numbers as many spied afar off the promised land of financial salvation. A very familiar story, a very human story.
To those who retired and moved their pensions to safer funds near the bubble top, we say “Good timing, well done. You took the risk and won." To those who are left with depleted funds we say, “You took a risk and failed, please consider diversifying your investments next time." To those thirty-somethings who have time to recoup their losses, the loss may seem big but it is not a mountain. They have to accept part of the responsibility of putting the precious eggs of retirement into one basket. Society advances by learning from its mistakes, so ought individuals to act.
They accepted the good times as Enron provided free gymnasiums, taxi rides, theatre tickets and first-rate benefits (see this link). As one employee said: “If you hadn’t earned $1m within four or five years, then you weren’t trying hard enough,." Now they have to accept the bad times also.
The one grain of hope they may consider is to sue Enron for depriving them of the individual liberty of selling their shares when the bad news became apparent. Enron did not allow this and that is criminal. Enron allowed their executives to cash their shares in but that is because they essentially are Enron.
But what is greed? Is it an expectation of more than you are entitled too? That is pretty unquantifiable. It is more like an expectation that becomes so all-consuming that all rational analysis is left at the front door. It is an expectation that is self-perpetuating and self-authenticating and leads one to conclude that such and such an investment cannot fail. It did and rational analysis made a dramatic and sudden comeback. I expect a lot of these people will stay in low risk investments for a long time.
Where was capitalism in all this? That is easy. Capitalism espied Enron from afar and unsheathed its blood-stained sword for it is a sword that always runs red as it tests and probes those who challenge its universal law. The questioning blade pierced the armour of Enron and his blood mingled with that of a hundred Nasdaqites. Enron staggered and fell dying upon the heap of bankrupt and economic apostates whilst Capitalism smelt the putrefying stench of cooked books and thundered off in the direction of Andersen Accountants.
Why is greed so readily linked to capitalism? The answer to that is simple, greed seeks those places where it can best satiate itself and is optimistic that wealth can be found and produced. Capitalism in combination with free market access maximises the efficiency of wealth creation and greed knows this else it would not congregate around it. The trouble with the critics is that they cannot see capitalism for the various clients that enthusiastically congregate around it. They equate the parasite with the host and do err greatly. Cleanse the land of the illegal parasites and the beauty of capitalism will shine all the more perfectly.
Therein lies the genius of capitalism. The most awesome and probing tool of wealth creation known to man.
January 21, 2002