Enron’s Bankruptcy at 15: A Revisionist Political Economy Conclusion

By Robert Bradley Jr. -- December 2, 2016

“Enron, and no one more than Ken Lay, time and again pledged allegiance to free enterprise, deregulation, privatization, and competition. Come the implosion, that rhetoric was taken at face value. If Enron was capitalism, then capitalism was prone to flim-flam, deception, and even fraud.”

“Enron was a paragon of crony capitalism and a master of politicized regulation. Like no other company in history, Enron leveraged non-market government opportunity in myriad and sustained ways that ultimately came at the expense of consumers, taxpayers, and investors.”

“Classical liberals applauded the fact that the market, not regulators, exposed and ruined Enron. True enough, but the broader point and the deeper moral of the story is this: Enron and Ken Lay, as they were and became, would not have existed in a truly capitalistic economy.”

I was part of Enron’s layoff the day after the company filed for bankruptcy, fifteen years ago tomorrow. I had been an employee for 16 years, joining HNG-InterNorth  (the name change to Enron came in 1986) in September 1985, more than a year after Ken Lay came over from Transco Energy Company in May 1984.

Enron became a worldview-forming event about capitalism. There are many facets to the business/political economy (or political capitalism) story that deserve a classical liberal analysis. Thus the inspiration of my book series.

My research editor mentioned that I should share the latest draft of my Preface to book 3, Enron Ascending: The Forgotten Years, 1984–96. (Scrivener and John Wiley & Sons, 2017).

Parts of the draft Preface follow.

“Enron is well on its way to becoming the most intensively dissected company in the history of American business.” So wrote Bethany McLean and Peter Elkind in their 2003 account, The Smartest Guys in the Room. Today, Enron stands as the most-analyzed corporate scandal in modern history, with countless books, journal articles, and reports about a company gone rogue.

            Well-documented financial and accounting legerdemain constitute the why of Enron’s artificial boom and decisive bust. But the whys behind the why—the motives, attitudes, beliefs, and practices that gradually brought about ruinous behavior—have been less chronicled and not well understood.

            Simplistic moralisms have abounded. “Fish rot at the head” declared one popular Enron book. “Shocking incompetence, unjustified arrogance, compromised ethics, and an utter contempt for the market’s judgment” found another. “Thoughtless and incompetent leadership” and “careless and lazy management” concluded the most professorial study of Enron to date.

            Hubris, amorality, and greed were certainly present at Ken Lay’s company. But accusations of incompetence, lethargy, and thoughtlessness fall short. Enron brimmed with smart, dedicated, focused decision makers who tirelessly sought to create a new kind of company. How and why did so much talent and effort go astray? Why was “innovation corrupted,” as a Harvard Business School professor asked.

Was it a species of market failure or capitalism run amock? Or was it, directly or indirectly, a nonmarket failure, an unintended consequence of contracapitalist public policy and contracapitalist thinking by, respectively, government and executives?

More specifically, did prevalent government involvement with natural gas, coal, oil, and electricity before and during Enron’s life shape the leadership and strategies atop the once iconic company? Did special features of America’s mixed economy invite financial deceit and other delinquencies at the once-celebrated experiment called Enron?

If so, why did bad practices come to dominate Ken Lay’s Enron rather than, say, Lee Raymond’s Exxon (later Exxon Mobil) or Charles Koch’s Koch Industries, Inc.? What was different about Enron? What was the role of the company’s founder and beginning-to-end chairman, the Great Man of his industry, and, as much as anybody, Mr. Houston?

            These questions have been inadequately explored for several reasons. First, many journalists lacked deep familiarity with Enron and the energy industry. Second, employee-book retrospectives (10, by my count), which might have offered deeper insight, tended to be provincial and personal narratives.

Third, most analyses were preoccupied with Enron’s last years and missed how earlier developments made the end predictable, if not inevitable—absent a major, even radical, course correction. Above all, most accounts failed to appreciate the political dimension of Enron’s profit centers and financial reporting.

            Lacking depth and breadth, mainstream history became misleading history, especially when placing Enron in its social-economic-political context. Ironically, commentators fell back on Enron’s own misleading self-narrative about its free-market reverence.

The company, and no one more than Ken Lay, time and again pledged allegiance to free enterprise, deregulation, privatization, and competition. Come the implosion, that rhetoric was taken at face value. If Enron was capitalism, then capitalism was prone to flim-flam, deception, and even fraud. Conclusion: More, tighter, smarter regulation was and is needed; privatization must be checked, especially in undeveloped countries; and business-funded lobbying must be constricted, if not banned. Only then can the government intervention that might have prevented Enron prevent future ones.

            This narrative stubbornly persists. The fall of the company remains a modern-day allegory for the perils of free enterprise and the capitalist spirit. Business students and professors purport to draw lessons about the need for regulatory oversight. Pundits, politicians, and intellectuals continue to make ideological points by using the company’s name as a metaphor for unfettered profit seeking. The result is that, even after the 15th anniversary of Enron’s bankruptcy (December 2, 2016), the company still lacks the detailed, chronological, you-are-there history needed for fuller interpretation and better insight.

            A complete history must focus on Enron’s beginning and maturation—and even its antecedents. What the company actually did—not merely what it said it was doing—must be established. Painstaking analyses must document how the company’s principals, and no one more than Ken Lay, acted, interacted, reacted, and failed to act during his company’s solvent life (approximately 17 years).

            But more than better documentation is required. The real lessons of Enron require a reliable, integrated worldview spanning the social sciences. Earlier interpretations, albeit presented as just-the- facts, rested explicitly or subtly on the worldview of American Progressivism: Whatever capitalists do is capitalism. The result was a contradictory and unintelligible picture of a supposedly free-enterprise firm profiting heavily from its political influence. This book, and the tetralogy of which it is a part, endeavors to resolve that contradiction.

            Book 1 of the Political Capitalism tetralogy (Capitalism at Work) explicated the classical-liberal worldview; Book 2 (Edison to Enron) detailed the back story of Enron’s industry and Ken Lay’s early career. Drawing on those previous works, this book (and the one to come) will trace the false prosperity and spectacular demise of Enron to the company’s violations of classical-liberal principles in epistemology, ethics, business, and politics.

Such contracapitalism is characterized most noticeably by the pursuit of special government favor, a practice that came to define Enron. Its deepest roots, however, lie in transgressions of the bourgeois morality that has always constituted the foundation of commercial capitalism. Such transgressions may be essentially personal—such as self-deceit, imprudence, recklessness, and prodigality. They may also be interpersonal, vices that go against the spirit of mutually beneficial exchange and best-practices management—such as false representations, zero-sum thinking, unreliability, and nepotism. This theory of contra-capitalism is explained in the Introduction and identified throughout the book to show that Enron’s spirit and practices were radically antithetical to classical liberalism.

            Classical liberals applauded the fact that the market, not regulators, exposed and ruined Enron. True enough, but the broader point and the deeper moral of the story is this: Enron and Ken Lay, as they were and became, would not have existed in a truly capitalistic economy….

The third major conclusion, concerning the role of ideology in shaping Enron’s business strategy, demands wholesale revision. The question to be answered is: Was the “systemic failure” involved in Enron’s collapse—implicating all the private and government gatekeepers and guardians of business—attributable primarily to a free-market outlook and capitalist spirit, or to an outlook favoring government intervention and regulation?

            The mainstream view is that capitalism failed. Didn’t Enron egregiously exploit the rules meant to protect the public? Didn’t Ken Lay pay homage to deregulation and free markets during his entire Enron tenure? Wasn’t Jeff Skilling the epitome of Social Darwinian capitalism? Didn’t the final result—tens of thousands of innocents financially compromised—reveal the downside of modern American capitalism? Amid the wreckage, even the Wall Street Journal editorialized that Enron was “a problem for anyone who believes in markets.”

            More regulation and better enforcement, Progressives concluded, must protect against free-market debacles. Post-Enron legislation, supported by both political parties, reflected this view.

            But one must look beyond Enron’s promarket image to actual behavior and true motivation. It is here that a far different view emerges. Enron was a paragon of crony capitalism and a master of politicized regulation. Like no other company in history, Enron leveraged non-market government opportunity in myriad and sustained ways that ultimately came at the expense of consumers, taxpayers, and investors.

            Unlike business/political scandals such as Crédit Mobilier and Teapot Dome, Enron’s political labors were legal. The final result revealed the perils of the mixed economy—in which special government favor via the tax code, regulation, or grants, as well as private-side manipulation of politicized rules (accounting, taxation, etc.), can replace a consumer-driven, free-market business environment. Enron, in other words, was about something different from the creative destruction of the marketplace, through which errant entrepreneurship is revealed and modified, usually short of surprising and spectacular failure.

            A revisionist view of Enron in terms of political economy and public policy begins and ends with Ken Lay, a big-picture PhD economist with much regulatory experience inside and outside federal agencies. After becoming CEO of Houston Natural Gas Corporation, a predecessor to Enron, Lay quickly remade his new company into a federally regulated entity. From innocent beginnings, he gradually came to abandon centuries-old maxims of business prudence in a vain quest to make Enron into the world’s leading energy company and, later, the world’s leading company.

           Highly ambitious and über-optimistic, Enron’s chairman was running from a past and superaccelerating into the future. What appeared to be a real-life Horatio Alger story would end up as an American tragedy, the subject of Book 4: Enron and Ken Lay: An American Tragedy (covering Enron from 1997 through bankruptcy and the criminal prosecutions). Jeff Skilling’s scheduled release from prison in 2017 will constitute a final data point for my history of Enron—and this tetralogy on political capitalism inspired by the rise and fall of Ken Lay’s enterprise.