Enron: It's OUR Problem

February 27, 2002 -- The enemies of capitalism are using Enron Corporation’s sudden bankruptcy to launch a new wave of attacks on the free market. Enron confirms the Left’s view that business is a dog-eat-dog arena of swindlers and exploiters that requires active government management. Enron lets the Right make a show of standing up to big business. So a host of new regulations on private business activities is moving forward in Congress, ranging from more restrictive rules on 401(k) retirement savings to intensive government oversight of the accounting profession.

These new regulations won’t help Enron employees or shareholders. They aren’t meant to. They are meant to fix capitalism, but politicians can’t fix the problems that Enron exposed.

The Left dreams of an economy that creates wealth without risk, rewards without effort, and responsiveness without responsibility. Wise, angelic bureaucrats will supposedly nurture “sustainable” technologies and prevent all errors and any malfeasance. But the risk of honest or dishonest failures cannot be eliminated from capitalism. Endless dynamism is a diverse and messy process.

Capitalism is a system of individual initiative. Its institutions arise because individuals freely choose to create them—no law ensures their provision. We depend on free choice to bring us everything from food and cars to music and dating partners. We also depend on private standard setters to ensure the consistency and reliability of our transactions. One such organization is the Financial Accounting Standards Board (FASB), which provides the standard accounting practices that make it possible for investors to assess the financial condition of a firm with relative ease.

The result of this freedom is a rich, diverse, division-of-labor society. We expect distant strangers to provide us with reliable information and a sound legal and contractual structure. The collapse of Enron betrayed these expectations. Whether or not Enron executives literally engaged in fraud, they plainly exploited loose accounting standards to inflate Enron’s reported earnings and hide its losses. They kept the company’s risks secret. They buffaloed investors and the press with vague hype about the untapped potential of the Internet. Enron’s accountants didn’t tell its board all they knew, and its lawyers colluded in the whole process. Shame fell upon the financial analysts, too, who failed to investigate the company, yet puffed it brazenly to their clients.

Enron was not the failure of a company only, but also a failure of the institutions of the marketplace. However, the cause of the problem was not the market itself—it was what we did with the market. Professional money managers ploughed billions into Enron without asking what the company’s business was or how it could be making money. Private investors flocked to every huckster broker who shouted, “Buy-buy-buy,” never asking “why?” Millions of readers of magazines and newspapers snapped up cheerleading CEO profiles and ignored incisive, contrarian reports.

Politicians cannot resolve this crisis of capitalism. If self-interested investors with money on the line and free professionals with their careers at stake could not plumb the mysteries of Enron, there is no way a panel of legislative appointees can be expected to do better. Enron’s auditors let its dubious book-keeping pass muster for several years, but many federal and state government agencies in America have gone for decades without following even basic standards of business accounting. If Enron is a swindle, what is Amtrak?

No, when it comes to our own risks and our own interests, it is up to us to solve the problem as individuals. We ourselves can correct systemic biases when they appear in the marketplace, using the means of the marketplace: individual initiative. We can make sure our savings are diversified if we want security; we don’t need a law to force us. Stockholders can press for better accounting standards from the firms they hire. We already see the power of the marketplace at work as big conglomerates like General Electric announce reforms to increase the openness of their books and financial analysts emphasize their independence from brokerage operations. But in the end, we as individuals are the marketplace. It is up to us to safeguard our own interests. No one else can, and in the end no one else will.

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