January 22, 2002

12:24 PM

Crime in the Suites.William Greider claims that the Enron collapse demonstrates the failure of market orthodoxy.
posted by Ty Webb (29 comments total)

What exactly is market orthodoxy? I didn't find a definition anywhere in the article.

In this era of deregulation and laissez-faire ideology, the essential premise has been that market forces discipline and punish the errant players more effectively than government does.

Is that it? In my opinion, that 'essential premise' is correct. Enron went out of business, that is the consequence of bad business practice. No one in their right mind will want to hire Kenneth Lay as their CEO. Admittedly, it is unfrotunate that Enron employees lost money, but those that had their entire retirement fund in Enron, for whatever reason, were setting themselves up for disaster. I don't care what you invest in, it's insane to have %100 of your retirement fund invested in one company. Diversify! The notion that people should be protected from their own mistakes by government regulation is a socialist one (that's good or bad depending your views). If in fact, shareholders and retirees were lied to, they are able to sue for damages and they might regain some of what they lost. Also, successful national litigation in this case would probably cause these 'insiders' in other companies to be much more wary of doing what Enron did.
posted by insomnyuk at 12:51 PM on January 22, 2002

Also, this is a simple case of theft, not o the free market screwing the poor workers. Those responsible will also be liable for criminal charges, and many of them, I hope, spend some time in jail.
posted by insomnyuk at 12:52 PM on January 22, 2002

Enron is a story or greed and corruption in a whole bunch of people at all levels whose of lack of any moral backbone would not have been believable without this story. It is also a story of the failure of checks and balances at almost all levels as they exist in the accounting world. I dont think it demonstrates a failure of market orthodoxy.

I totally agree that there is need for much closer supervision of corportaions and auditing organizations than what exists currently. But I dont think the recipe proposed by Greider in 'The Nation' is the way to go. e.g. what guarantee is there that Unions would be any less corrupt in administration of 401k than the corporations? Individual greed could be as strong among Unionists as among corporate officials.

I think Greider was right in saying that Arthur Levitt the ex-chair of SEC was one of the few people who tried to hold the big 5 to some kind of accountability. His op-ed in NYT has some constructive suggestions. There is a lot of constructive introspection going on elsewhere ( refer to Accounting in Crisis in Business Week). Whether anything will come out of it, only time will tell. Usually, the vested interests that are opposed to any such reform are so deeply entrenched that they manage to stop most such measures before they get enacted into laws.

People throughout the world, wrestle with the same problem and there has been a fair amount of ongoing debate about what really works. Scandals do break out from time to time in the financial world. In the modern market economy, they happen much less than earlier. Scope for corruption is also much lesser in a market economy than in a closed socialist economy.

Enron - to my mind - doesnt demonstrate the failure of market orthodoxy. It demonstrates that there needs to be much stronger supervision and that reforms in how corporate finance and auditing of corporations is managed is long overdue.
posted by justlooking at 1:02 PM on January 22, 2002

*nod* And re: my previous Arthur Andersen post, they'll lose a lot of business until they get their credibility back.
posted by SpecialK at 1:03 PM on January 22, 2002

The Enron collapse says nothing about the free-market system; it says everything about fraudulent individuals and the system that is or should be there to punish them.

Enron executives/accountants committed fraud, which is to be a criminal offense under laissez-faire capitalism -- in fact especially under laissez-faire capitalism.
posted by dagny at 1:07 PM on January 22, 2002

It demonstrates that there needs to be much stronger supervision and that reforms in how corporate finance and auditing of corporations is managed is long overdue.

Stronger supervision? By whom? The government? So long, market orthodoxy.
posted by raysmj at 1:07 PM on January 22, 2002

raysmj: Huh? Us "market orthodox" ones have never advocated allowing fraud. When fraud is committed, the responsible should be punished. Capitalism is not anarchy.
posted by dagny at 1:12 PM on January 22, 2002

Capitalism is not anarchy

Laissez-faire capitalism comes pretty close by definition.
posted by thewittyname at 1:17 PM on January 22, 2002

When fraud is committed, the responsible should be punished. Capitalism is not anarchy.

Unfortunately, in cases like this, punishing the criminals is pretty much closing the barn door after the horse is gone. It doesn't do anything to help the people who got screwed. More effective supervision of Enron's accounting might have helped those people a lot. If Andersen, or someone else (government agency, whoever) hadn't allowed them to get started down the road they went down, they might never have failed.

Also, blaming the employees for not diversifying their 401(k) accounts is disingenuous, since they were prohibited from doing so.
posted by anapestic at 1:22 PM on January 22, 2002

One thing I've noticed is that quite a few problems like Enron get blamed on free markets when the problem is really that free markets depend on smart buyers and we're getting a bunch of crackheads who spend like drunken sailors on leave.

Few people would buy a car without doing some research or at least taking a test drive - why do so many people think it's not their fault when flashinthe.com dies, when they did no research to check its long-term prospects before buying (or possibly even ignored the people predicting this)? There was at least one critical article about Enron's finances a year ago and there could have been more if analysts had been critically examing things instead of tripping over themselves to praise Enron.
posted by adamsc at 1:23 PM on January 22, 2002

Also, blaming the employees for not diversifying their 401(k) accounts is disingenuous, since they were prohibited from doing so.

One can choose not to participate, and setup a private 401(k) or Roth IRA with an outside broker. But the real problem there is that companies should provide financial advisors BUT that opens them up to significant liability to do so; therefore they don't and their employees, not being savvy investors and not taking the time to learn about the basics of risk and return, lose their shirts.

It didn't take financial geniuses to figure out that there was some friggin in the riggin over at Enron. People figured, I'm making cash right now, so wtf. But when your CFO doesn't want to disclose your balance sheet, you KNOW something is wrongwrongwrong. Anderson just covered up for them because they were getting a juicy a piece of the pie - fraud, then collusion thereof. Hardly an indictment of capitalism. If anything, the resilience of the energy markets at the complete implosion of a major player is a tribute to its strength.
posted by UncleFes at 1:51 PM on January 22, 2002

> Capitalism is not anarchy

Laissez-faire capitalism comes pretty close by definition

What is that supposed to mean? Smearing by way of association? Capitalism is not anarchy, and whether it involves a smaller government than the current welfare state is completely irrelevant.
posted by dagny at 2:09 PM on January 22, 2002

in cases like this, punishing the criminals is pretty much closing the barn door after the horse is gone. It doesn't do anything to help the people who got screwed.

The same goes for locking up or giving the death penalty to people who've killed someone. It doesn't help the murdered, but it is just and morally required nevertheless.
posted by dagny at 2:11 PM on January 22, 2002

---"whether it involves a smaller government than the current welfare state is completely irrelevant."

This is total hyperbole, but I'll bite: Welfare state for whom? The amount of taxpayer money the federal gov't spends on social programs doesn't come close to the amount of our dollars it gives away in corporate subsidies and tax breaks. Those corporate giveaways may be more or less appropriate given the situation, but then so are social welfare payments.
posted by Ty Webb at 2:33 PM on January 22, 2002

If you're waiting for me to defend corporate welfare (tax breaks is obviously no such thing), I'll have to disappoint you.
posted by dagny at 2:35 PM on January 22, 2002

dagny,
Thanks. Glad to see someone be consistent on the subject. Personally, I think there's an appropriate time and place for both corporate and social welfare.
posted by Ty Webb at 2:38 PM on January 22, 2002

> > Laissez-faire capitalism comes pretty close by definition
> What is that supposed to mean? Smearing by way of association?

A lot of laissez-faire capitalist thinkers are quite proud of the connection, and claim that the ultimate end intention is to eliminate government and coercive systems entirely. That's pretty much the definition of anarchy as a political philosophy.

OTOH, A lot of european anarchists hate being associated with the anarcho-capitalists. So who's smearing who?
posted by ntk at 2:39 PM on January 22, 2002

---"corporate welfare (tax breaks is obviously no such thing)"

Tax breaks can indeed be a form of corporate welfare. Take the attempted retroactive repeal of the corporate alternative minimum tax, which is about as blatant a giveaway as they come.
posted by Ty Webb at 3:02 PM on January 22, 2002

insomnyuk: “The notion that people should be protected from their own mistakes by government regulation is a socialist one”

The notion that people should be protected from powerful autocratic regimes is not socialist. In fact, it’s commonly called democratic, is a common theme in the US Constitution and it is good.

anapestic says Enron employees were prohibited from diversifying 60% of their 401(k)s. I’d add that at one point they were blocked by Enron management from touching any of their investments. Sounds like Enron wanted free markets when it suited the company, and closed, tightly regulated markets when it suited it’s stock price.

anapestic: “More effective supervision of Enron's accounting might have helped those people a lot.”

Word — a council made up of unaffialiated citizens would have worked real well in this case. Pretty much the opposite of Harvey Pitt’s idea: The industry seems to work so well, let's go ahead and let it police itself.

On capitalist anarchists: google for individualist anarchists. I think they’re mostly a crock—they’re your basic libertarian. The opposite side of them are socialist libertarians, who are your basic anarchists. (All anarchists are socialist, not all socialists are anarchists.)

q: What do you get when you lock two anarchists in a room?
a: Three splinter groups.
posted by raaka at 3:05 PM on January 22, 2002

A lot of european anarchists hate being associated with the anarcho-capitalists.

...and in other news, the People's Front of Judea hates being associated with the Judean People's Front.
posted by UncleFes at 3:07 PM on January 22, 2002

a libertarian is just an anarchist with money (runs away).
posted by Ty Webb at 3:10 PM on January 22, 2002

I’d add that at one point they were blocked by Enron management from touching any of their investments.

I believe that Enron locked down the 401(k)s to prevent a run when their stock started it's long slide into the toilet, but didn't always have that. Which was wrong anyway. And any company that would mandate 60% company stock participation in the 401(k)? Run, don't walk, to the nearest Edward Jones guy for a Roth. That's Vegas shit, there.
posted by UncleFes at 3:11 PM on January 22, 2002

Laissez-faire capitalism != anything goes

It means that government does not interfere to set prices, quality or quantity; in short, the players in the market define the boundaries of the market with the idea that markets can more efficiently find equilibria (points at which the market players are content) than the government. Capitalism does not guarentee that equilibria will be found, since many markets change quickly, or that market players will not cheat. Cheating is considered bad because it takes the power away from the MARKET and gives it to one or two PLAYERS. Thus, capitalistic countries have rules against monopolies, fraud and other abuses of the MARKET. Saying a true capitalistic society means having no rules, is like saying a true libertarian society should have no laws, even against abridging someone else's liberty. It's contradictory at its core.
Not that I necessarily think energy should be traded in a free-market environment, but Enron had too many unscrupulous activities to use this as a case study of market failure. It clouds the picture.
posted by dness2 at 3:41 PM on January 22, 2002

Laissez-faire capitalism != anything goes

That's still a valid point if not taken to its extreme. An earlier poster claimed one of the problems with Enron was its lack of morals. A corporation can't have morals. Executives do, but if something is not illegal why should a business avoid trying it if it may help the bottom line?

In that fashion that analog works, in an anarchist society you cannot depend on the morals of your neighbor to keep him from stealing from you and in lightly regulated business it would be just as foolish to expect morals to ever come into play.

In the end there's law, the ability to change law, and avoiding responsibility for breaking it. Unfortunately, large amounts of money used by a corporation or its executives help contribute to the last two.
posted by skallas at 4:51 PM on January 22, 2002

Was the "mandated 60% company stock in the 401(k)" actually "for each dollar you save, we'll toss in a buck fifty worth of Enron stock?" That's a lot more common, and less objectionable, corporate behavior.
posted by jaek at 5:03 PM on January 22, 2002

It's true that the lockdown of divesting of Enron stock from 401(k) plans was temporary, and I believe that the high concentration of Enron stock was mandated only in the matching portion (the portion that the company kicked in). And making a matching contribution with a company's stock is fairly common.

Yes, the employees should have diversified to the extent that they could have. But it's also normal for an employee to want to hold stock in his own company. In any case, the employees would have had a tough time knowing that it was a bad investment without accurate financial statements. And when it became clear that things were going south, they were prohibited from moving their stocks around.

As for the argument that we have to prosecute the fraudulent officers even if it doesn't help the shareholders and employees, I agree. But it still won't do the people who had their 401(k)s stuffed full of Enron stock a lick, and better oversight might have. Equating the punishment to a death penalty case is misleading. It's pretty hard to predict when someone's going to commit a murder. The issuance of financial statements, however, is entirely predictable, so it makes a lot more sense to put some resources into preventing problems rather than into punishing the wrongdoers after the fact.
posted by anapestic at 8:05 PM on January 22, 2002

Capitalism is not self correcting!
posted by onegoodmove at 10:38 PM on January 22, 2002

Just what is the relationship between oligolopolies and 'free markets' anyway?
posted by y2karl at 11:28 PM on January 22, 2002

Capitalism is not self correcting

Capitalism is self-correcting to the degree that buyers want it to be. The system works but it doesn't magically compensate for stupidity. It's sort of like voting - everyone bitches about the politicians but almost nobody ever votes for the alternatives and we end up with exactly the government we deserve.
posted by adamsc at 11:43 PM on January 22, 2002