RE: ECON: When capitalism falls on its sword

From: Dickey, Michael F (michael_f_dickey@groton.pfizer.com)
Date: Mon Jan 21 2002 - 12:30:11 MST


-----Original Message-----
From: Technotranscendence [mailto:neptune@mars.superlink.net]
Sent: Friday, January 18, 2002 9:53 PM
To: extropians@extropy.org
Subject: Re: ECON: When capitalism falls on its sword

On Friday, January 18, 2002 6:19 PM Robert J. Bradbury
bradbury@aeiveos.com wrote:
> A fairly good editorial by Paul Krugman in the NY Times
> today about "A System Corrupted" regarding the Enron affair.
>
> See:
> http://www.nytimes.com/2002/01/18/opinion/18KRUG.html?pagewanted=print

"This is, of course, the same Krugman who thought the WTC attacks would
be good for the economy. Who never met an inflation he didn't like or
an economic freedom he didn't hate. Who thinks government is the
solution to every last economic problem regardless of theory and
history.

Aside from this, the real problem with Enron is not some market failure,
but government encouragement and support of risky behvior."

     -------------------------------

Some of you may have seen this, but its a good article that counters Paul
Krugman's arguments. I have, incidently, had the (mis)fortune(?) of meeting
Paul Krugman. He lecturd at a Skeptic conference on the importance of
empirical validation of economic priniciples. Warning that no single thing
is as influential on our daily lives than economic policies, ones based on
psuedoscience should be avoided at all costs. It was my adherence to the
scientific methodology that led me to believe that (generally) a free market
economy is best for all involved. Oddly Mr. Krugman has since come to a
different conclusion or abandoned that viewpoint all togheter. - Michael

Myths about Enron
----------
Ludwig von Mises Institute
by William L. Anderson
   "While the facts of the Enron debacle are easily available
   in most newspapers and on the Internet, they are accompanied
   by a number of myths that are being spawned by politicians
   and their media allies. ... I would like to tackle a few of
   these economic and political 'old wives' tales' and help set
   the record straight." (01/18/02)

http://www.free-market.net/rd/659617030.html

Myths About Enron

by William L. Anderson

[Posted January 18, 2002]

As the once-formidable Enron Empire continues to implode--and new
revelations appear daily about the inner workings (and apparent financial
shenanigans) of this firm--we are treated, not surprisingly, to the wrong
story by the mainstream news media and their associates from the political
classes. It is bad enough to see a huge firm go bankrupt, but what makes
this situation even worse is the moral and intellectual bankruptcy that
follows in its wake as the apostles of statism feed the rest of us
disinformation.

While the facts (as we know them today) of the Enron debacle are easily
available in most newspapers and on the Internet, they are accompanied by a
number of myths that are being spawned by politicians and their media
allies. (For example, in decrying the Enron mess, columnist George Will
declared, "It will remind everyone--some conservatives, painfully--that a
mature capitalist economy is a government project.") I would like to tackle
a few of these economic and political "old wives' tales" and help set the
record straight.

Myth #1: Enron proves once again that capitalism corrupts politics.

This seems to be a recurring theme, most recently given by Sen. John McCain
during an appearance on CBS's "Face the Nation." The story goes as such:
Enron was able to gain political favors by supplying campaign money to
politicians from both major parties, thereby blinding these otherwise
public-spirited people from performing their duties to the people.

Part of this story is true; Enron has given vast sums of cash to both
Republicans and Democrats. While Democrats are presently attempting to link
Enron and its chairman, Kenneth Lay, to President George Bush and Vice
President Richard Cheney, they conveniently seem to have forgotten that
Enron in 1997 contributed $100,000 to the Democratic Party immediately after
President Bill Clinton directly intervened to help Enron gain a $3-billion
project in India.

The problem here is that the politicians have it backward. The energy
business, including oil and electricity, has been thoroughly politicized for
about a century. Producers of electricity, despite what mainstream
economists like Paul Krugman tell us, have been and continue to be heavily
regulated, both by state and federal agencies. Electricity production has
undergone some changes in its regulatory structure in recent years, but to
call this process "deregulation" (especially in California, which launched a
crazy quilt of reregulation that led to the recent energy crisis there) does
violence to the language.

Producers of electric power are regulated in every sense of the word, from
the fuel they use to the prices they can charge customers. Furthermore, the
process is subject to the whims of regulators and politicians, and that
makes it very difficult to plan for the long term, as the stroke of a
politician's pen (like that of California Governor Gray Davis) can wipe out
a lifetime of profitable investments.

Oil is another thoroughly politicized commodity. Government determines when
and where individual firms can drill for oil, the extraction processes they
can use, and, since much of the remaining oil-producing land in the United
States is in the hands of the federal government, nearly every exploration
and drilling project is controlled at some level by the political process.
The fact that Congress continues to bar oil firms from tapping vast oil
fields located beneath barren lands in northern Alaska bears eloquent
witness to the fact that the political classes are doing everything they can
to deny consumers the benefits of fossil fuels.

Given this set of circumstances, any firm that has anything to do with oil,
natural gas, or electricity is going to have to pay tribute to our political
masters. As Fred McChesney of the Northwestern University Law School so
eloquently put it, the vast amount of political contributions is nothing
more than protection money that companies must give to politicians in order
to be permitted to stay in business.[1]

Do payments to politicians "buy" political favors? Of course they do.
However, the process does not originate with capitalists, but rather has
been imposed upon capitalists by the politicians. The line of causality is
vital, as the politicians once again are trying to blame the wrong people.

Myth #2: Without proper regulation from government, companies like Enron
will abuse the financial system.

Again, the pundits have it backward. The supposed scenario as presented by
the media elite is one of the sharp-eyed regulator being stymied in his
vital work by the politicians who have been bought off by the capitalists.
A favorite example is that of the "Keating Five," which was a group of five
senators (including the "honorable" John McCain) who intervened with banking
regulators on behalf of Charles Keating, a savings and loan CEO whose
operations went belly up.

While the tale sounds good, it is just that: a tale. To assume that
government is not a political entity is to assume that dogs do not bark.
Regulators are part of a system put into place by politicians to benefit
politicians and their friends.

Furthermore, this myth is based upon the fiction that regulators care more
about the health of a business than do its owners. Take the savings and
loan crises of the late 1980s, for example. The oft-repeated story in the
media was that regulators and bank examiners could see the problems coming,
but were held at bay by their political masters.

There is a kernel of truth to that story. Some regulators did try to sound
alarms and were squelched by politicians. However, the story goes much
deeper. First, savings and loan industries, being regulated by government
and being the beneficiaries of government-sponsored deposit insurance, form
a natural political constituency, or, to put it more succinctly, an interest
group. What politicians do has great importance to those in this industry,
since Washington, D.C., can enrich this industry or impoverish it.

In the latter 1980s, it seems that Washington was doing both to the S&Ls.
On the one hand, changes in the regulatory structure enabled these firms to
better compete with banks by expanding the range of loans they could make.
On the other hand, Congress voted in tax law changes that damaged real
estate values, thus devaluing the major set of assets held by S&Ls.

Furthermore, S&L executives, having learned their trade in a heavily
regulated environment, suddenly found themselves facing a new set of rules
and constraints. It is not surprising that many of them made frightful
errors in their loan portfolios. When one combines that lack of free-market
experience with the congressional order that S&Ls immediately sell their
high-risk, high-return bonds (called "junk" bonds) assets, it was inevitable
that there would be a collapse in that financial sector.

Myth #3: Enron represented the future of free-market energy, as Lay was a
firm believer in free enterprise.

Natural monopoly theory, which was concocted by economists about a century
ago, went like this: Industries where large economies of scale are prevalent
will soon find one or two firms dominating production and exchange. In
order to keep these firms from being able to charge monopoly prices,
government must step in and regulate them.

While Austrian economists from Mises on have never subscribed to "natural
monopoly" theory, others in the profession have also "discovered" that
electricity, oil, natural gas, and telephone services can be bought and sold
as commodities in free markets. As entrepreneurs moved into these areas, we
found that the regulatory straitjackets around these industries ostensibly
to "protect" consumers actually were keeping consumers from enjoying
products and services in more abundance and at lower prices than were
possible within the regulatory regimes.

Enron has been one of those "ground floor" firms that both pushed the
envelope that exposed energy regulation for what it was and created new
opportunities for the trading of electricity. That was and will continue to
be a positive development. In other ways, however, Enron pushed a gospel of
statism, especially in environmental matters.

Lay, a member of the Union of Concerned Scientists, a radical
environmentalist and anti-free-market organization, supported the disastrous
Kyoto Accords on "global warming." Enron had banked on trading permits for
carbon dioxide emissions, which would have been based upon the existing
permit system for sulfur dioxide emissions from coal-burning electric power
plants. When the Bush administration refused to sign the Kyoto treaty,
however, Enron was left out in the cold.

(It needs to be said that a system of trading permits, while carrying a
fašade of free-market operations, is nothing more than state control of
production. Such a system has no private property rights and is controlled
by the arbitrary whims of bureaucrats.

One of the things that characterized the Enron enterprise was its
freewheeling ways in financial markets. There is nothing in economic theory
that declares free markets are only possible when entrepreneurs wallow in
irresponsibility.

However, the Enron mess demonstrates that the marriage of reckless
entrepreneurs and irresponsible government is always a recipe for disaster.
During the late 1990s, the Fed engaged in unprecedented credit expansion.
Of course, the flip side of credit is debt, and there can be no doubt that
the freewheeling Fed also set the table for Enron's shenanigans.

The final blow to the "Enron represents free markets" myth is the action
that Lay took as it became obvious Enron could not cook its books any
longer. Lay phoned the U.S. Department of the Treasury to ask for help. (To
its credit, the Bush administration did not attempt to bail out the rogue
firm.)

There is no doubt that the Enron debacle is a disgrace, both to the
executives who made these unconscionable decisions and to the federal and
state governments that made that firm seem as though it was invulnerable to
market realities. It is "crony capitalism" at its worst. Let us remember,
however, that it was the politicians who corrupted capitalism, not the other
way around.

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----
William Anderson, an adjunct scholar of the Mises Institute, teaches
economics at Frostburg State University.  Send him MAIL.  See his Mises.org
Articles Archive.
----------------------------------------------------------------------------
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[1] Fred McChesney, "High Plains Drifters: Politicians' Lucrative Protection
Racket," Ideas on Liberty, January 1998, Vol. 48, No. 1.
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