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What the Enron Bankruptcy Doesn’t Mean


A big company fails, maybe even commits wrongdoing, and in some people’s eyes that proves free markets are bad. This is what passes for logic these days. The full story on Enron is not known yet. But for the sake of discussion, let’s assume the worst: namely, that company management deliberately misled investors and employees, and tried to get government officials to help it through its trouble.

What follows from all that? Ralph Nader, economist Paul Krugman, and various members of Congress think it means more than merely prosecuting wrongdoers. To them it proves that deregulation of energy (or anything) is contrary to the public interest and a source of unearned goodies for undeserving fat cats. Their “solution” is even more regulation than we’ve had for the last hundred years. As Krugman puts it, “The great economic lesson of the 20th century was that to work, a market system needs a little help from the government: regulations to prevent abuses.” He’s being ironic. He doesn’t really mean “a little” and doesn’t really mean “help.” He really means a lot of interference.

But that is not the great lesson of the 20th century and it isn’t the lesson of Enron. At worst, the lesson is that there are dishonest people in the world. Surprise, surprise! Stop the presses!

Before we go asking the government to regulate, let’s remember that regulators are people too — which means they can also be dishonest, unless we wish to make the ridiculous assumption that a man becomes a saint the moment he undertakes government employment.

More important, as commentator Michael Kinsley once wrote, the real scandal in government occurs not when officials act illegally, but when they act legally. This is important to remember before we use the Enron case to augment government power. Government creates nothing. All it does is use the threat of force to rearrange what others have created and otherwise to interfere with people’s activities. When pundits and politicians glibly call for regulation of markets what they really want is bureaucrats’ dictating the terms of trade between producers and consumers. While this is usually couched in terms of consumer protection, that is not what it accomplishes. One way or another it ends up hurting consumers and at least some producers. Markets set prices according to supply and demand. Prices are signals to producers and consumers about market conditions and they elicit the appropriate action. But when government interferes with those signals, producers do not act to serve consumers and consumers cannot respond intelligently. This usually results in shortages when there would have been plenty. Low prices dictated by government in defiance of market conditions is no favor.

The upshot is that no matter what Enron did, it cannot discredit the case for deregulation of energy. Nader and Krugman would never concede that a scandal at a regulatory agency discredits the case for regulation. Why the double standard? (The case for regulation is refuted by economics and ethics. No scandal is required.)

The other lesson the Enron collapse supposedly teaches relates to the contact between company executives and members of both Congress and the Bush administration. Enron gave campaign donations to lots of congressmen from both parties. When the company’s troubles began, it asked the administration to intervene, apparently to no avail.

What’s to be learned from that? Simply that in a mixed economy, where government holds life-and-death power over whole industries, business will court its favor. Is anyone surprised by that? It is mystifying that people like Ralph Nader who want government to regulate business are scandalized when business tries to influence who does the regulating and how. Corporations consist of citizens. You’d think that people who wear their devotion to democracy on their sleeves would not get so upset when corporate citizens call on their government for help.

On the other hand, those of us who prefer strict limits on government to unlimited democracy understand that the only way to end business influence over government is to end government power over business. Free markets and free trade, with redress for force and fraud—that’s all the protection we consumers need.

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    Sheldon Richman is former vice president and editor at The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.