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   What the Enron Bankruptcy Doesn't Mean

Other Voices, Other Views:

What the Enron Bankruptcy Doesn't Mean

by Sheldon Richman

EDITOR’S CAUTIONARY COMMENT: While regulation often is a burden, this writer omits what Enron definitely showed: You cannot now trust audited financial reporting. So either tighter financial regulation is needed (to eliminate off-shore accounts/partnerships to hide debt or cash, for example), or existing regulation must be much better enforced. If this doesn't occur then stock markets will remain wounded. And as further incentive there must be prison time for executives who circumvent regulated and honest financial reporting for personal gain. That's called fraud! One also wonders why the recent switch from Enron to another energy trader resulted in a sudden 30% price drop, which indicates regulation to avoid price gouging is needed too! But asking a government fox to regulate business foxes isn't sure protection, since there is some evidence of collaborative Enron-Government corruption reported at seen.org.

“The only way to end business influence over government is to end government power over business”

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 person becomes a saint the moment that person 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.


Sheldon Richman is senior fellow at The Future of Freedom Foundation in Fairfax, Va., author of Tethered Citizens: Time to Repeal the Welfare State, and editor of Ideas on Liberty magazine.


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This story was published on April 4, 2002.
  
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