[the-ring] More on Enron

[Paul M. Jones]

Hi, all,

"The problem with capitalism is capitalists; the problem with socialism is
socialism."  (Anybody know the origin of that one?)  In short, capitalism is
great, but everybody has to tell the truth about what they're doing so everybody
else can make informed decisions; if a capitalist lies, it's a personal failure,
not one of capitalism in general -- and the market acts over time on its own to
quaratine or destroy the liar.

(You can skip the rest of my comment if you wish, since it bears only
tnagentially on the article, which is more about personal accountability than
economic systems.)

Which brings us to decentralization and complex adaptive systems.  For those of
you who have *not* heard my general rant, you can get very complex snd
unpredictable behaviors from a large number of relatively ignorant players who
each follow very simple rule sets.  Given the proper context, there's no need
for an overarching authority; the system reacts on its own more quickly and more
effectively than any person or group could mandate.  Indeed, overarching
authority usually misdirects, impedes, and hinders the effective operation of
such a complex system.

In this case, the market players make decisions based on what's going on
locally; if they are fed inaccurate data, they make bad desicions, and we see a
collapse.  In this case, there was a local collapse (Enron) because the accurate
data streaming in from global sources (auditors, the general market) overwhelmed
the inaccurate data (lies) being propagated locally (by Enron).

Read Henry Hazlitt (Economics In One Lesson) for the rules, and Steven Johnson
(Emergence) for the methods.  I'm in the middle of Hofstadter's
Godel-Escher-Bach right now, which talks about recursion and hierarchies of
independent actors in complex systems, which makes things even more interesting
(if more mind-bending).

Everybody got all that, right?  ;-)  The article's not really about that, of
course, but I never miss a chance to bring it up when there's even an oblique
reference.


-- COMMENT ENDS


-- ARTICLE BEGINS


I'm OK, You're OK! Enron's OK?
By ROBERT L. BARTLEY


Not even the most ardent advocates of capitalism claim it can abolish pride,
greed and the rest of the seven deadly sins. Sinners do get flushed out by
recession, however, and we find that Enron, a darling of the mid-1999 to
mid-2000 blowout, was a house of cards. Maybe, though the jury is not yet even
impaneled, a crime.

Such spectacles are occasion not only to pursue the miscreants but also to keep
the larger picture in mind. For all of human failing, capitalism as an economic
system has emerged triumphant from the long trials of the 20th century,
providing the developed world once unimaginable prosperity and, not so
incidentally, historically unprecedented personal freedom.

As we try to prevent another Enron, it will pay to keep in mind that the success
secret of capitalist economies is decentralized decision-making. When a
multitude of buyers and sellers meet in a marketplace, the vagaries of human
judgment even out, facts prevail and true values are reached. Over the centuries
since the first money-changers, this principle has been applied to wider and
wider economic spheres, reaching its highest expression in today's international
financial markets, directing the investment of capital around the world.

Capital markets are particularly good at funding innovation, providing
investment in promising ventures where government technology priming
consistently picks losers. Market-driven economies also have great recuperative
power; far from buckling from the shocks it has received over the last year, the
U.S. economy has stabilized and is probably already recovering. Too, advanced
capitalism has developed mechanisms, pension systems and mutual funds in
particular, for sharing the bounty through a deep middle class. Peter Drucker
has observed that with shares of big corporations predominantly held in pension
funds, workers do own the means of production, just as Karl Marx wanted.

Results can of course be disrupted by market imperfections, for example when one
buyer or seller knows things others do not. Perhaps also by the passion of the
crowd, though as history unwinds "bubbles" and "panics" often turn out to have
rational explanations after all. Whatever the exceptions, though, year in and
year out market-determined decisions outperform even the best-informed and most
brilliant individual mind.

A capitalist economy does not arise spontaneously from the anarchy of piracy and
war. Government plays an absolutely essential role in establishing a rule of
law, protecting property rights, enforcing contracts and providing sound money.
But it is also true that over history the greatest threat to property is
government itself, acting through immoderate taxation, stifling regulation and
even outright seizure.

These minefields suggest some care in designing arrangements to head off human
folly; the system works because people are allowed to fail, indeed to make fools
of themselves. It will not be an advance if we charter some group of brilliant
and well-informed mandarins to head off human folly. In reality, worse, the
mandarins would soon be marching to the tune of some or another batch of
politicians feeding this or that narrow constituency.

How then to curb the seven deadly sins? Surely the law plays a part, and as we
learn about the inner workings of Enron venality seems more and more likely. If
it comes time to indict, I hope prosecutors will not rest with a safe case
turning on some never-before-enforced provision Congress in its wisdom has
declared a felony. To satisfy what's on everyone's mind, they need to see
whether they can make the case that top executives set out to steal from their
shareholders.

What is particularly disturbing about Enron, though, is that failures run far
beyond individual executives. Directors suspending their ethical guidelines to
allow self-dealing partnerships. Accountants and lawyers studiously looking the
other way, even to the point of personal jeopardy. Wall Street analysts failing
in their principal duty of correctly evaluating share prices. This systemic
failure is being blamed on "conflicts of interest," an explanation that strikes
me as, well, jejune.

The systemic failure is not a matter of economic arrangements, but of the
societal collapse of standards and morality over the last three decades or so.
As a society we seem increasingly incapable of sitting in judgment of each other
-- certainly not on the behavior of prominent entertainers, sports figures or
presidents. We have a legal profession that tolerates and even promotes abuse of
the legal system in class action suits -- in the current Microsoft claims
settlement enriching lawyers while not even trying to give a cent to supposedly
injured plaintiffs. What kind of behavior can an "I'm OK, you're OK" society
expect from its professionals or business leaders?

Since accountants are bearing the first wave of recrimination, a few special
words: They're vulnerable because their exercise is so artificial. The "earnings
per share" figures they grind out and argue over have only a vague relation to
economic success and market value. Another of Peter Drucker's insights is that
"profit" is best defined as that portion of cash flow the government has decided
to tax. Dividends are not a tax-deductible cost, for example, though in economic
terms they are interest on the capital shareholders have advanced.

Thus any good economic principles course will distinguish between accounting
profits and economic profits. On the latter, mainstream economists take one of
two views: Some follow Frank Knight, seeing profits as the reward for bearing
uncertainty. Others follow Joseph Schumpeter, seeing profits as the reward for
innovation -- the monopoly return to an original product, quickly vanishing as
imitators arrive. One way to look at Enron's problem is that its economic
profits went away, and it sought to substitute accounting profits.

It's fine to close this particular barn door, to crack down on obscure financial
footnotes, to have more rules against conflict of interest. But the seven deadly
sins do not ultimately turn on economic arrangements. The real answer to Enron
is likely to be found in, say, the little sermons on vice and virtue that make
William J. Bennett so tiresome to our I'm OK, you're OK sophisticates.
 
 



_______________________________________________________________________

Paul M. Jones
pjones@ciaweb.net
http://ciaweb.net

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