“For three decades now, the dominant strain of economics from the University of Chicago has been teaching gullible undergraduates and journalists that there is no such thing as the public interest. Efficient outcomes are just the aggregation of selfish private interests, and government’s main job is to get out of the way. Well, after Enron, these theorists should learn some other useful trade.”

— Robert Kuttner, “Enron: A Powerful Blow to Market Fundamentalists,” BusinessWeek, February 4, 2002.

“Enron should be remembered as the antithesis of a true capitalist enterprise…. Enron lived, thrived, and perished in and through the mixed economy…. The capitalist worldview is stronger, not weaker, post-Enron.”

—Robert L. Bradley Jr., Capitalism at Work: Business, Government, and Energy (Salem, MA: M & M Scrivener Press, 2009), pp. 293, 302.

“Enron was a political colossus whose vision was premised on employing political means to catch up with, and outdistance, far larger and more-established corporations.”

In mainstream thought, the fall of the once-iconic Enron Corporation (1986-2001) has become “Exhibit A” against unbridled business. To capitalism’s critics, its collapse was about more than one company’s bad management. Enron exposed the economic truth about the deregulation movement that had begun in the late 1970s, as well as the moral truth about the ebullient profit-seeking ethos that went along with it. And that truth was: In underregulated markets, greed will shamelessly sacrifice the virtues of fairness, honesty, justice, and even legality.1

“I predict that in the years ahead Enron, not Sept. 11, will come to be seen as the greater turning point in U.S. society,” Paul Krugman wrote in the New York Times.2 Why? Because it will mean “ending an era of laxity, in which nobody asked hard questions as long as everything looked O.K.”3 And Robert Kuttner, in BusinessWeek, said that Enron “should signal the collapse of a whole economic paradigm” and “signal a whole new era of re-regulation.”4

Rice University business ethicist Duane Windsor lambasted “the Enron value set” of “an extreme laissez-faire ideology of absolutely ‘free’ (i.e., absolutely unregulated) markets.”5 Diane Swanson of Kansas State University, with Enron in mind, complained that “most MBAs will graduate without an anchor in social and environmental management,” leaving them with “an amoral, even brutish theory of management [that] has long been taught in business schools.”6

In short, Enron seemed to embody the Progressives’ view that the “idealistic” 1960s and 1970s had been overthrown by a revivified capitalism, coming out of the right-wing think tanks with a new confidence, based on Ayn Rand’s ethical individualism and Milton Friedman’s libertarian economics. The result was plain to see: America’s most admired company (according to Fortune magazine) turned out to be America’s biggest bankruptcy, and its top executives turned out to be criminals. Textbooks immediately began to incorporate this interpretation, and ten-year retrospectives of the company have not changed it.7

A False Narrative

“I believe in God, and I believe in free markets,” stated Ken Lay, the founder and chairman of Enron during its entire life.8 At a Cato Institute conference on natural-gas deregulation, Lay intoned: “Imperfect markets are often better than perfect regulation.”9

In some ways, Enron was entrepreneurial and free-market. The company’s large interstate natural-gas pipelines, regulated under the Natural Gas Act of 1938 by the Federal Energy Regulatory Commission (FERC), energized a staid public-utility-regulated industry with new services and pricing terms. Enron challenged regulation that advantaged coal against natural gas at both the state and federal level.10

But the historian must look deeper. Was Enron really a free-market, capitalistic company even when its apparent self-interest lay elsewhere? Or were profit centers dependent on tax subsidies, advantageous regulation, or checks written on the U.S. Treasury? Was Enron passive or active in seeking and receiving special government favor?

As it turns out, Enron was a political colossus with a unique range of rent-seeking and subsidy-receiving operations. Ken Lay’s announced visions for the company—to become the world’s first natural-gas major, then the world’s leading energy company, and, finally, the world’s leading company—relied on more than free-market entrepreneurship. They were premised on employing political means to catch up with, and outdistance, far larger and more-established corporations.

A big-picture Ph.D. economist with Washington, D.C. experience regulating oil, gas, and electricity, Lay found his niche in the private sector managing federally regulated interstate gas-transmission companies, first at Florida Gas Company and then at Transco Energy Company. When Lay became CEO of Houston Natural Gas Corporation, he transformed a largely unregulated intrastate natural-gas company to a federally regulated (interstate) one in 1984-85. Then, during the next 16 years, he steadily moved the renamed Enron into rent-seeking.11

Political Profit Centers

Government and energy in the United States have a linked history, and the links became more numerous during and after the 1970s’ shortages of oil and gas as a result of price and allocation controls.12 Still, the number and range of Enron’s politically connected profit centers was unique.

  • Enron Cogeneration Company built gas-fired electricity plants for utilities that were required to buy power at an “avoided cost” under the Public Utility Regulatory Policies Act of 1978.
  • Enron Oil & Gas Company specialized in tight-sands gas production eligible for the IRS Section 29 federal tax credit (1980-2000).
  • Enron Gas Marketing became a major profit-center in the mandatory open-access era, whereby federal law required interstate pipelines to offer “nondiscriminatory” transportation at “just and reasonable” rates to nonaffiliated marketers (FERC Order 636, et seq.).13
  • Enron Capital & Trade Resources (a successor to Enron Gas Marketing) marketed electricity under mandatory open access rules at the federal and state levels (FERC Order 888, et seq.).
  • Enron International specialized in project development in developing countries eligible for taxpayer-backed loans from the Overseas Private Investment Corporation and the Export-Import Bank.
  • Enron Renewables Energy Corporation’s subsidiaries in solar power and in wind power received Department of Energy grants and benefited from the federal renewable electricity production tax credit.

All of the above divisions relied directly, not tangentially, on government regulation, special tax provisions, or grants. The profitability of Enron’s interstate pipelines was also tied to government (FERC) regulation, which meant replenishing the rate base for maintaining profitability.

Environmental Regulations

Enron publications and speeches incorporated a “green” theme in 1988, the year that (anthropogenic) global warming became a national issue. Greenhouse-gas emissions, led by carbon dioxide (CO2), were in the spotlight, and natural-gas-centered Enron found new advantage over coal and oil. And so Enron became “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.”14

To receive preferential government treatment, Lay/Enron:

  • Lobbied for and supported the Clinton-Gore proposal for a Btu energy tax (1993),
  • Aggressively invested in solar power (1994),
  • Jump-started the ailing U.S. wind industry with the purchase of Zond Corporation (1996), and
  • Spearheaded the effort behind what became the nation’s most strict renewable-energy mandate (Texas: 1999).

For its efforts, by the way, Enron received a climate-protection award from the Environmental Protection Agency (EPA), a corporate-conscience award from the Council on Economic Priorities, and numerous other awards and recognition from pro-interventionist groups.

Enron did fall short, however, in its 13-year drive to persuade the federal government to regulate (price) CO2 emissions, an intervention that had promised profit opportunities in seven company divisions: natural-gas production, transmission, and generation (relative to oil and coal); energy outsourcing (a/k/a energy efficiency) services; renewable energy generation (wind and solar); and CO2 emissions trading (joining company trading in sulfur dioxide and nitrogen oxide).

The Kyoto Protocol of 1997, an international treaty regulating greenhouse-gas emissions,15 was the outcome of a process that no U.S. company supported more than Enron. Thus, Enron’s climate lobbyist excitedly wrote from Kyoto, Japan:

If implemented it will do more to promote Enron’s business than will almost any other regulatory initiative…. The endorsement of [CO2] emissions trading was another victory for us…. This agreement will be good for Enron stock!!16

“Enron now has excellent credentials with many ‘green’ interests,” the memo added. “This position should be increasingly cultivated and capitalized on (monetized).”17

Gaming Regulatory Complexity

Any analysis of Enron’s business history will reveal entrepreneurial error and unhealthy government dependence that left major divisions of Enron in the red or just marginally profitable. But rather than make midcourse corrections, Enron manipulated the highly prescriptive—indeed politicized—tax and accounting systems to create the illusion of profitability. Such gaming was another crucial government front for the company.

The corporate tax division acted as a profit center at Enron by meeting earnings targets.18 Federal investigators identified 881 offshore subsidiaries as part of Enron’s tax-sheltering strategy.19 Enron’s general tax counsel remembers reaching his gaming limit: “When the [tax-saving] number got up to $300 million [in 2001] I said… ‘We have to come up with a way to get this through [real] earnings—through regular business’.”20

Gamed financial reporting was a second “profit center,” as Enron scoured the Generally Accepted Accounting Principles (GAAP) rulebook to book paper earnings where economic profit (positive cash flow from operations) was absent. “Financial engineering” also hid liabilities and inflated assets, allowing Enron to meet investor expectations and concoct peculiar narratives about its business performance.21

A particularly contrived business in this regard was Enron Energy Services (EES), which purportedly split energy savings with customers via long-term outsourcing agreements. EES buttressed Enron’s “green” image, but the green was not monetary. Mark-to-market accounting turned into mark-to-model, under which arbitrary assumptions about future energy prices turned losses into profits. The GAAP game was even explained in Enron’s employee Risk Management Manual:

Reported earnings follow the rules and principles of accounting. The results do not always create measures consistent with underlying economics. However, corporate management’s performance is generally measured by accounting income, not underlying economics. Risk management strategies are therefore directed at accounting rather than economic performance.22

A third exercise in government gaming that gave Enron false profitability concerned electricity trading in California in 2000-2001. Through contrived schemes with code names like “Get Shorty” and “Ricochet,” Enron exploited loopholes in the state’s highly regulated system, which generated hundreds of millions of dollars of paper profits that utilities and their ratepayers could not and would not pay. One manipulation was described in an Enron memo: “The net effect of these transactions is that Enron gets paid for moving energy to relieve congestion without actually moving any energy or relieving any congestion.”23


Enron was essentially a political company, not a free-market one. Ken Lay’s creation would be unknown to history were it not for the distorted incentives from the government side of the mixed economy.

For more information, see Rent-Seeking, by David R. Henderson in the Concise Encyclopedia of Economics, and also the Econtalk podcast, Bruce Yandle on Bootleggers and Baptists.

For classical liberals, Enron is a case study in support of the separation of government and business. There is egregious rent-seeking, whereby the company worked to shape political intervention for economic advantage. There is bootleggers and Baptist politicking, whereby Enron teamed with nonprofit groups to win support for what was in the company’s narrow self-interest.

There is the peril of half-slave, half-free. Partially deregulated markets (such as with electricity in California) created a devil’s sand box for profit-making that otherwise would have been absent in a free-market order.

Although an Enron could not have been predicted, it is yet another example of the unintended consequences of interventionism in the field of energy, as well as from the politicized accounting and tax systems that governed all corporations.

For more on the dynamics of intervention, see “A Typology of Interventionist Dynamics,” by Robert L. Bradley Jr. PDF file at politicalcapitalism.com.

And then there is the ultimate consequence from the dynamics of intervention. Historically, the failures of the mixed economy have been an excuse to further politicize the economy. Richard Epstein warned: “The greatest tragedy of the Enron debacle is not likely to be the consequences of the bankruptcy, but from the erroneous institutional reforms that will take hold if its causes are not well understood.”24 The Sarbanes-Oxley Act (2002) and the Bipartisan Campaign Reform Act (2002), enacted with Enron in mind, proved him right.25

Both the false narrative and the real story of Enron impart lessons for intellectuals and pundits alike. Sound theory makes complex history intelligible; bad theory blinds us to recognizing what is there for the taking. Enron fooled many people in its active life, and it continues to fool in death. A true understanding of “Exhibit A” deserves to enter into the mainstream of thought.


“Perhaps more than any other company, Enron became a symbol of corporate excess and fraud.” Robert Frank et al., “Scandal Scorecard,” Wall Street Journal, October 3, 2003.

Paul Krugman, “The Great Divide.” New York Times, January 29, 2002.


Robert Kuttner, “The Enron Economy,” The American Prospect, January 1-14, 2002. Kuttner said elsewhere: “Defenders of deregulation are mounting a heroic effort to insist that the debacle was merely a business model gone bad, not an impeachment of freer markets.” “The Lessons of Enron: Regulation Isn’t a Dirty Word,” BusinessWeek, December 24, 2001.

Duane Windsor, “Business Ethics at ‘The Crooked E’,” In Enron: Corporate Fiascos and Legal Implications, edited by Nancy Rapoport and Bala Dharan, 659-87. New York: Foundation Press, 2004, p. 661.

Diane Swanson. “The Buck Stops Here: Why Universities Must Reclaim Business Ethics Education.” Journal of Academic Ethics 2 (1): 43-61 (March 2004), pp. 49, 53.

Enron 10 Years Later – Media Roundup – Business Ethics Expert Quotes — January, 2012, at the Institute for Corporate Ethics.

Quoted in Sandi Dolbee, “Prophet or Profit?” San Diego Union-Tribune, February 2, 2001.

Quoted in Robert L. Bradley Jr., “Foreword,” in Jerry Ellig and Joseph Kalt, New Horizon in Natural Gas Regulation (Westport, CT: Praeger, 1996), p. ix.

Under state public-utility regulation, electric utilities had an incentive to build coal plants instead of gas-fired power plants because the former created more rate base upon which to apply the allowed rate of return. The federal Powerplant and Industrial Fuel Use Act of 1978, repealed in 1992, blocked gas usage in favor of coal on the (errant) belief that natural gas was running out.

This history is taken from “Introduction,” Capitalism at Work, pp. 1-13.

The dynamics of U.S. energy intervention are surveyed in Robert L. Bradley Jr., “Interventionist Dynamics in the U.S. Energy Industry.” In The Dynamics of Intervention: Regulation and Redistribution in the Mixed Economy, edited by Peter Kurrild-Klitgaard, 301-34. Special Issue of Advances in Austrian Economics 8 (2006).

Critics called mandatory access “infrastructure socialism.” See Adam Thierer and Wayne Crews, What’s Yours Is Mine: Open Access and the Rise of Infrastructure Socialism (Washington, D.C.: Cato Institute, 2003).

Jeremy Leggett, The Carbon War (London: Penguin Books, 1999), p. 204.

The climate-change accord included a voluntary U.S. reduction target of 5.2 percent in CO2 emissions by 2008-12, compared to 1990 base levels. It was never submitted for ratification to the U.S. Senate and has expired on its own terms.

John Palmisano, “Implications of the Climate Change Agreement in Kyoto & What Transpired” (Enron memo), December 12, 1997, pp. 1, 3. This memo is reproduced at http://www.politicalcapitalism.org/enron/121297.pdf.

Palmisano, p. 2.

April Witt and Peter Behr, “Enron’s Other Strategy: Taxes.” Washington Post, May 22, 2002.

April Witt and Peter Behr, “Enron’s Other Strategy: Taxes,” Washington Post, May 22, 2002.

“The Enron scandal grew out of a steady accumulation of habits and values and actions that began years before and finally spiraled out of control.” Bethany McLean and Peter Elkind, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Portfolio, 2003), pp. 132-33.

Quoted in Bethany McLean and Peter Elkind, The Smartest Guys in the Room, p. 132.

Richard Epstein, “Praise for Corporate Aftershock,” in Christopher L. Culp and William A. Niskanen, eds., Corporate Aftershock, (New York: John Wiley & Sons, 2003), back cover.

Bradley, Edison to Enron: Energy Markets and Political Strategies. Hoboken, NJ: John Wiley & Sons and Scrivener Publishing, p. 16.


*Robert L. Bradley Jr., a 16-year Enron employee, is authoring a trilogy on political capitalism inspired by the rise and fall of Enron. The books are: Capitalism at Work: Business, Government, and Energy (2009); Edison to Enron: Energy Markets and Political Strategies (2011), and Enron and Ken Lay: An American Tragedy (forthcoming).

For more articles by Robert L. Bradley, see the Archive.