“For centuries, philosophers and economists in the capitalist tradition have warned against what Enron brought to life in an almost surreal form.”

My previous Econlib article, “Enron: The Perils of Interventionism,”1 described how capitalism’s most trenchant critics turned the rise and fall of this once iconic corporation into “Exhibit A” against laissez-faire. Other critics, though, understanding that America’s regulated economy leaves no company completely to its own devices, offered a more sophisticated case against capitalism. They linked Enron’s downfall to the free-market side of the mixed economy—and to government’s failure to properly control that side. New York Times business reporter David Leonhardt, for example, wrote that beginning with the Reagan administration, “the federal government has given companies fairly free rein, allowing them to operate with less and less regulation. Enron’s collapse may well halt that trend.”2 Still other analyses have blamed the company’s frauds and fall on an elusive corporate ethos that is alleged to be capitalist in spirit.

Both claims are incorrect. Enron, far from being a creature of the free market, was the quintessential mixed-economy firm, using its crony connections to gain financial backing from government and using its mastery of regulatory minutiae to create the appearance of profitability. Moreover, Enron’s employees demonstrated an ethos, not of capitalist creators, but of postmodern Potemkins that capitalism’s leading philosophers have warned against for centuries.

Capitalist Behavior?

The most common political-economic explanation for the Enron’s bubble is “deregulation.” Two authors wrote:

Regulatory changes created a laissez-faire environment for corporate governance…. Not surprisingly, a wave of corporate scandals marked the 1990s and 2000s…. One of the most publicized episodes in the rather long list of corporate scandals was Enron’s collapse in October 2001.3

But as closer inspection shows, the opposite was true. Enron Gas Services, the gas-trading division that made Enron famous, was enabled by the “infrastructure socialism” 4 of mandatory open access, a regime imposed by the Federal Energy Regulatory Commission on interstate pipelines beginning in the mid-1980s. Enron Capital & Trade Resources, the successor to Enron Gas Marketing, tried to promote and exploit similar infrastructure socialism in the electricity industry.5

The examples multiply. The highly profitable Enron Cogeneration Company (ECC) was dependent on a regulation imposed under the federal Public Utility Regulatory Policies Act of 1978 that compelled utilities to buy electricity from independent providers (such as early mover ECC).6

Enron Oil & Gas Company profited from the tight-gas-sands tax credit under Section 29 of the Internal Revenue Code. In 1992, the company was getting 92 cents in tax credit per dollar of gas it sold.7 And the benefits of this tax credit remained almost to the end of Enron’s solvent life: $15 million in 1996, $21 million in 1997, $12 million in 1998, and $6 million in 1999.8

Enron was the largest and most influential U.S. company to embrace the pricing of carbon-dioxide (CO2) emissions, lobbying for a cap-and-trade program whereby Enron would make a trading market as it already had done for sulfur dioxide allowances under provisions of the 1990 Clean Air Act Amendments. Enron had six profit centers tied to government regulation of CO2.9

Enron International, specializing in infrastructure development in high-risk countries, depended on Export-Import Bank (ExIm) loans and Overseas Private Investment Corporation insurance and loans—more than $2.5 billion from ExIm and more than $3 billion from OPIC. It also received $232 million in loan guarantees from the lesser-known U.S. Maritime Administration.10 And when the U.S. government threatened to not pony up, Enron’s vice president of Global Finance, Linda Powers, warned Congress that Enron would find foreign support.11 It did so, successfully gaining financial aid from the governments of the United Kingdom, Japan, Germany, Italy, France, Canada, and Belgium.12

Enron also received financial support of various kinds from other government agencies, including the World Bank’s International Bank for Reconstruction and Development, the International Development Association, the International Finance Corporation, and the Multilateral Investment Guarantee Agency.13

Enron’s relentless rent-seeking required the company to acquire political muscle that few, if any, other corporations could match. At the time of its collapse, campaign contributions from the Enron Corp. Political Action Committee had gone to three-quarters of all U.S. Senators and nearly one-half of all the members of the U.S. House.14 Enron had at least 28 former government officials working for it as lobbyists or consultants, including former Secretaries of State Henry Kissinger and James A. Baker III, President Clinton’s former White House chief of staff, Thomas “Mack” McLarty, and former Senator J. Bennett Johnson of Louisiana.

Several former officials worked directly for Enron or its subsidiaries. Wendy Gramm, wife of Senator Phil Gramm, went from heading the Commodity Futures Trading Commission to serving on Enron’s board. Brent Scowcroft, former national security advisor to President George H. W. Bush, was a director of Enron Global Power & Pipelines. 15

Capitalist Spirit?

Given Enron’s blatant mixed-economy activism, more sophisticated analysts have tried to tie Enron’s failings less to capitalist economics than to a capitalist spirit among its employees. Such philosophical explanations for calamities have long been popular, at least since St. Augustine’s City of God blamed the decline of Rome on the vices of the empire’s pagan inhabitants.

The first and simplest of these attitudinal explanations was the endlessly repeated accusation of capitalist greed. Thus, among the first crop of books about Enron were Anatomy of Greed: The Unshredded Truth from an Enron Insider, by Bryan Cruver; Pipe Dreams: Greed, Ego, and the Death of Enron, by Robert Bryce; and Infectious Greed: How Deceit and Risk Corrupted the Financial Markets, by Frank Partnoy.

But the most influential allegation of greed came from the best-known book about Enron, The Smartest Guys in the Room. Authors Bethany McLean and Peter Elkind wrote:

[Jeffrey] Skilling [former CEO of Enron] believed that greed was the greatest motivator, and he was only too happy to feed it. “I’ve thought about this a lot, and all that matters is money,” Terry Thorn, an Enron managing director, recalls Skilling telling him. “You buy loyalty with money. This touchy-feely stuff isn’t as important as cash. That’s what drives performance.”16

But Skilling did not say that greed was the greatest motivator; he said “this touchy-feely stuff isn’t as important as cash.” His point might simply have been that monetary take-home outdistanced the morale-building adventures for which he was so well known.17

Malcolm Salter, author of Innovation Corrupted: the Origins and Legacy of Enron’s Collapse, put the Skilling quotation into perspective: “Skilling’s view is actually not so distant from that of many organizational economists.”18 But, Salter went on to note, everything depends on how you apply the maxim. The trouble was not that Enron used large sums of money to motivate its employees; the problem was that the company did not pay its employees for achievements that they had actually accomplished.

Rather, Enron paid employees who projected achievement, by means of its abused use of mark-to-market accounting to determine future income from long-term contracts. Mark-to-market accounting makes sense when it applies to liquid financial instruments for which a market value can be determined independent of the wishes of those who would use it. But Enron applied mark-to-market to illiquid commodities, beginning with natural gas and extending to “other areas where the ‘value’ was even more subjective—and abuse even more tempting.”19

Using management discretion in place of objective values,20 “mark-to-market” values created profits in name only (leading critics to call it “mark-to-model”21). Such estimated profits were not the typical accounting profits, that is, a positive cash flow (revenues in excess of expenses) as determined by traditional accrual accounting.

Enron’s accounting deception was the very opposite of capitalism’s hard-nosed rule of pay-for-performance, cash on delivery. Enron’s was the politician’s approach: Launch a big program, have a ribbon-cutting ceremony, and then walk away and collect the benefits (votes for politicians or bonuses for Enron managers).

The consequences were predictable in the corporate world as in the political world: The worst—the deceivers, the anti-reality personalities—got on top. As I wrote in Capitalism at Work, “Profit-and-loss measurement should not be profit-maximizing for its own sake (to impress others or increase bonuses) but for the sake of value-creation.” In the same place, I quote Charles Koch: “‘Financial statements must reflect economic reality. Remember, anywhere profit and loss is measured, analysis is also needed to understand what drives those results.'”22

A more-subtle attempt to blame Enron on capitalist culture starts off by praising capitalist culture as economically disruptive. For example, in 2010, Chris Brady of the Financial Times wrote:

What contributed to his [Skilling’s] success during that period was a belief that anything could be challenged and improved. The clue to the energy engendered by Skilling was contained in the company logo. Below the “crooked E” were the words: “Ask why”. His genius was to question constantly.”23

Nor did this process at Enron end with questioning rules. Employees were encouraged to break rules and even to celebrate breaking them. Gene Humphrey, Jeff Skilling’s first hire, recalled:

It was all about creating an atmosphere of deliberately breaking the rules. For example, our official vacation policy was that you could take as much as you wanted whenever you wanted as long as you delivered your results. It drove the human resource department crazy.24

So how did rule-breaking lead to Enron’s downfall? Pravin Jain, a lecturer at Santa Clara University who worked for Enron, recently claimed that it created a corporate culture of lawlessness:

The moral failings of particular individuals were held as the cause of the Enron fiasco, and sending them to the prison was taken to be a fix for what had occurred. What I witnessed firsthand, however, was quite different. I saw informal chats among traders escalate views about regulations into cult-like beliefs that served as justification for fraudulent and reckless actions. Monopolies and regulating bodies were increasingly vilified, to the point where any action to defy them came to be seen as heroic.25

Why should a corporate culture of rule-breaking be considered peculiarly capitalistic? In Enron’s case, the beginning can be traced to the early 1970s, when Ken Lay was teaching graduate economics at George Washington University, using Peter Drucker’s Age of Discontinuity and imbibing Drucker’s admiration for Joseph Schumpeter’s theory of creative destruction. Apparently, both Lay and Skilling equated capitalism’s “creative destruction” with a spirit of rule-breaking. And it was just such a spirit—critics allege—that morphed into a willingness to abuse, if not defy, accounting regulations and laws against securities fraud.

For more information, see Creative Destruction, by W. Michael Cox and Richard Alm in the Concise Encyclopedia of Economics.

But as the late Ayn Rand often said: Check your premises. Schumpeter’s theory of creative destruction is not about rule-breaking per se. Capitalism’s destruction of old industries and professions is merely a secondary and eventual consequence of patient and creative construction—conceiving and successfully developing an entirely new way of doing things. As I wrote: “Having a good idea or a bold vision for greatness is just a start. ‘The good-to-great companies continually refined the path to greatness with the brutal facts of reality,’ [Jim] Collins found.”26

By contrast, many executives at Enron were notorious for their lack of interest in following up their revolutionary new ideas with years of patient development. Much of their flaunted “paradigm shifting” amounted to nothing but big talk and dishonest numbers.

Perhaps the most famous example of this syndrome was Enron’s revolutionary plans to develop video-on-demand. After signing a twenty-year contract with the video rental chain Blockbuster to supply content through Enron’s fiber-optic network, Ken Lay announced in July 2000: “We have put together the ‘killer app’ for the entertainment industry.”27 But did the company then begin the long and arduous task of creating a video-on-demand industry? No. It produced a pathetic trial run involving about 300 households; calculated a wildly speculative, mark-to-model worth for its entire 20-year-deal with Blockbuster; and sold most of its profit rights to an Enron joint venture which sold them to a second joint venture, which, in turn, was funded by a Canadian bank, which, in turn, had been assured that it risked nothing.28 Ken Rice—the CEO of Enron Broadband Services—began spending little time in the office, preferring to race fast cars.29 Eight months after it began, the whole scheme was abandoned.

The quote by Samuel Smiles is from his book, Character, p. 213. See also Smiles’s book Self-Help: With Illustrations of Character and Conduct. For more on the topics in this article, see the EconTalk podcast episode Winston on Market Failure and Government Failure and Free Market, by Murray N. Rothbard in the Concise Encyclopedia of Economics.

Enron’s rule-breaking was not an example of Schumpeter’s creative destruction via innovation; it is an example of self-destruction through reality falsification. In The Theory of Moral Sentiments (1759), Adam Smith warned the “prudent man” against such “over-weening conceit” and “self-deceit” and “ostentatious avidity.” Self-help moralist Samuel Smiles, a century later, blasted the “many … forms [of] untruthfulness,” including “reticency on the one hand and exaggeration on the other.”30 Capitalist philosophers have long unmasked the character defects that anti-capitalistic Enron brought to an art form.


Capitalist practice and the capitalist spirit had little to do with the Enron bubble. Economically, the company was a model of industrial policy, corporate “liberalism,” and neo-mercantilism—political capitalism.31 Perhaps the best term to describe Enron’s modus operandi is simply mixed-economy cronyism.

Psychologically, the company was a model of illusionism, subjectivism, perceptionism—philosophic fraud. The academic term would be “postmodernism.” Laymen would call it, simply, deceit.

For centuries, philosophers and economists in the capitalist tradition have warned against what Enron brought to life in an almost surreal form. Their insight and prescience should not be in vain.


Robert L. Bradley Jr., “Enron: The Perils of Interventionism,” Library of Economics and Liberty, September 3, 2012.

David Leonhardt, “How Will Washington Read the Signs?” New York Times, February 10, 2002.

Bruce Carruthers and Laura Ariovich, Money and Credit: A Sociological Approach (Malden, MA: Polity Press, 2010), p. 146.

Adam Thierer and Clyde Wayne Crews Jr., What’s Yours Is Mine: Open Access and the Rise of Infrastructure Socialism (Washington, DC: Cato Institute, 2003).

Robert L. Bradley Jr., Edison to Enron: Energy Markets and Political Strategies (Salem, MA: Scrivener Publishing, 2011), p. 21.

Bradley, Edison to Enron, p. 355.

Glenn Simpson, “Senator Dole’s Greatest Harvest,”American Prospect, December 19, 2001.

Gary McGill and Edmund Outslay, “Did Enron Pay Taxes?: Using Accounting Information to Decipher Tax Status,” Tax Analysts Special Report, Doc 2002-19158, Table 3.

Robert L. Bradley Jr., Capitalism at Work: Business, Government, and Energy (Salem, MA: M&M Scrivener Press, 2009), pp. 306-9.

Jim Vallette and Daphne Wysham, Enron’s Pawns:How Public Institutions Bankrolled Enron’s Globalization Game, Institute for Policy Studies, March 22, 2002, p. 24.

Linda F. Powers, testimony before the Subcommittee on Internal Economic Policy and Trade, Committee on International Relations, U.S. House of Representatives, March 18, 1997. Quoted in Timothy P. Carney, The Big Ripoff (Hoboken, NJ: John Wiley & Sons, Inc., 2006), p. 209.

Valette and Wysham, Enron’s Pawns, p. 24.

Valette and Wysham, Enron’s Pawns, pp. 18, 24.

Dale Van Natta Jr., “Enron’s Collapse: The Politicians, Enron Spread Contributions on Both Sides of the Aisle,” New York Times, January 21, 2002.

M. Asif Ismail, “A Most Favored Corporation,” The Center for Public Integrity, January 6, 2003; updated April, 14, 2011. At:

Bethany McLean and Peter Elkind, The Smartest Guys in the Room. Updated with epilogue. (New York: Penguin Books, 2006), p. 55.

McLean and Elkind, The Smartest Guys in the Room, pp. 122-23.

Malcolm Salter, Innovation Corrupted (Cambridge: Harvard University Press, 2008), p. 67.

McLean and Elkind, The Smartest Guys in the Room, p. 40.

McLean and Elkind, The Smartest Guys in the Room, p. 40.

Peter Fusaro and Ross Miller, What Went Wrong at Enron (Hoboken, NJ: John Wiley & Sons, 2002), p. 35.

Bradley, Capitalism at Work, pp. 316-17.

Chris Brady, “An Unlikely Inspiration: Enron’s Jeff Skilling,” Financial Times, December 6, 2010.

Christopher A. Bartlett and Meg Wozny, “Enron’s Transformation: From Gas Pipelines to New Economy Powerhouse,” Harvard Business School, January 5, 2001, p. 4.

Pravin Jain, “Confessions of an Enron Executive: We Lacked Finesse, E:CO, Vol. 15, No. 2 (2013), p. 105.

Bradley, Capitalism at Work, p. 83.

McLean and Elkind, The Smartest Guys in the Room, p. 292.

McLean and Elkind, The Smartest Guys in the Room, pp. 290-96.

McLean and Elkind, The Smartest Guys in the Room, p. 333.

Quoted in Bradley, Capitalism at Work, pp. 24-26, 46.

Robert L. Bradley Jr. and Roger Donway, “Capitalism, Socialism, and ‘the Middle Way,'” Independent Review, vol. 15, no. 1 (Summer 2010), p. 79-82.


*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.