Ten years ago, December 2, 2001, Enron declared bankruptcy. The company had used complex and non-transparent financial statements to misrepresent its earnings, to inflate the apparent value of its assets, and to keep liabilities off its books. When questions started arising, Enron began losing customers and its house of cards, built with fraudulent accounting, collapsed.
Some critics cite Enron as an example of the moral failures of capitalism—as an example of what happens when people place profits ahead of ethical considerations. Because of unethical behavior like this, some argue, markets need to be more highly regulated and more closely controlled by government.
While I would agree that the Enron case shows what happens when people engage in unethical behavior in search of profit, the policy conclusion that this demonstrates the need for more governmental oversight or interference with markets is exactly backwards. Enron was already regulated in many dimensions, and their non-transparent and fraudulent accounting practices were already illegal.
Government regulation didn’t put an end to the unethical behavior: the discipline of the market did. The impersonal response of the market system rewards companies that add value to the economy and punishes those that do not. The company went bankrupt, its owners lost all of their equity, and several of the company’s officers went to jail once the discipline of the market revealed their unethical activities. The Enron case shows that the market mechanism works well to punish those who behave unethically. Government regulation is not needed, and in this case, regulations were in place and did not work.
Some people will always be tempted to behave unethically. The Enron case shows that when they do, the market mechanism provides sufficient discipline to punish unethical behavior, and provides a signal that shows others the negative consequences of unethical behavior. Seeing what happened to Enron, no business people—no matter how greedy—will consider Enron as a model that their company should follow. Because Enron was already highly regulated, it shows the ineffectiveness of government regulation, and the effectiveness of the discipline of the market.
The Enron case is an example of a market success, and a government failure.