Why Enron Always Happens

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As a result, CEO salaries have gone through the roof, and such perks as private jets, luxurious apartments, no-cost and often forgiven loans, and vast stock options have proliferated. During the go-go nineties these abuses largely went unnoticed, just as the excesses of Wall Street did in the twenties. But when the market turned down and the stocks of these companies began to slide, the shenanigans began to attract attention, and reforms are being instituted.

As I said above, in mathematical terms capitalism is a game. It has players (everyone from chief executives to janitors, not to mention writers and editors), it has a means of keeping score (in a modern economy, money), and it has rules. The players are out to win the game—or more exactly, since the game of capitalism never ends, to be in the lead. As the players seek to score, they constantly devise new tactics and strategies. Some of these are good ideas, such as the idea of standardized money itself, first used around 700 B.C. , and are made a permanent part of the game, and some of them are not, such as secret rebates from railroads for big shippers like Rockefeller’s Standard Oil, and are banned after a period of experimentation.

In this way capitalism is no different from, say, American football. That sport began in 1869 when Princeton played Rutgers in a soccerlike game with 25 men on a side, and goals were scored by kicking a round ball under the crossbar of the goalposts. Over the next few years the game evolved rapidly.

Harvard, which favored a more rugbylike game, used an eggshaped ball and permitted a player to run with it if pursued. Yale, which played a soccerlike game, wanted to play Harvard, so the two forms were arbitrarily combined in the 1870s.

As the game changed, the players sought a balance between offense and defense that was challenging for them and entertaining for the spectators. They also, of course, sought advantage over their opponents in order to win and constantly developed new tactics. Some of these were very effective in the short term but disastrous for the game overall. The flying wedge, first used in the 1880s or early 1890s, depending on whose account you believe, made the offense nearly invincible and caused numerous injuries. It was banned 10 years later. The forward pass, however, first legalized in 1906 and much expanded in 1912, revolutionized the game.

 

Even today football’s evolution continues, although at a much slower pace. Videotape made it possible for referees to check their first impressions before making a call, but after a period of experimentation, doing so was thought to slow down the game too much, and the idea was abandoned.

Capitalism has had a similar history. The industrial corporation was virtually unknown in 1800, yet some today have annual gross revenues that exceed the gross domestic product of most sovereign countries. Money then was gold and silver or, sometimes, paper directly backed by precious metal. Today money is largely electronic blips stored in computers.

A vast number of rules have had to be devised and tested on the fly in order for these developments to work for the good of all. A whole corpus of law governing incorporation, for instance, has had to come into being. In 1800 it was state legislatures that granted corporate charters, and politics played a very large part in determining which charters were granted and which were not. By mid-century every state had standard procedures and rules governing incorporation, with politics largely taken out of the process. But many of these new rules forbade or discouraged industrial companies from operating in more than one state. As the railroads, telegraph, and telephone knitted the country into a single continent-spanning market, and as companies grew to take advantage of economies of scale to better serve this new market (and, of course, make more profit), these obsolete provisions proved ever more confining.

To get around the old rules and operate efficiently, companies such as Standard Oil of Ohio adopted a trust form of organization beginning in 1882. Then, in 1888, New Jersey—in pursuit of tax revenue as much as economic efficiency, to be sure—rewrote its statutes regarding corporations, taking modern reality into account. Companies flocked to the state to take advantage of them. The trust form of corporate organization disappeared a mere decade after its invention. But a growing fear and dislike of the burgeoning power of these new, vast concerns did not, and the term trust stuck.

The first federal antitrust legislation, the Sherman Antitrust Act, had been enacted in 1890 to prevent companies from coalescing through mergers into monopolies that could threaten the market as a whole. Much of the public debate regarding corporations since then has revolved around striking a balance between allowing economic efficiency on the one hand and preventing economic heeemonv on the other.