‘Political capitalism’ explained in Wichita

In Wichita this Monday, Robert L. Bradley, Jr. explained the state of capitalism in America today, using his experience working in a high-level position at the failed energy conglomerate Enron as a backdrop.

Bradley asked: What happened to business prudence? What has happened to capitalism? The answer is that what we have today is not free market capitalism. Rather, it’s a very different type of capitalism: political capitalism.

A common question today is has capitalism failed? Problems are automatically blamed on greed, self-interest, and profit maximization — in other words capitalism.

Historically, robber barons have been condemned as examples of capitalism out of control. But many “robber barons” such as Rockefeller made money through voluntary transactions with their customers, Some, however, lived off special government favor such as tariffs. That’s political capitalism.

Then during the Great Depression capitalism was blamed again. At that time, however, the Federal Reserve Bank was already in control, and this era saw the rise of other forms of government interventionism.

Today our problems are commonly blamed on self-interest and capitalism rather than government.

What is real capitalism vs. American-style political capitalism — the mixed economy where government intervenes heavily in business and the economy?

Enron is still the premier example of political capitalism. But not many knew the full extent of Enron’s activities, or they though it was okay: “Enron was everyone’s favorite company.”

But the company that everyone thought was the best turned out to be the worst.

Bradley said the moral of Enron is deeper. There was a systemic failure surrounding Enron. All the gatekeepers — regulators, auditors, legal counsel, the business press, credit rating agencies, business professors — all failed at the same time.

Many critics said that Enron refutes all that is good about free markets. Bradley quoted one business ethics professor: “The Enron value set was an extreme laissez faire ideology of absolutely free unregulated markets.”

Bradley disagrees with this assessment, however. Enron was all about Ken Lay, “a master political capitalist.” Lay was a PhD. economist with a lot of Washington experience. His business model for Enron was regulatory change. If Enron could direct the change, it could gain the “first mover” advantage.

Bradlet quoted a definition of political capitalism as “The utilization of political outlets to obtain conditions of stability, predictability, and security to allow corporations to make reasonable profits over the long run.”

Socialists, he said, believe that when there is private property, its owners will be in bed with politicians in order to gain special favors.

Enron’s profit centers had to do with regulatory change. Enron was the first major United States company to proclaim that the climate was in crisis and that government intervention was needed to reduce greenhouse gases.

But it was a self-interested position. Enron rescued the domestic wind power industry by purchasing a company in that industry, and getting a mandate from the Texas legislature for renewable power mandate.

Today, the Obama energy plan has a lot to do with Enron’s public policy thrust.

Enron also gamed regulatory systems. By manipulating accounting rules, Enron could show accounting profits where there were no true economic profits.

In the tax department, Enron used boutique accounting and legal firms to find niches in the tax code that could be exploited.

The lesson is that these regulations may not be providing investors useful information and protection, although there may be an illusion created. A corporate report from the 1930s of just three pages gave investors more useful information, and held the firm more accountable, than did Enron’s last corporate report of 56 pages. The lesson, Bradley said, is “simple rules for a complex world.”

So how did someone like Ken Lay get to the top of the business world? How did he fool everyone and bring down all the gatekeepers with him? Bradley said the government side of the mixed economy was the factor that created an environment that could be exploited.

The lesson is that the rise and fall of Enron discredits the mixed economy and political capitalism.

A question was asked: What should we do? Bradley said we should support public policies that are market-oriented, instead of supporting government intervention. But given the mixed economy, we need to watch out for artificial incentives.

Afterwards, I asked Bradley about government intervention at a local level, such as in Wichita. Specifically, what about TIF districts and tax abatements? Are these examples of political capitalism? Bradley said yes, these are. A side effect is that a tax abatement does leave money in the private sector instead of the government public sector. But a special favor means an artificial stimulus that encourages malinvestment.

I asked if we need more regulation to protect us, or is our current regulatory regime sufficient? Bradley mentioned that in the Bernie Madoff scandal, the defrauded investors are as mad, or more mad at the Securities and Exchange Commission, that they are at Madoff himself. Many figured that the SEC, with its thousands of regulators, had done their homework for them, and that Madoff’s company was safe. This represents a major unintended consequence of regulation.

Much more information about this topic can be found at Bradley’s website Political Capitalism. His recent book is Capitalism at Work: Business, Government and Energy.

2 Comments

  • “Socialists, he said, believe that when there is private property, its owners will be in bed with politicians in order to gain special favors.” – Socialists? I thought that was the Libertarians.

  • wichitator -

    If the state picks the winners and losers by setting up the rules to favor one business or industry over others, this will raise the overall level of uncertainty and raise risk. That’s bad.

    When you combine an increase in risk with uncertainty over the regulatory and tax climates; when you add the certainty of higher federal taxes when the Bush tax cuts disappear; and when congress keeps legislating with 2k pages for a single bill; you know that this economy will have a very hard time recovering in such a hostile work and economic climate.

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