Capitalism at Work Business, Government, and Energy

Capitalism at Work

To Charles G. Koch,

free-market capitalist

Capitalism at Work

Business, Government,

and Energy

Robert L. Bradley Jr.

Published by M & M Scrivener Press

3 Winter Street, Salem, MA 01970

www.mmscrivenerpress.com

Copyright © 2009 M & M Scrivener Press

Confl icts and Trends® in Business Ethics

Series Editor: Nicholas Capaldi

Cover design by Hannus Design

Library of Congress Cataloging-in-Publication Data

Bradley, Robert L., 1955–

Capitalism at work: business, government, and energy /

Robert L. Bradley Jr.

p. cm.—(Political capitalism; 1)

Includes bibliographical references and index.

ISBN 978-0-9764041-7-0 (hbk.: alk. paper)

1. Corporations—Moral and ethical aspects.

2. Corporations—Political aspects. 3. Capitalism.

I. Title.

HF5387.B687 2008

330.12'2—dc22 2008024425

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted in any form or by any

means electronic, mechanical, photocopying, recording, or other￾wise, without the prior permission of the publisher, except by a

reviewer who wishes to quote short passages for use in a review for

inclusion in a magazine, newspaper, broadcast or website.

Printed in Canada on acid-free paper.

v

Preface ix

Introduction 1

Part I Heroic Capitalism 15

Chapter 1 The Soul of Commerce: Adam Smith 19

Chapter 2 Character and Success: Samuel Smiles 37

Chapter 3 Supply-Side Ethics: Ayn Rand 58

Part II Business Opportunity, Political Opportunism 91

Chapter 4 Business Opportunity 96

Chapter 5 The Business of Politics 119

Chapter 6 U.S. Political Capitalism 142

Part III Energy and Sustainability 183

Chapter 7 Malthusianism 189

Chapter 8 A Joined Debate 208

Chapter 9 Neo-Malthusianism 224

Chapter 10 The Dark Decade 241

Chapter 11 New Light 271

Epilogue Surreal Enron, Real Capitalism 292

Appendixes

Appendix A The Ayn Rand Problem 320

Appendix B A Taxonomy of Political Capitalism 332

Contents

vi Contents

Appendix C Gabriel Kolko’s Revisionism Reconsidered 336

Appendix D Resources for the Future: Away from Optimism 343

Source Notes 351

Bibliography 417

Illustration Credits 451

Name Index 453

Subject Index 459

We may well turn to the “wisdom of the ages” in our

human quest to understand reality,

for that wisdom contains a truly inexhaustible contemporaneity.

—Josef Pieper, The Four Cardinal Virtues (1954)

ix

DURING MY LAST TWO YEARS at Enron (2000–2001), I was asked to

gather information for a history of the company—with particular

emphasis on its chairman, Ken Lay. In this period, Enron declared vic￾tory on its mission to become the world’s leading energy company and embarked

on a new one: to become the world’s leading company. Expectations were high

for an eventual book with a title such as The Making of the World’s Leading Com￾pany. Joining me as codirector of the Enron Oral History Project was a leading

business historian and energy specialist, Joseph Pratt, Cullen Professor of His￾tory and Business at the University of Houston.

In the course of the project, we gathered the recollections of key employees

and members of the board of directors, past and present. Reminiscences from

Ken Lay’s old economics professors and former bosses were recorded. One

interview was with Lay protégé Jeff Skilling, who gave nary a hint of Enron’s

brewing troubles. His impressions were akin to a hall-of-fame acceptance

speech—how the company came together, endured tough industry conditions,

and fi nally triumphed—as if it were game, set, and match Enron. This mentality

never wavered, at least in Skilling and Lay, despite Enron’s bankruptcy and

despite subsequent revelations of blatant wrongdoing. Enron was a great com￾pany, Skilling maintained. Enron had an unassailable competitive advantage, Lay

insisted.

In retrospect, Skilling and Lay suffered from extreme overconfi dence, hubris,

even delusion. So long as everyone believed, and got others to believe, a healthy

ENE stock price would make everyone a winner, they thought. Doubters were

dumb and, within the walls of Enron, not considered good team players.

But Enron could not invent its own reality forever. Real value was not being

created. Cash fl ow was inadequate. Enron’s problems came from a combination

of many bad bets and the poor execution of some good bets—and were magni￾fi ed by a paucity of midcourse corrections. What is remarkable, in retrospect, is

that the company did not implode sooner.

Preface

x Preface

When the extent of the company’s machinations came to light after the

bankruptcy, the great majority of employees came to revise their thinking

about the company they had once admired. Only then could they get beyond

Enron and get on with their lives. But Lay and Skilling did not, partly because

of their inviolable egos and partly because of their audacious legal strategy.

But this was antireality, a continuation of their failings while steering Enron.

Ken Lay died delusional and disillusioned; a defi ant Skilling still believes,

behind bars.

Needless to say, Enron collapsed before the work of the Enron Oral History

Project could be fashioned into a book. I was part of the mass layoff of December

3, 2001, the day after Enron fi led for bankruptcy in a Southern District of New

York courtroom. But having published widely on energy history and policy, I

decided to write my own version of events, combining what I had learned

from my 16 years at the company (almost as long as Lay’s own tenure) with

what I came to know about Enron after my layoff, which was considerable and

troubling.

I embarked upon this project despite being asked by Ken Lay to help him

prepare an autobiography—something he undoubtedly saw as part of his come￾back strategy. I declined, and no such book was evidently written. Aided by

antidepressants, Lay, still chairman of the bankrupt Enron, saw himself as a

victim of the debacle. But the real story was different. Ken Lay was the philo￾sophic enabler of the whole sordid affair and was emotionally wed to the man

who had done so much (however unintentionally) to ruin him: Jeff Skilling.

Sensing this, I chose instead to write a detailed retrospective from a more

neutral vantage point, something I was able to do thanks to the generosity of a

group of distinguished individuals and foundations, many Houston based, who

wanted a lessons-learned chronology that would stand the test of time. Still,

given the fi nal result—a trilogy and publication years after most other Enron

books—some explanation is in order.

Why didn’t I pen a shorter, “timely” Enron book, tapping into the mass

readership of, say, The Smartest Guys in the Room or Conspiracy of Fools?

First, I am a political economist and industry historian, not a commercial

writer, although this book is geared for nonacademics as well as academics.

From the beginning, my goal has been to identify cause and effect by telling the

whole story, not only its poignant highlights. But the story had not run its course.

The trial of 2006 was Part II of the Ken Lay/Jeff Skilling tragedy, and the fi nal

tallies of the company’s debacle would not come before the last remnants of

Enron were sold off and the fi nal trial appeals were exhausted. Any comprehen￾sive look at what is one of the most important stories in business history would

have to wait until these events unfolded.

Second, my research into the prehistory of both Enron’s businesses and Ken

Lay’s Enron career uncovered fascinating material concerning two of America’s

greatest and most regulated industries, electricity and natural gas. Because this

Preface xi

history offered important context and striking similarities and contrasts to

Enron and Ken Lay, and because little of it is known by today’s historians and

industry practitioners, I believed that it merited inclusion.

Third, and perhaps most important, I did not know enough to write a defi nitive

summary of the multifaceted Enron story. Yes, I was a longtime employee and was

Ken Lay’s speechwriter for most of our last seven years together at Enron. I

knew the history of the energy industry and was Enron’s anointed historian.

And I had unique documentation and records, including many speeches and

notes by Lay himself, not to mention access to many colleagues who could fi ll

in the gaps of a very complicated story. Still, I simply was not knowledgeable

enough to rush out a book that would stand up to history. Time was needed to

let the dust settle, survey the post-Enron world, and evaluate the many other

Enron-related books and articles.

I have taken that time and prepared a trilogy on the theory and practice of

political capitalism, with Enron as the touchstone. Book 1 presents a multidisci￾plinary worldview capable of analyzing Enron in its many dimensions. Book 2

examines a famous case similar to Enron (the rise and fall of the legendary Sam￾uel Insull) and then describes Enron’s prehistory, as well as Ken Lay’s early

career. Book 3 describes and interprets Enron, Ken Lay, Jeff Skilling, and the

post-Enron world.

Such an effort required much more than my prior experience and expertise;

it necessitated new investigations into the fundamental principles of the capi￾talist worldview. The good news was that those principles had already been set

forth by a dozen or so major authors, ranging from philosophers to economists.

The challenge was to integrate their contributions to illuminate both Enron

and the related episodes covered in this trilogy. To the extent that this has been

accomplished, I will have succeeded. But the true test of this reintegrated world￾view is whether it can be more broadly applied to business practices and public

policy, both to understand the past and offer insight for a better future. For the

practical consequences of a wrong worldview are all too evident in the unhappy

fates of Samuel Insull and Ken Lay.

x

Books of this scope and detail are rarely started and seldom completed, and it

took more than a lone author to pull it off. Thus, I have many individuals and

institutions to acknowledge and thank.

My fi rst thanks goes to my persevering family—three generations’ worth—

and particularly to my wife, Nancy. I also thank the board of directors of the

Institute for Energy Research for their patience and support. Major funding

came from the late Gordon Cain, a heroic capitalist whose autobiography, Every￾one Wins! A Life in Free Enterprise, is testament to a life well lived. Jerry Finger’s

enthusiasm for the project helped get me over some early humps. George

Peterkin Jr. got behind the project and got others interested on my behalf. Leo

Linbeck Jr., capitalist intellectual, was one such distinguished supporter.

xii Preface

Other support is gratefully acknowledged from W. J. Bowen, Jeremy S. Davis,

the late James A. Elkins Jr., Frank A. Liddell Jr., John H. Lindsey, W. R. Lloyd,

Doris Fondren Lummis, W. R. Lummis, Robert C. McNair, Clive Runnells,

L. E. Simmons, David M. Smith, R. Graham Whaling, and Wallace Wilson. I also

benefi ted from the generosity of the George R. Brown Foundation, Earhart

Foundation, Ray C. Fish Foundation, Liberty Fund, and Walter Looke Family

Fund.

Roger Donway provided invaluable research help and edited the entire vol￾ume. When I reached my intellectual limit on a matter, Roger was always there

for help and resolution. Richard Fulmer provided a keen editorial eye. And fel￾low Enron-ex Jean Spitzner, now with Bowne & Company (Houston), provided

the expert graphics herein.

The following individuals critically reviewed one or more chapters in their

area of expertise: M. A. Adelman, Joe Bast, Robert Bryce, Robert Campbell,

Nicholas Capaldi, Douglas Den Uyl, Richard Gordon, Gil Guillory, Stephen

Hicks, Jack High, John Jennrich, Dwight Lee, Leo Linbeck Jr., the late Stephen

McDonald, Robert Michaels, Robert Murphy, William Niskanen, James Otteson,

Valentin Petkantchin, Sheldon Richman, Colin Robinson, John Ryan, Chris Mat￾thew Sciabarra, Elaine Sternberg, and Jonathan Wight. To these and others

unnamed, I offer my profound thanks for their spirit of expertise sharing.

A particular thanks goes to Charles G. Koch, who has built Koch Industries

into the world’s largest privately owned company. My intellectual career has

benefi ted from his philanthropy from the beginning, and it is his book, The Sci￾ence of Success (2007), that offers the most compelling antidote to Enron-like

behavior in print today. Koch’s business philosophy of Market-Based Manage￾ment® points the way to a sophisticated ethic of free-market capitalism in the

post-Enron world. This is why I have dedicated this book to him.

One comment on documentation: I have kept footnotes to a minimum

while instead providing full reference information in the Source Notes section

and the Bibliography. I believe this format meets the highest standards for

scholarly research, while rendering the book more accessible to nonacademics,

who have an important role to play in the cause of advancing realism in the

humanities and social sciences. For academics desiring more discussion or docu￾mentation on technical issues, I have posted 52 appendixes on the Internet at

www.politicalcapitalism.org. Each is cited in a footnote of this book.

Finally, there was one publisher who stayed on the phone after I said the

word trilogy. Martin Scrivener, founder and chairman of M & M Scrivener Press,

has aided in numerous ways with the book project, from title suggestions to all

the details behind the publication of a handsome book. I am very grateful to

him and to Evelyn Pyle, whose intelligent fi nal edits put the book over the top.

Any shortcomings, of course, are my responsibility alone.

September 23, 2008

1

S

UCCESS, ARROGANCE, PROBLEMS, DECEIT, more problems, more

deceit . . . spectacular failure. That sequence describes the heady boom and

decisive bust of Enron Corporation, the most chronicled and dissected

business story in history.

But hubris, dishonesty, and obstinacy were not the exclusive franchise of

Enron and its two principals, Ken Lay and Jeff Skilling. This destructive pat￾tern was present in the record bankruptcy of Bernard Ebbers’s WorldCom,

which came just months after Enron’s collapse in December 2001, not to men￾tion other corporate scandals that greeted the new century. Looking back, the

virus was also operative in the fall of Samuel Insull’s titanic energy-utility

empire during the Great Depression, a failure that was in some ways the Enron

of its era.

The same failings characterized the 1904 bankruptcy of Houston Oil

Company of Texas, which had been capitalized at a princely $30 million just

three years earlier. Houston Oil, which emerged from receivership four years

later, was a predecessor company to Enron.

History can meet itself coming and going.

The central fi gures in these three debacles were revered business titans. In

the fi rst third of the twentieth century, Insull was the Great Man of the electric￾ity industry, as well as Mr. Chicago. Ken Lay was the Great Man of natural gas

for much of the 1980s and 1990s—and Mr. Houston as well. Houston Oil cen￾tered on the bigger-than-life John Henry Kirby, the Mr. Houston of his day.

Kirby would recover from Houston Oil’s early stumbles, but his reign ended

with his personal bankruptcy in 1933, a time when Samuel Insull was living

abroad to avoid his legal woes. In the end, an extradited Insull was acquitted of

his alleged business crimes, but such was not the case for Ken Lay, who in two

trials was found guilty on all counts by jury and judge. Yet Lay escaped the

prospect of life in prison, receiving what his sympathizers called a pardon from

God—death from a heart attack just weeks before his sentencing.

Introduction

2 Introduction

“The bigger they come, the harder they fall,” goes an old adage. And yet

history mostly remembers the winners: Astor, Carnegie, Morgan, Rockefeller,

Vanderbilt. By contrast, the lives of Kirby, Insull, and Lay are riches-to-rags sto￾ries, with Enron representing perhaps the ideal type of business failure—and

thus a near-perfect specimen for lessons and learning.

What was the socioeconomic system within which Enron thrived—and

then perished? Why did such a revered company collapse, and just who was

responsible? What incentives, ideas, and habits led the perpetrators astray?

How did deviations from common sense and standard business practices lead

to unintended outcomes, slippery slopes, and such a disastrous fi nale? Most

important, what are the lessons for business and government going forward?

These questions are the inspiration for this trilogy. Book 1 examines the capital￾ist worldview; Book 2 focuses on Insull, Kirby, and Enron’s prehistory (includ￾ing the career of Ken Lay); and Book 3 chronicles Enron’s rise, fall, and

aftermath.

x

Bad habits acquired in boomtime, in addition to old-fashioned fraud, go a

long way toward explaining dramatic business reversals. But Enron was some￾thing more. Ken Lay’s company was not the largest bankruptcy in U.S. history

(WorldCom’s fi ling, listing $107 billion in assets, was double Enron’s claimed

amount) or the most overtly fraudulent. What set it apart was that Enron’s sins

seemed to involve every commandment and every pew. It was what journalist

George Will called a “systemic failure,” encompassing academics, accountants,

boards of directors, consultants, credit-rating agencies, investment bankers,

journalists, lawyers, politicians, regulators, securities analysts, and more. Thus,

American business, even capitalism itself, was placed on trial, prompting

Princeton economist Paul Krugman to declare in the New York Times: “I predict

in the years ahead Enron, not September 11, will come to be seen as the greater

turning point in U.S. society.”

George Will was right. Enron shamed professions and institutions, not only

individuals. Ken Lay’s handiwork made Adam Smith’s invisible hand tremble.

Still, Krugman missed the boat, as did other pundits, including Robert Kuttner,

who declared in BusinessWeek that Enron refuted free-market economics. These

critics thought that the system that had made an Enron possible was capitalism

and that free-market economists from Adam Smith to Milton Friedman had

thus encountered their equivalent of stagfl ation (simultaneous high infl ation

and high unemployment), which had humbled Keynesian economics a quarter

century before. Philosophically, these critics equated Enron Man to Capitalist

Man, with one-and-the-same running footloose in an inadequately constrained

system. The 2005 movie documentary The Smartest Guys in the Room linked

Enron to Ronald Reagan, deregulation, and California’s alleged electricity￾deregulation experiment to make the same point.