Interview with Robert Bradley, Jr.
Robert Bradley worked at Enron for 16 years. As director of public policy analysis for his last seven years there, he wrote speeches for the late Ken Lay, Enron’s CEO, who was convicted in 2005 of fraud and conspiracy. Dr. Bradley is also founder and CEO of the Institute for Energy Research of Houston, Texas, and Washington, D.C. He frequently writes and lectures on energy, political economy, and corporate governance. He is currently completing his seventh book, Edison to Enron: Energy Markets and Political Strategies, the second volume of a trilogy on political capitalism inspired by the rise and fall of Enron. We met with Dr. Bradley in Houston to explore his thoughts on Enron, political capitalism, and the future of energy.
Kaizen: Why does the Enron case matter?
Bradley: Enron’s fall was front-page news in the United States and around the world. It was such a surprise that the company everyone thought was the best—the most innovative, most socially progressive, and so on—was revealed to be the very worst. Virtually everyone got fooled by the reversal, so it had tremendous mystery and appeal.
The fooled were not only a lot of investors and the great majority of Enron employees, including me, but also the financial press; intellectuals who were interested in energy, environmental, and corporate-governance issues; a lot of business professionals; and many Houstonians and those at other Enron locations.
It was also a bit of a populist morality play in that four thousand Enron employees got laid off three weeks before Christmas 2001. You know, the masses get hurt thanks to a few Enron executives at the top, some of whom cashed out before the collapse.
Enron was very political, so that intrigued the Left in particular. The Left really pounced on it, while the Right was kind of embarrassed and bewildered by it all. The Left confidently announced Enron as the failure of capitalism. Paul Krugman in the New York Times and Robert Kuttner in Business Week basically said that Enron refuted the notion of the invisible hand.
Kaizen: So it was a huge financial disaster, but it also caught people off guard. It was a surprise since Enron had a reputation for being a progressive and innovative company. It then became a test case for the big debate of our age between free markets and government regulation.
Bradley: Right. During Enron’s heyday you had academics from the University of Virginia and other places who were using Enron as a case study of a progressive, successful, entrepreneurial company. Other academics were looking at Enron as a sort of example of what capitalism should be: Enron is “green” investing in wind power, solar power, energy efficiency, and air-emissions trading. The company overtly emphasized corporate social responsibility too.
I always try to remind folks that Enron was the Left’s favorite company. Enron then collapses. Some in the know on the Left were embarrassed by Enron and went silent. But the pundits had a field day despite the irony and the true lessons for the Left and anti-capitalist environmentalism.
Kaizen: At the same time people on the Right are also embarrassed by Enron?
Bradley: They were embarrassed because Ken Lay spoke a lot about the virtue of free markets. He poised himself in the debate as a real free marketer. So a lot of people’s worldviews got shaken by his misdirection. Enron’s PR machine also branded Enron as revolutionary, an agent of creative destruction. That had sex appeal to pro-market types.
Kaizen: The economic disaster was billed as the largest bankruptcy at the time. Approximately how much money was lost as a result of the bankruptcy?
Bradley: If you value Enron at the peak versus where it ended up, maybe there was a value loss of $60 billion. But keep in mind that the beginning point was a bubble. There weren’t real assets behind it.
Enron was the biggest bankruptcy in history, and then several months later WorldCom goes bankrupt and becomes the largest. And Lehman Brothers is now the biggest.
Kaizen: Everyone is shocked and trying to figure out what went wrong. Naturally there are allegations of mismanagement. Was it a local problem with Enron, or were there more general political-economy problems? And there were allegations of fraud and fingers pointed at Ken Lay and Jeff Skilling.
Bradley: It was a compendium of things—a very complex event that requires a multidisciplinary worldview and a lot of insider knowledge. That is why I am devoting many years of research, buildup, and thinking to try to get it right.
Kaizen: What was your position at Enron toward the end?
Bradley: During the last seven years, my title was Corporate Director of Public Policy Analysis. This was a new position that they created around my skill set. It was a rather unusual position for corporate America, but the needs of Ken Lay and Enron, in retrospect, were rather unique.
Kaizen: What was your main task as director of public policy analysis?
Bradley: Speechwriting for Ken Lay was a big part of my job. So I tried to keep up with the literature, with business, economics, and energy, in order to fill up his speeches with the right statistics and interpretations—and new stuff. What could Ken Lay say that audiences hadn’t heard before so he would be perceived as the visionary, the Great Man?
Kaizen: So it was a great job for someone with a scholarly bent who wants to work in the real world of business?
Bradley: Yes, it was a dream position for me. Ken Lay was a brilliant man with an economics Ph.D. and access to the very top, but he was not well read. He was so busy with his social functions and promoting Enron that he never really read books or studied things in depth.
And on a variety of key public policy issues, I was in meetings where the agenda would fascinate just about anyone interested in the big picture of political economy or business history. I was on the front lines of a very progressive, large corporation and seeing business strategy and political capitalism in the making. No Harvard professor had that!
Kaizen: So your part of the division of labor was to read the books and brief him.
Bradley: Yes, and this is important. Ken Lay was not a real homegrown intellectual. He was not really thinking for himself like a Randian entrepreneur or a builder like Charles Koch of Koch Industries—who spends quality time on his worldview and works from the truth out. Lay was just the opposite. He is living the life of a corporate head, socializing and building an image, and only from that image do the big picture and the “truth” become important to him.
Lay, in Rand parlance, was a “second-hander,” always worrying about perception so that everyone would like Enron and help the stock price. Part of this was being a master political capitalist, getting special government favors.
Kaizen: About your background. You got a BA and an MA in economics and a Ph.D. in political economy—all at different schools.
Bradley: I returned home from four years at Rollins College in central Florida and got my master’s in economics at the University of Houston. I was their top student when it came to everything but mathematical economics, which I was not intuitive with. But humans do not act mathematically, so economics does not strictly need mathematics. I was not a good fit with where some new professors were taking the department, which was a very narrow, formalistic view of economics.
Kaizen: So you left the University of Houston after receiving your master’s.
Bradley: Correct. I left UH before the Ph.D. stage.
Kaizen: But you ended up getting your doctorate.
Bradley: Yes, but the degree was in political economy, not economics. What I did was to turn my proposed history of U.S. oil and gas regulation into a dissertation proposal for a Ph.D. in political economy at International College, Los Angeles.
I got Murray Rothbard, who was interested in the application of political economy to energy, to chair my committee. The other committee members were Dom Armentano, professor of economics at the University of Hartford, and Don Lavoie, professor of economics at George Mason University.
Kaizen: Before the Ph.D. you first worked in banking?
Bradley: I was actually in a bank training program when I took a leave of absence to write a history of oil and gas regulation for the Cato Institute in the early 1980s. The bank asked me to figure out why it was making so much money from letter-of-credit business from oil resellers. This was a new industry segment that grew up in the 1970s under federal price and allocation controls on crude oil and oil products. That study, which turned out to be my big break, got me very interested in energy regulation and led to my book proposal to Cato.
Kaizen: And that was the beginning of a new career, as it turned out.
Bradley: Yes, I was out of banking for good, although I would get to return to business by joining Enron in 1985. I was there until late 2001 when the bankruptcy and mass layoff occurred.
Kaizen: How would you describe yourself professionally?
Bradley: My specialization, government intervention in energy, has made me a political economist. It has given me a niche. But maybe my niche is having done so much archival research, more than my peers and intellectual opponents. I refer to myself as a “blue-collar scholar” in this regard.
Kaizen: So you got interested in energy by accident, and that led to the dissertation and book proposal and then completion.
Bradley: It was by accident. Figuring out 1970s oil regulation for my bank led to the idea that I could chronicle and interpret the whole history of U.S. oil and gas regulation—local, state, and federal. That had never been done before, and I got Cato to give me a shot.
My Cato book ended up as a two-volume, 2,000-page treatise published in 1996 by Rowman & Littlefield. There were 15,000 references and some 6,600 footnotes. Ed Crane at Cato will tell you it was the longest and most elaborate book project they have ever been involved with. I spent four and a half years of full-time research and writing with little distraction. More years followed, what with editing and finding the right publisher.
Kaizen: You must have had a lot of motivation to do all that.
Bradley: I was motivated by the fear of failure, I later realized. I was in my mid-twenties, the glorious third decade as Schumpeter would say about being in one’s intellectual prime. I had never written a book and had just a few short pieces to my name. I had so much to prove.
Kaizen: When did you discover you were a writer?
Bradley: It wasn’t automatic! I got a grade of “D” in English during my senior year of high school and had to take a remedial writing course my first semester at Rollins College. I still have one of my essays from that class. My content was better than the penmanship for sure!
But I worked at it. I wrote political pieces for the school paper, the Sandspur. And in my junior year, a history teacher surprised me by saying how well I had summarized the source material in an essay. Actually, the teacher told someone else, who told me. I was stunned. That was the first inkling that I could synthesize information effectively in written form. Remember: I was no superstar. I got into Rollins because the tennis coach lobbied the admissions office!
Now, I’m just an academic writer who footnotes extensively. I do not write bestsellers, or even public-policy bestsellers like, say, my friend Robert Bryce, who has also written books on Enron and on energy. But being passionate about the subject, I write fairly well for the academic market. And not being too brainy, by the time I can understand something I think I can get others to understand it too.
Kaizen: Having gone on to write and publish extensively in the energy field—that makes you a natural fit for working at Enron.
Kaizen: Enron operated in a highly mixed political and economic environment. In the decades that Enron was operating—the 1980s through the early 2000s—to what extent was the U.S. energy market a free market, and to what extent was it a regulated economy?
Bradley: The energy industries—oil, natural gas, and electricity—have all been politicized. And Ken Lay, the big-picture economics Ph.D., had a skill set that was attracted to the mixed economy and thus to energy, particularly to natural gas.
Kaizen: When was Enron created?
Bradley: Lay joined Houston Natural Gas Corporation as CEO in May 1984. The next year, HNG became HNG/InterNorth after a merger with InterNorth, a major Midwest supplier. A year later, in 1986, the company was renamed Enron.
Kaizen: Did it begin as a regulated company?
Bradley: Not really, interestingly. What Lay did in his first six months was to take a company that was selling gas in the largely unregulated Texas market through a vast intrastate pipeline and transform it into a company of interstate gas-transmission companies regulated by the Federal Energy Regulatory Commission (FERC) out of Washington, D.C.
So in addition to its unregulated core, Enron obtained three major interstate pipelines that are public-utility regulated. And Lay starts staffing up with some very innovative folks who understood the ins and outs of public-utility regulation. One was James E. “Jim” Rogers, who had a background with FERC. He was a master at figuring out ways for the regulated pipeline to “beat” its rate case, or how to exceed your authorized regulated rate of return.
Kaizen: So Rogers is a “gamer” of regulation.
Bradley. Yes, but in a good way since in this case regulatory entrepreneurship was to a large extent pro-consumer—doing what your customers want to transport or sell gas in new ways.
Rogers left Enron in 1988 for the electricity industry and is now CEO of Duke Energy, a major electric utility company. He became the leading political entrepreneur of the electricity business. Over the years, he sold his industry on cap-and-trade as a global-warming policy strategy—a real blow for the free market and those of us who are against climate alarmism and related policy activism.
Kaizen: So Rogers has continued the political-capitalism strategy of the late Ken Lay?
Bradley: Yes—Ken Lay lives in Jim Rogers. The master of the regulation game for natural-gas transmission brought Lay’s get-out-in-front political strategy to a company called Public Service Company of Indiana, which became Cinergy, which was bought by Duke Energy. Rogers positioned his coal-laden company as very concerned about climate change and wanting cap-and-trade regulation.
This might seem to be a paradox—a coal company wanting carbon-dioxide regulation—but Rogers’s model, which was the Ken Lay model, was “Let’s see what regulation is coming. Let’s get out in front, get to the table. If you are not at the table eating, you’ll be on the menu.” Rogers ran the math and figured out that with enough preference under cap-and-trade, he could convert his coal plants to natural gas—or just retire his coal plants, some of which needed to be mothballed anyway—and win in the transition with lots of emissions allowances to monetize. But this is at the expense of consumers: if not his own, then the others who do not fare well in the new world of rationed energy, which is what cap-and-trade is all about.
What Rogers did from the late ’80s to the present has caused a civil war within the electricity industry, which has led to the current cap-and-trade legislation before Congress. Most electric companies including their trade association, the Edison Electric Institute, are for pricing CO2.
But now Rogers is in some trouble because his political promiscuity has not worked out very well. And after raising expectations among Left environmentalists, there are protests in front of his house when he (Duke) proposes to build a new coal plant.
Kaizen: InterNorth bought HNG, so how did Lay and HNG in Houston come out on top?
Bradley: It was a reverse merger where the chairman and CEO of the bigger InterNorth was an older man eyeing retirement. He saw the young Ken Lay as the future of the industry, and Lay worked a deal with InterNorth whereby HNG stockholders made out very well. That positioned Lay to become CEO of the combined company in short order.
Kaizen: But Lay was probably different from the old-school head of InterNorth.
Bradley. He was. He had already transformed the old Houston Natural Gas into something political. It started with federally regulated interstate gas transmission and continued with a number of profit centers that had lots to do with government intervention.
The Enron model was new for the energy industry. Really, Enron was the first energy company whose comparative advantage was playing the government side in the mixed economy, the political side of political capitalism.
Kaizen: The concept of “political capitalism” involves a distinction between market entrepreneurs and political entrepreneurs. What in general terms is the distinction?
Bradley: Market entrepreneurship occurs where government is neutral, passive, and consumers drive outcomes. There’s no special government favors with the tax system, with regulations, or with financial grants. All firms are treated alike—no government picking winners or losers.
So here you have Ken Lay—who is not an engineer like most successful energy-company heads. He is a Ph.D. economist. He’s interested in the big picture. And Lay’s background, before entering the private sector for good in 1974, was heavy with Washington experience. Lay was a natural-gas regulator with the predecessor agency to FERC, the Federal Power Commission. Then Lay joined the Department of the Interior to regulate oil after Nixon imposed wage and price controls that caused oil shortages and led to a lot of allocation controls.
With his interest in the big picture and his Washington regulatory experience, Lay joined Florida Gas Transmission, whose major asset was an interstate, federally regulated pipeline. Then Lay goes to Transco Energy Company, whose major asset is a federally regulated interstate pipeline. And then he’s hired away for Houston Natural Gas, which is largely unregulated, but within a year Lay has his company primarily in the regulated interstate gas-transmission business. That was the beginning of his political business model.
Kaizen: If there is neutral government in a free-market economy, as you mentioned, the way one makes money is by developing new products, increasing quantity, increasing quality, and increasing customer service.
But in the political model—to the extent that the government is regulating the business sector—one’s route to success is through political ins and outs. In political entrepreneurship, you use your economic power to get a seat at the table, so to speak, to influence legislation, to get targeted subsidies, to put obstacles in the way of competitors.
So your thesis is that Ken Lay’s conscious strategy was for Enron to be a political company, one where business success would come through playing the political system well.
Bradley: Right, this is a new and fairly unique area of emphasis. But you still have the engineering, the accounting, all the traditional business functions that you need to do well. This extra layer of government involvement is Ken Lay’s comparative advantage.
Kaizen: So-called “crony capitalism” then becomes essential, knowing the politicians, knowing the regulators, and having good relationships with them so as to be in a better position to get favorable regulations and largesse?
Kaizen: You said that at the beginning of the 1980s the energy field was much less regulated. Or was it still significantly regulated but what Ken Lay was doing was speeding up the process?
Bradley: A lot of the 1970s oil-price and allocation regulation is gone by the early 1980s. But Lay was not interested in oil—no comparative advantage there with the free market back in control. But there is a lot of regulatory change with reregulation of natural gas and electricity on the federal or wholesale (interstate) level. And on the state level, too.
Within the state of Texas, there was very little energy regulation with natural gas at wholesale. And the old Houston Natural Gas was an intrastate gas company that was largely unregulated. So to answer your question, the energy industry was extremely regulated, except in some energy states where the main activity was intrastate.
Kaizen: So federal regulation is evolving and there’s variability among the states. Enron was significantly involved in California toward the end, and California’s regulations were a significant part of the Enron story. It becomes a very complex political landscape.
Bradley: California transformed its regulation of electric utilities. It was part of a national movement spurred by Enron to get states to implement open access, so that marketers (read Enron as first mover) could buy and sell power in the state rather than just interstate (wholesale). California’s new rules were a mess, and Enron’s traders infamously exploited them. The full story is in the books and covered in the movie, Smartest Guys in the Room. But this was not about deregulation and the free market by any means.
Kaizen: This is part of a broader effort of Enron, the common denominator being regulatory change and government largesse?
Bradley: Enron gets involved in new areas that are very government driven, part of Enron’s self-described “revolutionary” way of doing things.
For example, Enron became very involved in building pipelines and power plants in poor areas of the world. The infrastructure was badly needed, but the governments were bad, explaining why the country was so poor. This required that the U.S. government get involved to secure financing. Enter the Export-Import Bank and the Overseas Private Investment Corporation. So Enron has major projects based on taxpayer guarantees.
Enron was also doing some things that didn’t require government intervention—for example, in the U.K., where Margaret Thatcher opened up the market, allowing natural gas to compete with subsidized coal. Enron built the world’s largest gas-fired power plant in England, the Teesside project, in response to Thatcher’s privatization and deregulation. So there’s an instance that got lots of media coverage where Lay and Enron wore the white hat.
But for the most part Enron’s profit centers had something to do with government intervention, whether it was with interstate gas pipelines, international asset development, energy trading with natural gas and later electricity under mandatory open access, or wind and solar energy development.
Enron’s air-emissions trading was another example, although such trading was not related to mandatory open access but to air-pollution laws. Enron was the market leader with nitrogen oxides (NOX) and sulfur dioxide (SO2) and was gearing up to do the same with carbon dioxide (CO2), the major global-warming gas.
Kaizen: What is mandatory open access?
Bradley: It refers to a type of regulatory mandate, under public-utility regulation. One sees it with long-distance telephony, where interstate transmission has to be offered on a nondiscriminatory, rate-regulated basis to marketers of the commodity.
With transmission access from point A to point B, there could be buying and selling of the commodity, the gas, or the electrons, by independent third parties that might or might not own the assets. And Enron did a lot of innovative things to be the leader in gas and in electricity marketing, two huge new businesses.
Enron is making a market, but this competitive space was in a contrived market, given mandatory open access. In a free market, the owners of the pipelines or wires could chose not to allow access to an outside party and do the marketing themselves. Or there could be integrated ownership involving the customers where a third-party marketer such as Enron was excluded.
Kaizen: So Enron emerges with some market-oriented segments and some political ones. Can we put some approximate numbers to it? To what extent was Enron’s success in the early days a result of money coming in from government versus non-government activities?
Bradley: You could separate out those numbers. The trading business, first with natural gas and then with electricity, was really the major money-maker for the company, and this whole trading operation was built upon mandatory open access, as I just mentioned. So that would be on the government side of the ledger, although under government rules the transactions are voluntary by buyers and sellers. The wind and solar businesses are government dependent, as are investments such as the Dabhol power plant in India, which was built on the strength of a federal loan guarantee.
The other thing that’s happening is that Enron’s public-relations and government-affairs departments are exploding. This is an incremental cost of Enron’s political-capitalism model. And this gets to the “tar-baby effect” of more and more complex government intervention, with problems developing and the lobbyists having to work overtime to make things “fair” to the company. Enron is in the middle of this.
Kaizen: Rent seeking and lobbying government can involve lots of sub-strategies, from just having a seat at the table, to lobbying to push a certain interpretation or a change of regulations, to having inside knowledge about what is likely to come along. All those things can still be within the purview of the political entrepreneurship system—they are fair game, so to speak.
Was Enron involved in anything beyond the ethical or legal limits here? Is there undue influence on regulators or politicians or outright bribery?
Bradley: The general answer to the best of my knowledge is no. Enron was certainly a master at stretching the interpretation of the law. But Enron’s smartest people, and the high-priced legal and accounting talent behind the company, were all about doing things legally, while helping the company.
I remember very distinctly Ken Lay’s concern about violating the Foreign Corrupt Practices Act. A violation might have occurred if an Enron official took a bribe from a foreign government, in a country where bribes were okay. Remember: We were dealing with governments that were unstable or shady. I remember at a management conference he warned that if anybody violated this they were gone; there would be zero tolerance.
So Ken Lay was trying to be careful. He did not want to break the law, and his image as being someone who was shady or would break the law was completely counter to the image he wanted to have and to what he internally believed.
Kaizen: What about when things worsened and then got desperate?
Bradley: As time went on, and he and the company got into trouble, things no doubt changed. There was tremendous pressure on Enron to find new things and to make new profits, and Ken Lay was very aggressive about Enron becoming “the world’s leading energy company,” which he said we achieved, and then becoming the world’s leading company period, which was our final vision as we peaked, before heading to the bottom.
So Lay’s very aggressive vision increasingly came into conflict with the reality of what Enron could do. The lack of midcourse corrections, which would have put these ambitious visions on ice, was just not something he could stomach.
Kaizen: How about with your presentations? Did you have to resort to fudging?
Bradley: Ken Lay never asked me to use a bad number in a presentation to my knowledge. And I never knew about a bad number that I got from accounting and the different divisions. If I had known about it, I would have remembered it and, in the spirit of things, asked questions.
I am sure that I would have gone to Ken Lay about it, given that I, like many others (including Sherron Watkins, the famous whistleblower at the company), believed that Lay was honest. Some of this faith was naïve, in retrospect, as she found out, and I would later find out researching Enron from the outside well after my layoff in December 2001.
Kaizen: Your case studies of government intervention have put you on the front lines of the theory of political capitalism. Is this what your Enron-inspired book Capitalism at Work is about?
Bradley: Yes. It actually began with Oil, Gas, and Government. I got to the end of that treatise, which summarized oil and gas intervention at all government levels from the nineteenth century until the 1980s, and I had to make sense of it all. What commonalities are there between the thousands of interventionist acts and hundreds of regulatory episodes? How do they fit with one another?
So I ended up creating a typology of intervention with categories and terms that I revised and published in an essay of a book dedicated to an old friend of mine who tragically died of cancer at age 51, Don Lavoie. That book is Humane Economics: Essays in Honor of Don Lavoie, edited by Jack High (Edward Elgar: 2006). My essay is “A Typology of Interventionist Dynamics.”
Oil, Gas, and Government also identified the different regulatory personalities in one of the concluding chapters, an early excursion by me into public choice theory.
Kaizen: Which classification in the typology applies to Enron?
Bradley: A particularly useful one is that the political companies can practice either defensive or offensive rent seeking.
An example of “offensive intervention” is where you’re really picking a fight and trying to create a whole new government opportunity in a new line of business. Trying to get open access for electricity is one example: Enron hires a small army of lobbyists to get rule changes state-by-state. Enron did not have an electricity-trading profit center, but it wanted to create one for new competitive space and profit-making.
Another example is building a power plant in a new country where government loan guarantees are needed. That is a whole new project and profit center—that’s going out of your way to violate free-market capitalism.
“Defensive intervention” is where you’re in an existing market, changes occur, and you’re in a bind and need government help. An example would be clamoring for oil tariffs to raise the price of imported oil to help natural gas fend off residual fuel oil in dual-fuel power plants. That is exactly what Enron wanted, in 1986 and forward, to help gas compete against oil in Florida, for example, to aid Florida Gas Transmission, one of our interstate pipelines.
Kaizen: Is defensive rent seeking any better?
Bradley: It is more common and more understandable. Imagine if you or I had a business that was threatened by imports of some kind. We have our equity and salaries in our business. We know the workers and even some of their families. The amoral decision would be to get legislative help—“temporary” of course.
The right answer would be to not be in that type of business, or to sell or liquidate it ahead of its crisis. Don’t put yourself in a position to be a government welfare case.
Kaizen: So there are examples of both with Enron.
Bradley: There are both, but what is pretty amazing in retrospect is how much offensive intervention there was. The scope and variety of rent seeking in this regard was unprecedented to my knowledge. Again, this gets right to Ken Lay’s skill set as the big-picture Ph.D. economist.
Kaizen: You mentioned that Enron was also involved in alternative energy sources—wind power, solar power, “green” energy, and that it was one of the first at the political table. Did Enron think that the right kind of farsighted investment the new energies could be profitable?
Or was this again part of a political strategy? Alternative energy was a political favorite, certainly during the Clinton administration, when Al Gore was vice president. So if Enron gets a seat at the table, then whether alternative energy actually succeeds or not it’s a good business strategy at least in the short term?
Bradley: Believe me, the fact that the intellectual class is pushing these things and you have Al Gore as vice president and the “greens” in political ascendancy in the U.S. and in the EU is huge to Ken Lay’s and Enron’s thinking. If global warming were not an issue, Enron would not have been on that bandwagon. So NASA’s James Hansen and Al Gore were Enron enablers, in retrospect.
Kaizen: So Enron had a “green” category within its political business model?
Bradley: Absolutely. This is all part of the business model of rent seeking, political capitalism—and offensive rent seeking at that. Enron ended up with seven, count ’em seven, profit centers tied to the global warming issue, or more specifically, to government policy setting a price on carbon dioxide.
Kaizen: How did this begin? Was there a buildup?
Bradley: Enron’s “green” play actually had a noble basis at the very beginning, in that rate-base or public-utility regulation penalized natural gas in favor of coal-fired electricity generation, and natural gas was and is cleaner burning than coal. So there was a free-market, environmental angle to promote gas, which Enron exploited to its advantage because it was a natural-gas company, not a coal company.
Here is the problem. Electric utilities like coal rather than natural gas because coal plants have a greater up-front capital investment than gas plants. That means a greater rate base from which the rate of return is set under traditional public-utility regulation. So there’s this regulatory bias in favor of coal.
Enter Ken Lay and Enron with a very strong case for natural gas, including new company products to lock in the future price of gas, to convince, and also shame, utilities and public-utility commissions to go with gas for new capacity. So Enron goes national with a campaign to promote gas over coal for new generating capacity in the name of better economics and a better environment. Ken Lay in the early 1990s called this “the Natural Gas Standard.”
Kaizen: So far so good. But what comes next?
Bradley: Then they get into new areas beginning with solar—a 50%/50% deal with Amoco, later purchased by BP. Solarex, as it was called, was never profitable. The people who ran the company were perennially optimistic that solar would become more competitive. Maybe solar improved, but the other technologies for conventional fuels are improving too—and maybe no technology more than natural gas thanks in part to Enron!
And then Enron went into wind and actually rescued the U.S. wind industry. I’ve written a lot about this. Here’s another example of offensive rent seeking where Enron gets into an industry that depends on special government favor: the production tax credit, accelerated depreciation, state and federal mandates for wind power. Enron was behind the Texas mandate for wind power, first passed in 1999, which really created a national boom for wind-power construction.
Kaizen: We all have heard that solar and wind are the fuels of the future—that we are running out of fossil fuels and have unlimited energy from the sun and wind. So is Enron’s over-optimism defensible?
Bradley: There is a lot of fallacy in believing that we are about to run short of oil or gas or coal in our lifetimes or even our children’s lifetimes. At the same time, there are inherent reasons why wind and solar are so energy-poor and energy-deficient for the needs of a modern society. Blog posts at MasterResource on energy density and renewable integration explain why. In short, wind and solar are dependent on fossil fuels to be usable, and the hydrocarbon age is still young. What we will see in future centuries will not be the technologies we now have with wind and solar.
People at Enron never understood, much less cared about, energy history. If you understand the history of energy technology, and the concept of energy density, you see that renewables are caveman energy—the dilute stuff we had to use pre-industrial. As William Stanley Jevons so brilliantly explained in 1865, coal—and by implication the other fossil fuels—was the energy future. And there was no going back to falling water or burning woody matter for the machine age.
Kaizen: Did Enron pay for its lack of understanding of energy history and technology?
Bradley: Enron’s green investments lost money year-by-year despite the taxpayer subsidies, so yes. The “green” kick also got management off track—got the company off of a consumer-driven track onto a government-driven track. That is a bad trade even in our government-polluted mixed economy.
So Enron just keeps getting into these new areas where they’re overly optimistic about the technology. They need not only taxpayer subsidies but something stronger—mandates. And they need to make an intellectual case. And the grand, open-ended rationale for government largesse is anthropogenic global warming.
So guess what: Enron signs on to climate alarmism in a big way, although I have this climatologist as a consultant, Gerald North of Texas A&M’s Department of Atmospheric Sciences, who is telling me a far more nuanced story than what the alarmist scientists are saying. North to this day has hidden his non-alarmist “private” views, which tells me a lot about what is going on. I have posted about this at MasterResource.
So Enron gets on the same political track that the government is going on. And the intellectuals, the Left foundations, and Left politicians are saying, “Ah, Enron is great. You’re doing the right thing.”
So the intellectual elite is teaming up and giving Enron cover to get into these political areas that are bad for consumers and taxpayers and certainly the free market. And post-Climategate, we see that climate alarmism for the last ten, twenty years was exaggerated and intellectually dishonest. I have publicly challenged my old mentor, North, on this—quoting from his own memos to me—and he has broken off communications. A good part of his profession is an “Enron” at work—but without profit and loss, which would allow them to go financially bankrupt and get dismissed for cause.
Kaizen: So Ken Lay has a winning strategy politically and a lot of intellectual clout. He is well received in some sectors in the academic world and the intellectual world.
Bradley: And this is a public-affairs bonanza for Enron—and part of the façade that Enron is building up, trying to be everyone’s favorite company. The image is sort of a profit machine manned by the smartest guys and gals anywhere—or at least east of Silicon Valley. Ken Lay called this the “house advantage” at one time, as if profits did not come and go under the pressure of market adjustment, as economists know.
And Enron is the epitome of political correctness. The mainstream media loves Enron. The White House loves Enron. The environmental groups use Enron as the example of the forward-looking company. Meanwhile, I am writing furiously at night and over the weekends for Cato and later my think bucket on why renewable energy is expensive and not really “green.” I am challenging climate alarmism. I remember a number of times getting up late at night to compose on my computer to find some peace and get back to sleep.
Kaizen: 1997 is an important transition year for Enron, as Enron enters its death spiral over the next few years. Until 1997, Richard Kinder was Ken Lay’s number-two man. From your writings, you think of him as an important stabilizing, reality-orienting influence?
Bradley: Absolutely. Kinder was a lawyer by training. But he had more than a legal mind. He was one of those rarities who comprehended engineering and understood accounting and finance. He was just a great COO whose strengths negated Lay’s weaknesses.
Kinder was reality oriented and counterbalanced Lay the visionary. Kinder was really running the company with Lay more interested in the outside than the inside of Enron. It was a real tragedy when Lay didn’t pull back, as he originally planned to do, and let Kinder become CEO effective January 1, 1997. That was easily the worst mistake in Ken Lay’s life.
Because Lay changed his mind, Kinder went off and formed another company from scratch and is today a multibillionaire. Back at Enron, meanwhile, instead of Kinder we have Jeff Skilling as COO, and that’s sort of the beginning of the end of Enron.
Kaizen: So prior to 1997, was it a bed of roses at Enron under Kinder?
Bradley: No, it was not. Industry conditions were very tough in the first decade of Enron’s life. There were no commodity price booms to help. And Kinder had his hands full because Lay overpaid for his acquisitions, particularly the reverse merger when InterNorth bought HNG (but HNG’s Lay named the price and stayed on to run the merged company).
Something else: Both Kinder and Lay jeopardized the company by not taking care of some rogue characters who were trading oil between 1985 and 1987, part of the story of Book 3, Enron and Ken Lay: An American Tragedy.
But Kinder got things going eventually, and our natural-gas trading was profitable enough to carry the company—and that is where Jeff Skilling became the wonder boy of the company. So Lay/Kinder/Skilling was a workable combination that allowed Enron to out-compete its peers in many ways.
Kaizen: Why was there a parting of the ways between Kinder and Lay?
Bradley: The genesis is that Kinder was doing a good job and Lay promised Kinder that when Lay’s multi-year contract expired, Kinder would be promoted from president to chief executive officer (CEO), and Lay would become chairman. In other words, Lay would cede the CEO title to Kinder, which really made Rich the number one but left Lay as a close number two with a lot of power with the board as the real founder of the company.
Kaizen: What was Kinder’s position up to that point: chief operating officer?
Bradley: He was president and COO. He was the one running the company while Lay was imaging the company and being rah-rah with employees. And Rich Kinder was plenty tough, which Lay himself knew was necessary for the right blend at the top.
Kaizen: So Lay changed his mind in late 1996, Kinder left in early 1997, and Jeff Skilling became COO a short time later?
Bradley: Skilling becomes number two and later becomes CEO with Lay remaining as chairman. That was a huge mistake. Skilling was no Kinder, as it turned out. The new blend at the top was toxic.
Kaizen: What had been Jeff Skilling’s role at Enron up until 1997?
Bradley: Skilling was definitely the smartest guy in the room—a brilliant person in natural-gas trading in the mandatory-open-access environment. He devised new products and figured out new ways to package gas that made a lot of money for the company—while giving gas users more options and flexibility than ever before. Skilling did much to revolutionize natural gas as a commodity and as a financial product using derivatives. And he went on to do the same with electricity—at least until Enron began to hit the skids.
But to be a CEO of a major company—where you have pipelines, international infrastructure, and other things—Skilling had the wrong skill set for that.
Kaizen: He didn’t have the engineering background? He was just a numbers-and-trading-floor guy?
Bradley: You can be a great trader but not have the skill set to run different traditional businesses or to do things that in the long run are in the best interests of the company. A top CEO needs to be firm but fair and to be an effective people person—very skilled in matching talent to job and structuring the right review process and compensation packages.
You have to set the example for everyone and not be a wild man. Even to Lay, I believe, Skilling was an ends-justify-the-means CEO, by which I mean he was thought of as a profit-making genius who could be coached out of some of his bad habits. That turned out not to be the case in spades.
Kaizen: Is Lay still actively involved, or is he taking a back seat and letting Skilling run the show after 1997?
Bradley: Ken Lay is still a company workaholic but in many wrong ways. Some of his key company time is with business development: running around the country closing deals where the marketers are real close. A lot of this was for Enron Energy Services, which was signing deals that were really liabilities parading as assets. That is another story.
Ken Lay is in Washington, D.C., a lot; he is the person that Ayn Rand fingered as “the man with Washington ability.” He is giving speeches all over the place—rather than being inside the walls of the company tackling minutiae. Mr. Outside is putting form over substance by always talking about how great Enron is, and how people need to buy Enron stock, how Enron is the future.
That’s why I was spending so much time as a speechwriter for the man. How many nearly full-time speechwriters are there in corporate America? Even in the mixed economy, there aren’t many. So there is really something wrong with this aspect of my job, in retrospect.
And now Skilling is destroying the company on the inside through just bad decision making—nothing on purpose. Problems are being papered over. The rules are being bent and even snapping. So the company is really getting out of control.
Kaizen: Is anything going right? Surely there are also good things to mask the bad.
Bradley: Some profit centers are doing well, and none more than the regulated pipelines that are the cash cows for the company. At the Alamo, the weakest wall went to Davy Crockett and the Tennessee sharpshooters, and they were holding their own until the Mexicans stormed the other walls and wiped them out from behind. That’s the analogy I use for the pipelines.
But energy trading, while profitable, is becoming a more mature sector, so its high profit margins are becoming smaller, and that’s not good for Enron, which is losing a lot of money in other divisions like Broadband and Enron Energy Services. Regarding Enron’s bread and butter: competitors like Dynegy just down the street are hiring Enron’s traders and offering similar products. That works to equalize margins.
All of this was predictable. As first mover in a high-margin business, Enron made a lot of profits. But the markets catch up. An economist will tell you that the average rate of profit in a free economy tends toward the rate of interest where pure profits are zero. This is because those who have the new ideas and break the routines make extraordinary profits, but their costs generally start going up and revenues start coming down as rivals catch up. No dominant position is forever.
Then there are profit centers that just are not doing well at all, as I mentioned above. International asset development is barely profitable. The water business is making huge losses. But rather than having a Richard Kinder make midcourse corrections, shutting down businesses and making tough-love decisions to position Enron for the future—and with Ken Lay’s ego wanting Enron to become the world’s greatest company—and with Jeff Skilling’s being petrified about being a failure—Enron is papering over all the problems. And here is where Andy Fastow comes in.
Kaizen: So now we head into the collapse. Accounting becomes very important, which brings up Andy Fastow. Fastow is CFO and doing deals that Enron’s board had to approve by waiving the company’s conflict-of-interest code of ethics. Tell us about him.
Bradley: Fastow is finding investors to buy bad assets from Enron with a guarantee that ultimately rests on Enron’s own stock price. He makes big money and so do the investors under the guarantee. This allows Enron to show in its financials that it’s making profits or just not taking losses where normally there would be write-offs for bad investments.
So assaults on reality are going on, and there’s no one to blow the whistle and say “Stop.” Once you get going on that path, it really becomes a problem where some in the know are saying: “If we true up with the world, we’ve got a scandal on our hands and, by God, guess what can happen. The world will begin to lose confidence in Enron and therefore our trading operations, which are the cash cow of the company, will cease to operate because Enron’s credit is not good.”
At some point the people at the top—certainly Skilling and Fastow—know they’re at a point of no return. When and to what extent Ken Lay knew of this, we still don’t know well.
Kaizen: An interesting part of your analysis is that you agree with Roger Donway’s thesis that Enron developed a “postmodern corporate culture.” What do you and Donway mean by that?
Bradley: I remember reading Roger’s article on the Internet. It was 10:30 one night. I’m in my upstairs office. It was exactly like I knew where I was when JFK was assassinated and where I was when I heard about Nixon’s wage and price controls.
Kaizen: A defining moment.
Bradley: Yes, a defining moment. This guy Donway, whom I had never heard of, had read a write-up in the New York Times about how weird things were at Enron. The article described a meeting where the CFO Andy Fastow met with the rating agencies to try to get a higher credit rating for the company.
At the end of the meeting, the rating agencies said, “You just don’t have a case given your financials.” Fastow comes back and says, “Hold on, if you just give Enron a higher rating, our borrowing costs will fall and the increased confidence by the general investor community will help us become the company you want us to become.”
Roger read this and realized that Enron is really at war with reality. They’re a postmodern company where they think they can create the reality that they want just by wanting and thinking it—and getting others to share the narrative.
So I read Roger’s piece. I had been at the company for 16 years. I was very close to Ken Lay. I was working on a history of the company for the company when Enron collapsed. I’m supposed to know more about Enron than anybody else in the world. And this outsider, this generalist, having the right worldview, got it in a fundamental way that I had not realized.
Kaizen: The postmodern idea is that social reality creates its own reality, that there is no hard and fast reality that everything has to take its direction from—but rather you can game reality as long as you have the right PR strategy, the right political connections, people having the right opinion about you. You believe you can succeed purely through social construction and, as you say, “paper over” apparently messy underlying reality issues.
Bradley: This is how Enron was doing it. I have already talked about the political entrepreneurship, the rent seeking, of Enron. Enron’s smartest were masters at gaming complex regulatory structures, and one of these was the accounting system. Enron figured out how to create accounting profits, sort of an alternate reality, by manipulating the fine-print requirements of the multi-thousand-page code of generally accepted accounting principles, or GAAP.
But it was fictitious in the sense of real underlying profitability as demonstrated by cash flow: cash that actually comes in the door versus expenses, the cash out the door. Enron was able to use its financial models and make certain assumptions on long-term energy contracts to satisfy all the accounting requirements and to report profits, GAAP profits, which really were fictional.
Was that illegal? Not necessarily. But it was philosophical fraud that set the stage for the grand financial implosion.
Kaizen: It’s hard to read minds, but on this issue of postmodernism: To what extent did Ken Lay believe that social and political realities and gaming the system are the only things that matter or the most fundamental things that matters—that one doesn’t have to attend to underlying realities so long as things are going well at the social and political levels? And to what extent did Enron become “postmodern” only after they realized their strategy wasn’t working—and that these were the actions of desperate men trying to rationalize, cover up, and string things along?
Bradley: It was an evolutionary process; it was the old slippery-slope process. You start making bad judgments and errors and you get committed to a path and at some point you realize you can’t get off the path. But it is not that Ken Lay, or Jeff Skilling or Andy Fastow, are reading the postmodernists—now that would be too easy.
Bradley: That stuff. It would be so easy if we could find out that there was a meeting among postmodernists and Enron executives and maybe the board of directors too where they buy into the idea that you can create your own reality by just wanting or wishing it.
Remember what good-guy realist Richard Kinder was saying back in Enron’s better days: “Be careful here. Make sure that we’re not smoking our own dope and drinking our own whiskey.” He left, and the perceptionists and corner-cutters took over.
Kaizen: And it all gets back to Ken Lay.
Bradley: Ken Lay was the architect behind Enron and either directly or indirectly (via Kinder or Skilling) made the major decisions. He was chairman from 1984 until right after the bankruptcy when the creditors removed him. And Ken Lay, a people person, always interested in the big picture and public relations in Washington, D.C., and highly attuned to being perceived as the Great Man, had this virus in his personality that made him susceptible to slippery slopes.
Kaizen: So whether it was simply that he was a PR-and-politics guy that put him on a slippery slope until he believed in perception over reality—or whether from the get-go his position was that perception is reality—we wind up with disaster either way.
Bradley: What is clear is that in the end, Ken Lay has lost his moorings. I remember the last employee meeting where a thousand of us in this ballroom are sitting there thinking: “We don’t think that we believe you, Ken Lay.” The trust is all but gone, but folks are listening.
Kaizen: When was this?
Bradley: This would have been mid-fall of 2001. The company went bankrupt in December 2001. There are just a couple of months to go. We are getting into the death spiral.
Everyone had loved Ken Lay. Here’s a man who was sweet, had great attributes, was a philanthropist, he just went the extra mile for so many, including me. Enron’s perks in retrospect were higher than merited by the marketplace. You have employees who are listening to the man they had revered and want to believe him but really cannot. At the beginning of the question-and-answer period, the question to Lay is: Are you on crack cocaine? We all laughed at the time, not realizing how good a question it really was. Lay was rationally gone and didn’t know it—and we really did not know it.
So what is Lay’s final pitch to employees? I didn’t write this speech for him, and this is the speech of his life to try to stem the tide to get confidence back in Enron, beginning with the employees who own a lot of stock. How does Ken Lay begin? This is about a month after 9/11. He says, “Terrorists are attacking Enron.” In other words, the short sellers and others who know the problems or do not have confidence in the company are acting like terrorists because they are destroying the great company Enron, and they’re destroying our wealth.
For Lay to liken the agents of reality—the short sellers who are seeing the real problems in the company, the media who are getting the inside scoop, some of which even Lay did not know—to the terrorists of 9/11—this is where Ken Lay is philosophically unhinged.
Kaizen: Greg Whalley came on board as CEO, but it was too little too late?
Bradley: He came on with just months to go before the company’s end. He was a hard-nosed trader but with a much better skill set than Ken Lay. Would Whalley have been a good CEO for Enron over time? We really don’t know. But he was very successful at Enron as head of trading and has been successful post-Enron with an energy-trading company.
In his short tenure as CEO, Whalley was reality oriented and interested in finding out the truth. He called everyone on the carpet, including Ken Lay. What’s interesting is that in the last magazine that Enron ever published for employees, Whalley mentions that one of his major influences was Ayn Rand. So he has a reality focus here that’s very interesting.
This is why I would love no one more than Ayn Rand to have watched the rise and fall of Enron. I think the whole Enron story is really the “fictional” book that Ayn Rand didn’t write. Enron is where her philosophy comes alive in a dramatic, multi-dimensional business and political-economy situation.
Kaizen: So Enron is now into its death spiral, and everybody inside the company is aware that something is seriously wrong. How does the world learn that Enron is a failure? Was it the ratings agencies that sent a signal? Were there analysts who said the numbers aren’t adding up? Was it regulators not happy with something or other? Accountants or auditors or the IRS saying the books aren’t right here? Who pulled the plug?
Bradley: Well, everything starts collapsing about the same time. The Wall Street Journal is getting the inside scoop and reporting Enron’s problems when most of the company, including Mark Palmer, the head of public relations, did not even know what was going on. Two of the Journal’s reporters wrote a book called 24 Days, the period in which the truth prevails and Enron fails.
The SEC is putting pressure on Enron to come clean on some things. Enron internally is starting to find errors when they realize that under law they have to restate financial statements. It becomes obvious that Ken Lay doesn’t know what is going on.
Skilling has left the company and is holed up in a mansion two miles from the company watching the news reports, terrified. He becomes so desperate that he allegedly makes phone calls to Lay wanting to rejoin the company to try to save things. He might have done it just because he knew that he was culpable in all this and he wanted to put forth a good effort to try to assuage his guilt.
But reality sets in, and the reality is begun by short sellers who were raising questions so that the financial press, including Bethany McLean of Fortune, starts writing critical articles about Enron. She really started the process in the Spring of 2001 with a piece, “Is Enron Overpriced?” Then there are some folks who have left Enron and know some of the dirty secrets who are anonymously giving some of this information out. In all it’s a pretty quick unraveling.
Kaizen: Enron is then forced into bankruptcy—you mentioned the approximately $60 billion loss. Financially, who are the main victims of Enron’s collapse?
Bradley: A lot of companies had receivables. I saw a bounced check at a cookie company a block from Enron for pocket money. They proudly displayed it. Then there were major creditors Enron owed money to for gas and electricity trading. The banks that had loans out to Enron—they’re under water. And the stock price collapsed, which meant that people have securities that are virtually worthless.
Kaizen: Let’s turn to the lessons to be learned from Enron. Many lessons are being floated, and one that gets much attention is the issue of deceptive accounting practices. But the way you’re explaining things here, the deceptive accounting practices were a late-in-the-game cover-up. The real problems were earlier.
Kaizen: Nonetheless, one of the main political responses to the collapse of Enron was Sarbanes-Oxley, a major change in accounting requirements. Sarbanes-Oxley was passed quickly by Congress. Was this new financial overhaul a good response?
Bradley: Capitalism took the blame after the collapse. And regulators—do they want to say that existing regulations caused the problem? That the politicized accounting system and the GAAP profits was candy for Enron’s smartest? No, the regulators want to say, “Oh, gosh, we didn’t have the right regulations, or we left in loopholes that we now can plug.” Sarbanes-Oxley was the unfortunate result, where you raise accounting requirements and costs on everyone—the good actors in particular—to try to prevent the bad apples from doing their damage.
The accounting code should be something quite different: what Richard Epstein calls “simple rules for a complex world,” where you keep the guidelines basic and let companies present their own positions. But if their financial statements are misleading, consider it fraud; tell it to a judge and jury. Instead we have thousands of pages of accounting regulations, so it’s legal to comply with the regulation even though your intent and end result might be something that’s very different from reality.
Unfortunately, you have the intellectual class believing that “Enron-qua-capitalism has failed,” though there are some free-market counterattacks to that. The free marketers are saying, “Oh, the free market worked. Enron went bankrupt.” But the free marketers really missed the point here, which is that it was political capitalism—all the political profit centers that Ken Lay was after, as well as the gaming of regulatory structures of accounting, the tax code, and the California electricity market.
The “market failure,” in other words, was really a political or government failure. And it was analytical failure (a term I am trying to elevate) in that the intellectual class enabled a Ken Lay and Enron with the mixed economy writ large.
Let’s regulate accounting—that enabled Enron. Let’s politicize the tax system—that played into Enron’s hand. Let’s have public-utility regulation and mandate open access—the same result. Green is good—build solar panels and wind turbines. And the climate is in or going to be in crisis. All this set the table for a Ken Lay to form a company called Enron and reach the very top.
But unfortunately, the intellectual class says, “This is a market failure and not a political failure.” And we get more regulation rather than less.
Kaizen: So in your judgment the new accounting regulations are a bad solution because they are not focusing on the right problem?
Bradley: Right. The increased accounting regulations create their own set of problems. What I’m saying is that in the politicized mixed economy, the worst get on top. So you want to take away those incentives for the bad guys to get on top, rather than allow them to get on top and then put in new regulations to try to somehow defang them.
Kaizen: When you have a more complicated set of rules, with thousands of pages, that’s more opportunities for the bad guys to game the system?
Bradley: Let me put it this way. Everyone can take a business ethics course where you are instructed not to game the regulations, but there’s always an underclass that’s going to do it. Incentives matter. People like to make money.
Kaizen: The book and documentary, Enron: The Smartest Guys in the Room, by Bethany McLean and Peter Elkind, probably most shaped the public’s perception about Enron. Is it a good or bad book? Did it get it right?
Bradley: The book and the movie were two different things. The book is fun reading, great storytelling. You laugh out loud. I heard that Charles Koch, the builder of Koch Industries, and the polar opposite of a Ken Lay, laughed his way through the book. In retrospect, the problems and perverted processes are so obvious. It’s sort of like the “science of failure” in action versus the “science of success.” So it’s worth reading.
But the movie had an unfortunate tendency to muckrake against “deregulation” and Ronald Reagan and capitalism. It is very entertaining to watch, but the public-policy slant got it backwards.
Kaizen: That must be frustrating.
Bradley: It has been. The intellectual class has their own “smartest guys in the room” (Enron) problem—but they go on and on and don’t end up in bankruptcy court like a postmodern business.
But what I am doing in my full review of Enron, a top event in the history of commercial capitalism, is to say: “There is a worldview you can apply to all these stories that helps us understand what in retrospect seems to be ridiculous but at the time wasn’t ridiculous.”
So I try to start where The Smartest Guys in the Room leaves off—or plain falls short. What I found was that just about the whole classical-liberal view comes into play to really understand Enron. And that’s why one book turned into three, a trilogy. And that’s why my 500-page Book 1 develops and applies the worldview that you need to understand not only Enron but, more broadly, organizational failure versus organizational success.
Kaizen: That is Capitalism at Work: Business, Government, and Energy.
Kaizen: So there is the energy market in particular, then there are the many accounting and management issues going on in that sector. But there is a broader lesson about political economy and an even broader lesson about philosophy in general.
Bradley: It is all about a worldview, and this is where “the science of liberty” meets “the science of success,” to use two terms of Charles Koch.
There are four books in the classical-liberal tradition that provide much of the worldview needed to dissect Enron. Charles Koch’s The Science of Success is the most important because it is contemporary and builds upon the classical-liberal tradition. But there are others that anticipated the problems and the slippery slopes of Enron. I’m thinking of Adam Smith’s 1759 The Theory of Moral Sentiments and Samuel Smiles’s classic, Self-Help, in particular.
Kaizen: Smiles’s book was 1859?
Bradley: Yes, it was published exactly one century after Adam Smith’s The Theory of Moral Sentiments. Then the general writings of Ayn Rand and certainly Atlas Shrugged come into play. Rand’s worldview solves what I call “The Ken Lay Paradox.” I define this as: How can a man so seemingly intelligent, well educated, and experienced; religious, moral, and law-abiding; kind, civic, and philanthropic—with long training as a top corporate manager—preside over the greatest business fraud and debacle in corporate history?
The seeming paradox is solved when it is realized that Ken Lay was a philosophical fraud. I explain this in terms of philosophy, Objectivist philosophy, in an April 2006 interview in The New Individualist.
Kaizen: About the legal fallout: Ken Lay was found guilty of fraud. In your judgment, his was more a philosophical fraud than a legal fraud. But do you agree with the guilty verdict?
Bradley: That’s something I will spend a lot more time on. It will be an important part of my third and final book, and Roger Donway is going to look at this very closely, too. Roger—I engaged him on the spot some years ago after I read his article—helps me resolve the really tough things. He is a very talented, varied thinker, a polymath.
But the tragedy of Ken Lay continued after the fall of Enron. If only he had confessed: “Here is what I really knew and didn’t know. And here is what Andy Fastow and particularly Jeff Skilling knew.” But Lay chose a defense strategy where he and Skilling, who were tried together, formed a cartel where they agreed they weren’t going to criticize the other one.
They were going to sink or swim together. They thought that so long as there wasn’t a smoking gun, like a memo from Skilling to Lay saying, “You know we’re beyond the point of no return. We have to do this and this with accounting and hope it is legal,” then the jury wouldn’t be able to convict them.
But of course the jury looks at the whole picture and in sort of a populist verdict says, “You’re guilty.” There are questions of whether this was a fair trial, being in Houston. I’m going to study it more. And there might be a retrial too depending on what the U.S. Supreme Court decides regarding Skilling’s appeal.
Kaizen: As of the spring of 2010, Skilling’s trial is in oral arguments before the U.S. Supreme Court. Obviously there will be some legal fallout, but the broader lesson has to be that it’s not going to be solved through legal after-the-fact punishments. We need political and economic reform, and certainly philosophical reform, to prevent the next Enron?
Bradley: Right. We need business leaders and their investors to be attuned to reality and wary of not only legal fraud but also the philosophical fraud that precedes and abets it. An Objectivist understanding of the social world would be a huge step forward for encouraging good behavior and recognizing, penalizing, and preventing bad behavior. Think in terms of self-help, not government instruction.
Kaizen: To make a big judgment call: To what extent Enron’s collapse was a matter of a bad, politicized business strategy and to what extent it was a standard case of an overly optimistic business? Was Enron trying too hard and had bad judgment and risk—or did Enron get lost in the world of public relations and politics?
Bradley: Both of them came together. The promiscuity came in different flavors. Ken Lay was certainly an optimist, and he had enough success in his career to believe he could spin out of Enron’s troubles until the end.
But one thing for sure: The political business model is not good for long-term sustainability. Special government favor comes and goes. Temporary political majorities are fickle. A firm can get a subsidy and lose it later on. But the political promiscuity is a sign of promiscuity all over the place.
But a lot of things can go wrong with that. And one problem is that it’s awfully expensive to have a big government-affairs office. That‘s corporate overhead that the subsidiaries, the business units, have to pay and still meet the competition. And funny things can change the game such as the California electricity crisis where Enron was making all this money that could not be monetized and where shortages created a public-relations nightmare.
I don’t think many companies in United States history have consistently made money off special government favor, outside of private companies in the military-industrial complex—even firms that rode the ethanol mandate. They do well for a while and often sink.
Kaizen: Wasn’t Enron’s political strategy to give lots of money to Democrats and Republicans so that no matter who’s in power they had a seat at the table?
Bradley: There was a lot of pressure on employees to give to the PAC (Political Action Committee). And Enron had employees who were Democrats and Republicans and, in my case, libertarian.
Kaizen: So what is your big takeaway political-economy-wise? Is it something bigger than just the market brought down a bad company?
Bradley: I finally came to realize that Enron was about much more than a company gone awry. That is a familiar story that hardly deserves extra scrutiny and understanding. Enron was different. It took me years to realize it, but my major takeaway is that a Ken Lay and Enron would have been unknown to history in a free-market, Objectivist world.
So while the free-market community concluded that the free market triumphed because Enron failed, my point is that the mixed economy fooled us by allowing Enron to get on top, then shock us with its failure. This is a subtle but more important insight, I believe.
A Ken Lay would have had to become an engineer, an accountant, or a finance man, and work up the business ladder in that way. Or maybe Lay would have been the head of a public-relations firm or a politician. But he would not have been the CEO of a major energy company in a market setting, short of a completely different educational background and practical focus, which just might not have been in his personality.
The important point is that Lay had a different skill set than most all market-driven CEOs. It was the government side of the mixed economy that allowed him to get on top, or allowed “the worst to get on top,” to borrow a phrase from F. A. Hayek regarding those who make it to the top of a centrally planned economy.
Kaizen: Should we be optimistic or pessimistic about what we have learned about Enron? Will we be making the right kind of changes? Or will it be politicized business as usual with more Enrons in our future?
Bradley: On the one hand Enron has sort of been overtaken by events—the Great Recession, the Bush and Obama bailouts, healthcare legislation, and all the rest of it. But Enron lives when it comes to energy policy because Enron’s energy policy is virtually the same as Obama’s. Obama is stressing wind, solar, energy efficiency, and a cap-and-trade system with carbon dioxide. We have scarcely talked about Enron’s most fraudulent division: Enron Energy Services, which was peddling energy efficiency.
And on global warming, Enron was the first major U.S. corporation to sound the climate alarm and to push for pricing CO2, which is certainly front and center in the Obama administration. It could be a cover story for a magazine like The Weekly Standard about how Obama’s energy policy goes back to Ken Lay and Enron.
So the parallels and lessons remain unlearned. Getting the mainstream to see what I see has been difficult. I continue to hammer away on this at the energy blog MasterResource.
As far as financial reform, we have a real effort to regulate derivatives, which I think takes the wrong lessons from Enron and further regulates financial markets. You mentioned Sarbanes-Oxley, how we have gone down the road of more accounting and compliance regulation rather than less. But there is a backlash now against Sarbanes-Oxley.
Kaizen: Is there hope with your trilogy to get the real lessons from Enron into the mainstream of thought?
Bradley: Well, I think I can make a case that I do, or will, know more about Enron than anyone else, and that I have done my homework to attach a worldview to the facts to interpret the whys and wherefores. But there are two books to go of the three, and Book 2 might be out by year-end.
My task is not only with the Left but also getting the free-market community to see that Enron wasn’t just a bankruptcy and a major event of 2001; it was a defining event of history that has tested the classical-liberal worldview. And that worldview has passed in ways we would have never known about in the absence of such a peculiar mixed-economy saga.
Kaizen: You’re now working on a trilogy. The first volume, Capitalism at Work, is out. All of this is in the context of your work at the Institute for Energy Research, of which you are CEO. What is IER’s scope and mission?
Bradley: I founded an organization that has grown from basically a “think bucket” (as one journalist put it) to a bona fide Washington, D.C.-based think-and-do tank. The Institute for Energy Research, a 501(c)3 educational nonprofit, used to be just me working out of my house, but now has a 501(c)4 advocacy affiliate, the American Energy Alliance. I am still CEO, but the main operation is now in Washington.
IER is the leading free-market voice in today’s energy debates. There are other think tanks that educate for free energy markets—Cato, Competitive Enterprise Institute, Heartland, and others—but IER is all energy, all the time, so to speak. We are very specialized and focused.
IER has gotten big in the last couple of years and now has an advocacy affiliate, the American Energy Alliance. We are very involved in educating about the problems with expanded government intervention such as cap-and-trade energy rationing, new motor-fuel taxes, renewable-energy mandates, that sort of thing.
Kaizen: Of your several books on energy history and policy, which is the best as a primer to the field?
Bradley: The primer that I coauthored with Richard Fulmer, Energy: The Master Resource (2004), is currently used at the University of Texas law school and at Texas Tech for undergraduates.
Kaizen: Focusing on energy, what the late Julian Simon called “the master resource,” you’re fighting to characterize so-called depletable energy—such as oil, gas, and coal—as an expanding resource. We often hear that we are running out of oil and should focus on renewable energies. How should we think about the future of energy?
Bradley: In “Resourceship: An Austrian Theory of Mineral Resources,” I develop the thesis that in a business-economics, real-world sense, minerals are expanding. The historical record contradicts the static, perfect-knowledge notion of minerals being fixed and thus depletable.
On your more general question, there is an energy problem, or challenge. But it is not the usual rhetoric about energy sustainability. It is not about the free market and voluntary consumer choice with oil, gas, and coal. It is not about depletion. The energy problem has to do with statism: government intervention in energy that has created energy shortages and crises, like what we experienced here in the United States in the 1970s with the gasoline lines.
And statism has a lot to do with Arab OPEC and Venezuela and statist oil economies that have led to some of our historical energy problems regarding availability and price—not to mention the lost social welfare in these countries. Private ownership of subsoil minerals has led to great social gains, while government ownership of resources has lead to narrow, elitist political gains.
Kaizen: I’ve heard, and maybe you can verify it, that 13 of the top 14 energy companies in the world are state-owned or state-run foreign companies, and that large U.S. companies like ExxonMobil are actually quite small in comparison?
Bradley: Your statistic is probably close. State energy companies are much larger than private companies. And that is the gist of our international energy problem.
So the problem is statism. T. Boone Pickens and others take the statist problem around the world and say: “Okay, there is no free market. Therefore, the government needs to intervene and do this and that.” Boone wants mandates and tax incentives for vehicles, heavy trucks in particular, to use natural gas and avoid oil from the Middle East.
For those who think that U.S.-side intervention solves or undoes the problems created by foreign governments, I differ. More intervention adds to problems.
Kaizen: If we could take it out of a political context, there’s the standard view that there’s only so much oil so eventually we have to run out of oil. What do you think of that?
Bradley: That is the fallacious natural-science view of the social world. But as Julian Simon has taught us, as well as the institutional economist Erich Zimmermann, human ingenuity and the capital required to “make” minerals out of the neutral stuff of the earth are not depleting but expanding. Each breakthrough of human knowledge creates new opportunities for learning and discovery. This is where the Malthusian fixed-pie, zero-sum game viewpoint falls apart.
If you really want to measure how much energy we have left under our feet with fossil fuels, which are substitutes for one another thanks to technology, the inventory is measured not in years or decades but in centuries.
Kaizen: The traditional view is Malthusian and you’re arguing for Simon’s approach. The Malthusian position is that there are fixed, scarce resources and no amount of human ingenuity is going to be able to overcome that problem. Simon’s argument was that human ingenuity is, as his book puts it, “the ultimate resource” that can solve all resource problems over time.
Bradley: In free-market settings, right.
Kaizen: Are Simon’s followers making headway on this debate? It does seem that in some important sectors Malthusians have taken a defensive position: food production, population issues, and so on. Is it a natural extension to say that it’s going to carry over to other energy-source fields?
Bradley: When Simon made his bet in 1980 against Paul Ehrlich, John Holdren, and others—the most famous bet in the history of economics—he proved that mineral prices don’t have to increase. They can stay the same, or they can even decline over time. And what this means is that with this “fixed” resource, human ingenuity can and does overcome diminishing returns or the limits to nature.
So the Malthusians have moved from resource depletion (“peak oil” in today’s parlance) and pollution to climate change as a new rationale for putting a cap on carbon-based energy, which is really putting a cap on capitalism. And as Climategate and other developments have recently shown, the exaggerated view of the human impact on climate has been exposed.
© 2013 Stephen R. C. Hicks. All rights reserved.