Part I:

Part II:

Jack Stack is the founder and Chief Executive Officer of SRC Holdings Corporation, an award-winning, employee-owned organization based in Springfield, Missouri. Springfield Remanufacturing Corporation and its 22 subsidiaries provide a wide range of products and services, including engine remanufacturing, packing and distribution, business consulting and banking. SRC employs 1,600 people and generates annual revenues of about $400 million.

Kaizen: Where did you grow up?

Stack: I was born in Chicago in 1948. My father bought a house in Elmhurst, Illinois, and I lived in Elmhurst from the time that I was about three years old to about 30. Then I was transferred to Springfield, Missouri, where I’ve spent the last 31 years of my life.

Kaizen: It sounds like you were a wild card as a youth—you were kicked out of college and seminary and fired from a job at General Motors?

Stack: I just couldn’t find what I really wanted to do in life. My dad worked in a factory and had a college degree and believed in everybody in the family working. So I had an unbelievable number of jobs as a child. I delivered newspapers and sold Christmas trees and went door-to-door selling. Then I worked at a post office delivering mail. I was a janitor in high school; kids would leave from school and I’d clean the classrooms and the restrooms. I worked all my life; I always worked at something.

Then I went to college and I couldn’t handle the boredom. I went to strong Catholic Schools, so it was all repetition: nothing was interactive; nothing was exciting. It was mostly rote. So I didn’t pay a lot of attention.

When I went to work, I worked in organizations where you could get the job done fast, and I had a lot of time on my hands. At General Motors, my job was picking parts. You had to pick 400 line items in eight hours; that was the minimum expectation. I could be done by 1:30 or 2:00. I had nothing to do, so I went and played poker in the back room with the guys because that was more active. Eventually we got caught and I got discharged. They didn’t think that my vocation was to be a General Motors employee.

Kaizen: But your father worked at International Harvester and got a job for you there?

Stack: He got me a job in the mailroom, so I had the opportunity to work in the mailroom for a while. I always had good relationship-building skills and people liked me and took care of me. If they hadn’t, I probably would have been discharged from that operation. But they kept pressuring me to go to school and be something.

International Harvester gave me challenging jobs; they threw me in over my head and I just loved it. I had ten jobs in ten years, and every one was twice as hard as the previous one. They had faith that I could get it done, and I could get it done. I wasn’t good at showing up on time, but I would work late into the night and be totally focused on whatever assignment they gave me, and I had the tremendous satisfaction of pulling everything together to get it done. I could get it done, which was really a skill that I began to develop.

But at the same time, being a young kid in this massive factory, whenever they gave me this big job I would always go through this cycle. I began to believe that there is this crash factor that one has to go through — I call it the “freakout factor.” Every time you have this new job, you think it looks small and you can do it. Then you get into the job and suddenly it turns into this big thing. And you say, “What did I get myself into?” Then, depending on how fast you freak out, that’s how fast that job gets smaller.

I was good at freaking out fast. I’d call my boss in the middle of the night and I’d tell him I couldn’t do it. I’d embarrass myself and tell him I’m not the right guy for the job. Then I’d wake up the next morning at rock bottom. From that point on you say to yourself, “It can’t get any worse.” And then, suddenly, you take the assignment on.

This happened to me six or seven times in my career. I began to watch other people we put in positions to see how fast they’d hit that wall. The faster they hit the wall, the more entrepreneurial they were. So I was always watching for the person that you promote to find out how they lose total confidence in themselves—they have this breakdown. And they wake up the next morning and say to themselves, “It can’t get any worse than this.” And then it gets better from that point on. That was what happened to me when I worked at International Harvester.

Kaizen: In what you call freaking out, is there two parts? One is quickness—sizing up the situation and realizing that you have a big problem—and then resilience in being able to bounce back when you’re overwhelmed?

Stack: It’s an entrepreneurial trait to be quite naïve. Naïveté is really, really good because it’s the point by which you start. You have the confidence. It may be a little bit stupid to think you can leap tall buildings in a single bound, and then you find out you can’t jump very high.

Once International Harvester gave me a public relations job. The plant had never had a PR department. It was the largest manufacturing plant in the Chicagoland area, where the corporate office was, and it never had plant tours. They didn’t want to show the people off.

They put me in charge of Public Relations. Now, I can’t write a paper. I can’t write a sentence. I’ve got to write newsletters, PR notices. I’ll never forget sitting there in front of that blank piece of paper and just staring at it for days. It was like a piano was on my back. Finally, I was like, “Look this job is not for me. I can’t handle this job. I didn’t go to school to do it. I don’t like it.” Then I made an ass of myself. The next morning I woke up and dug the hole deeper; I didn’t ladder my way out of it. So I went back and said, “Okay, I’ll do it,” and I did it. It’s a trait that I see quite frequently in a lot of people.

Kaizen: In all these jobs at International Harvester, what made them say, “Let’s give him this new job and see what he can do”? You were a kid who started in the mailroom. What were they seeing in you?

Stack: Well, I think they saw my ability to work with other people. Like I said, I had good relationship-building skills. It was a timing issue because most of the people were ex-World War II people — confrontational. Management was a big issue inside the factories. Nobody sat down and really talked to anybody.

The average age in the factory was about 55 years old. I was single. I didn’t have the responsibilities of children and home and car payment. I was carefree and loose. I think they missed that, embraced it, appreciated it about me. As strong in discipline as they were, they liked a bit of mischief and fun and laughter.

It broke the monotony of the situation, because International Harvester must have been very, very stale from the ‘50s and ‘60s. It was the “organization man” mindset: you worked in a box. The second guy I replaced sat in the same chair for 26 years. It was, “Do your job, nothing more and nothing less; just do your job.” It was process oriented. I broke every rule there was. Someone told me to be quiet and I would talk about it. Someone told me it can’t be done—well, we did it.

Kaizen: Aside from International Harvester’s stale culture, from your book The Great Game of Business it sounds like it was a rough culture with lots of conflict.

Stack: We had the worst union, UAW. Local 6 was the worst UAW in the United States. It was the toughest union.

Kaizen: What did you learn at International Harvester about management and dealing with those kinds of problems?

Stack: It was obvious to me that people wanted to win; they did not want to just coexist. They did not want to walk into an empty box where the jobs were boring. IH’s management didn’t make it exciting — it was boring as you could believe. The result was conflict.

So my concept was: How do you get people to feel like winners? So I would set up these crazy little games—anything that meant someone could feel good about themselves. Once they started feeling good about themselves, they had an edge on almost anybody in the organization. My organizations could outperform because we made everybody feel like they’re number one and they were the most important thing in the world. When we hit a target, we’d throw our fists up in the air and celebrate. We’d party and do crazy things.

Kaizen: What’s an example of making a game out of a boring job to make it exciting?

Stack: We were shipping tractors to Russia to save the division, and they didn’t think we could get all these tractors out. They told us it was an impossible order: We had to do 700 tractors. So I put out a scorecard, and every day I would post how many tractors went out—15, 20, 30, 40.

But the cool thing was the finish line—it was the tension and whether you could or couldn’t do it. I’ll never forget the time that we did it and we put balloons all across the board and how good everybody felt.

You begin to realize you can do anything you really want to do—because of the ingenuity of people, and the ability to be able to put a team together. If you can put that team together, it’s almost like you’ve doubled the size of your intellectual capacity. When you use the wisdom of the crowd, it’s incredible what can happen.

The greatest one I had was when I became a superintendant of manufacturing when I was 26 years old. Five general foremen had been told they were going to have the job. They were all my father’s age and I was 26. And I don’t know a machine tool from a hammer. They just threw me down there, and the closest guy in age to me had spent 30 years more in the profession.

I did a freakout again. I went out the night before and had too much to drink. I woke up and I was petrified. I walked in and said to the five foremen: “Listen, it’s not my fault that I have this job. I didn’t pick this. I know you’ve been promised the job. All I can tell you is I will work my heart out to get you the tools to succeed and to get out of here as fast as possible to make room for one of you guys. But by the same token, if any of you guys try to go behind my back or you don’t want to play by the rules, I will personally punch you in the nose on the shop floor.” I told them that. They thought I was crazy and they said, “Why you would do that?” I said, “Because both of us would get fired at the same time. We have a policy here if two people get into a fight, they both get fired.” And I said, “That’s all I’ve got.” I walked out, and I could see these five old guys with gray hair, bent over, walking back to their departments saying, “This is the craziest son of a gun I’ve ever seen in my entire life!”

But I was also able to give them numbers and information that they had never had in their entire careers. We had an Iranian programmer down in the bowels of the storm shelter. I’d go down there, and he was developing a productivity report that was only given by carbon copies on a Thursday night, prior to a staff meeting. This guy had been paralleling this thing with a big IBM 76. Nobody was paying any attention to any of those reports. I went down to him and I said, “You mean to tell me that you can give me my productivity every single day?” He said, “To the penny.”

I had five departments at that time: five general foremen, 26 supervisors, and 500 UAW guys. Ours was one of seven divisions in the plant. We would all go to the staff meeting and we’d all get beat to hell on productivity. We didn’t know the day before or the day after; all we did was prayed to God that we wouldn’t get killed.

My division was the seventh out of seven: $53 per person is what we were running. We had all kinds of bottlenecks because of union contracts and compromises. The previous plant manager went in and said, “We’re going to run 300 crank cases through this machining line, and there’s going to be no rework area.” Well, there are 1,172 perishable tools in this line, and they didn’t tell the perishable tools when to fail. So obviously you had a lot of rework, and rework kills your productivity. The unions had flat rate allowances, so they would never allow any productivity changes, like tool changes and tool set ups and things like that.

So when I started to teach them they were lowest of the seven. I would have the Iranian give them their numbers every single day. The first several weeks, they didn’t want to look at them. Then they started to look and wanted to know why there were so bad. What did we need to do to be able to improve them? We were able to talk to the union—to tell them that we needed to make the changes on the three shifts, do the tooling on the second shift. We did more things because people wanted to be winners.

By the time we ended up, we were turning $72 per person, up from $53. The other divisions were chasing us.

Then we started to make bets with the other departments. I bet one machining superintendant that we could take him on. One time it was within a sixteenth of a cent in terms of productivity. He was running $72.16 and I was running $17.19 all the way to the very end. His department lost $500. We took the $500 and had a party inside of the department.

I’ll never forget one guy. We got down to one guy out of our 500 who was holding everybody up. I went to him and I said, “Look, you’re the key here.” This was a Wednesday, and we had Wednesday, Thursday, Friday, and then the contest was over. “If you don’t turn it on and do 79, we’re not going to take this guy.” He said, “I come to work every single day for 25 years. I have exceeded my quota. I performed better than anybody else in the organization. And you come around here and you change the whole parameter of the game.” I said, “Listen, I’m not trying to change anything. What’s it going to take for you to do 79?” He said, “Okay, I’ll do 79 if you promise me you won’t change my standard so I still could be number one in the entire department.” He did 79 and we won; that was the whole thing. And then I had my general foreman go on a bike—we had a little bell on the bike—and he rode around the competitor’s organization ringing his bell.

We did those things because jobs are boring. Here we had the most incredible numbers, and we did it by having fun. We tricked people into learning things they didn’t want to learn.

But there had been this invisible wall between everybody—and it was crazy, it was absolutely insane, and it was stupid. Those are some of the things that would cause us to lose the manufacturing edge that we had in the 60s and the 70s.

Kaizen: When you were just 30 years old, IH sent you to Springfield, Missouri, to head its Springfield plant. Were you ready for that leadership role?

Stack: It was like everything else. Anytime there was a pile of crap, they threw me into it. This was a big pile of crap. I didn’t know where Missouri was, let alone Springfield. I took my wife and kids and jumped off the face of the earth. No family down here, didn’t know anybody.

I went in the first day and talked to the organization. I told them I was there to help them and do what I can to get them the tools to do the job—the same thing I tell everybody. I promised them I would give them a visible idea of everything that goes on and they’ll be as transparent as they want. And I said, “Do you guys have any questions?” And this guy raised a question: “How old are you, anyways?” I said, “I’m 30 and feeling like 50.”

I was actually sent down here to either close the facility or to get it up and running. IH banked on it being closed. I basically fell in love with the people. As tough as it was up in Chicago, this was so much easier.

In Chicago, my guys went home to Indiana, Wisconsin, or Illinois. There wasn’t a suburb like Rockford where everybody kind of knew everybody, knew the factory, and stood behind the business. In Chicago it was tough to get the whole idea that we’re in this thing together.

But down here in Springfield, it’s this community; it’s like a cul-de-sac. So I was able to pull everybody together. They were also very entrepreneurial down here. They didn’t have a union contract. They were the type of people who came off farms and did things with their hands.

So what we did is we taught them how to run the business, we taught them how to be profitable, we taught them how to be safe, we taught them how to provide good quality. And as we began to teach them, they taught us.

Kaizen: What did the Springfield plant do?

Stack: It was building transmissions and engines and anything that you can imagine that went on a crawler tractor for construction, or a highway truck, or a farm tractor, or industrial equipment. Any component that was on there, we had the responsibility for remanufacturing it and getting it back out there, for the entire International Harvester company.

Kaizen: What was the plant’s financial condition when you arrived?

Stack: They were losing $2 million a year. For a small operation, that was huge.

Kaizen: Did you have a timeline for turning around or closing it down?

Stack: Well, they gave me about six months.

The plant’s up-to-schedule condition was about 28 percent; that’s how on-time delivery was. It was horrible. Their inventories were growing because they didn’t have very good manufacturing discipline. The plant was developed as a sales and marketing tool, and it was run by sales and marketing people with no manufacturing experience. That’s why I got the job: to discipline the manufacturing.

In manufacturing, you have a lot of metrics, a tremendous amount of metrics, when it comes down to the product. I knew how to handle the metrics. The metrics really motivated the people. If you can measure it, then you can play the games, and you can have success, and you can have wins. If you’re 28 percent on-time delivery and every time you go to 30 or 40 or 50 or 60 percent, there’s cause to celebrate. You also draw inventories down.

One thing the employees never had access to was the financial metrics, because they were heavily burdened by corporate overhead. So we started to create our own common-sense financials to tie in with teaching the employees the metrics of manufacturing. Then we taught them the metrics of the business. If you can do both at the same time, it’s perfect because most companies just teach people how to make a product or a service. They don’t teach them how to make a company. If you’re focused on making the company, you have to have great products and services.

Most companies’ processes have a tendency to dumb people down. You always have: Go out there and do a good job. If the company fails, they can’t put two and two together. But if you teach people what it takes to make a successful company, then the products are better, the services are better, because they are totally cognizant of the fact of where the end zone is. Instead of running them from the 20 to 20 yard lines and they’re getting frustrated because they can’t score—when you give them the balance sheet and the income statement, then they know how to score. So we then taught them that and within six months we were smoking.

Kaizen: That’s great. But even so International Harvester as a whole was in deep trouble and heading toward bankruptcy?

Stack: Arthur Andersen Consulting came in and said that in order for IH to go into the next decade, they had to have a significant change of leadership. So in 1980, they started bringing in these whiz kids and hotshots without any industry experience. They came up with an analysis that said: in order for the company to go forward, it really needed to break the UAW. So they took on the UAW.

An ex-Xerox guy and ex-Continental Can guy were the two head guys. They knew nothing about our business. They took the UAW on, and the UAW walked and they stayed out on strike for six months. We weren’t prepared for a strike. We brought in inventories. It was pathetic. We ended up with a tremendous amount of debt. We ended up with 6 billion dollars of debt by 1981—and then interest expense went up to 22%. We were hemorrhaging like crazy.

But here in Springfield we were doing really well. We didn’t strike because we were non-union, so we were doing good. But it didn’t matter because the whole company was going down. IH had to start selling assets all over the place.

Once they came back from the strike, we didn’t change one work role. We didn’t gain a darn thing. It was terrible how many things they were negotiating for that meant absolutely nothing; a very, very bad strategic move. That killed the company. IH had to start selling assets all over the place.

Our people in Springfield were looking at the assets sales and the factory closings and were panicking. They were trying to figure out what was going to happen. They were asking me whether they should get married, whether they should have a kid, whether they should buy a car. I’m questioning the whole concept of leadership. I’m sitting there saying to myself, “Here you are, a bigshot in a small town because you’re working for a big company, but in reality you can’t help people. When the company tells you to shut the factory down, there’s not a damn thing you can do about it; you’ve got to shut it down.”

I could see the handwriting on the wall—that we were no longer part of the core IH businesses—so it was only a matter of time before they were going to take a bullet.

Finally, I just couldn’t take it anymore. I said, “Look, don’t get married, don’t have a kid. The economic reality is we’re not going to be part of this company, and several things could happen. One: They shut us down cold and there are no severance packages. They just let you go in an unemployment market of 11%. Or: They could sell it. Or: if IH did survive and owes that kind of money, it’s going to be a brutal comeback.”

So I suggested that we try to buy the place. I was hoping that they would say “You’re crazy,” because I didn’t know anything about running a company. I knew how to make things but I didn’t know how to make a company, because I was never taught how to.

But this is my mental outlook: This was just a cop-out. I was sitting there saying, “What could I do for these people? I can’t do anything.” I dreaded the fact that I had to lay them off, so I thought if I said, “Let’s try a buyout,” and if I failed at that at least I felt I tried. The employees were so petrified at that meeting they would have followed anybody—they would have followed Rin Tin Tin. So I ended up trying to do an employee buyout. It took me two years of negotiations.

Kaizen: That process sounds tedious, with lots of setbacks. You knew nothing about raising capital investment money at this point, so you were learning everything on the job?

Stack: My first call to the bank—all  I had was a letter of intent—the letter of intent that I wrote the IH company asking them to sell me the place. The guy laughed at me and he started asking me these dumb questions like, “When are you going to pay this money back?” And I went, “Wow, really good question.” I didn’t plan on paying it back; I needed to save the jobs.

Kaizen: International Harvester was asking for about $6 or $7 million?

Stack: I offered them $6 million, but eventually got up to $9 million in two years. The letter for intent was for $6 million and they said, “No, we’ve got to have $9 million.” I got a line of credit for $8 million and a receivable for them for a million, or something like that.

Kaizen: Your debt ratio was huge: You and your colleagues raised $100,000 but had to borrow $8.9 million to buy the Springfield plant. At the time, did you realize it was the largest debt-ratio for a leveraged buyout in American history? What made investors willing to stake you at those rates?

Stack: Well, they saw a lot of assets. They saw inventories. They saw a building. It was a leveraged buyout, so they pretty much felt that they could sell the assets and recover some of the debt. That was what I thought. But then the day I signed the papers, my lending officer wasn’t there because they had fired him for booking bad loans. He didn’t show up.

Bank of America was in tremendous disarray: they had fired their CEO out in California, and they’d fired their president out in New York. They were desperately trying to survive and we got caught right in the middle, and we were very fortunate to get the loan. Because they were getting out of leveraged buyouts at the time, so it was like divine intervention.

Kaizen: How was it for you psychologically taking on that debt and responsibility? Were you scared, confident—both?

Stack: Naïve, totally naïve. If someone told me 89:1, I wouldn’t know whether that was 98.1 degrees body heat. It meant nothing to me. We had a chance. I found later on it was really significant, but we were naïve. We were not afraid.

Kaizen: Who else was involved in buying the plant with you?

Stack: I wanted to make everybody owners; I wanted everybody to have 100 percent. “All for one, one for all” — all these things you grew up with — Robin Hood and things like that. But the bank wouldn’t take all the employees so they said, “We’ll take the management team because we don’t want to chase people all over the United States paying back this debt.” So they took the 13 managers and then I designed an equity formula for them. Then I went to the thirteen and they all chipped in the $100,000.

Kaizen: After SRC Holdings bought the Springfield plant, what was your first priority?

Stack: Well, I felt strongly that I had to drive down inventories as fast as I could. But I was amazed about how stupid we were because I didn’t negotiate an IT contract with International, so I ended up with no computer system.

I had to scramble because the banks were now getting mad because they found out what they had done. So we started this income statement, this manual income statement. I would have a huddle on a Wednesday. We’d get everybody together and forecast for the month what we are going to do.

It was absolutely extraordinary to have this “Aha!” moment: for every single line on my income statement I had a person that was responsible for the line. It was amazing. And then for every line on my balance sheet, I had someone who was responsible for the line. I had spent fourteen years writing job descriptions and accountabilities and going to all these schools and measurements. And here, right in front of me, was the purest form of measurement I had ever seen in my entire life.

When a person says he’s going to sell a million bucks—then somebody buys as a result of someone buying that million dollars—and then someone hires as a result to someone selling that thing. The income statement folds out as nothing more than stories about people—that’s what numbers are. But more importantly, they’re standards that people set for each other.

I came from a world where most of the standards were set by industrial engineers, and you then had to fight with the hourly guy on the shop floor to convince him that you could make that many pieces in that short a period of time. Now all of a sudden, I began to realize that — holy cow — the marketplace sets your standards; people set your standards. Very few people understand that it’s what we say to each other that is the most important thing. Our actions are based on what we see.

So I started to run this huddle, and I started to build financial statements on the walls of the staff room. We’d come in and fill them out every week. We’d fill out what we thought we would sell for that particular month, then what the balance sheet was going to be, and what the cash flow statement was. It was brilliant. Everybody took the psychic ownership. We had transparency. What you had then was peer pressure. But you also had, at the same time, reward and recognition. That was everything that I was looking for. I was looking for stability. Income statements and balance sheets and cash flow haven’t changed since the 1400s. So I had the stability of the financials, but the change occurred with the numbers. And that was what made it entertaining; that’s what made it exciting.

Some people hate change, some people love change; well, here I had both. Sales is always going to be here, profits are always going to be down here, cash starts the balance sheet, equity ends the balance sheet. The irony of the situation is that it hadn’t changed since the 1400s. But what blew me away was so few people knew how to interpret them; so few people knew how to read them.

I began to realize that most failure occurred not because an entrepreneur didn’t have the ability to service or make something: they had no idea of the metrics of the business. So we began to teach the metrics and we appealed to a higher level of thinking in people. We just didn’t give them a worksheet on how to build a transmission. We said, “You’re running a company, and these are the metrics of the company.” All of a sudden, it’s 28 years later, and they’ve just been outrageously successful from that point on.

Kaizen: Your method seems to have three elements: motivation, power, and knowledge. Employees are motivated if they connect working hard to rewards that matter to them, if they have some control over the process, and if they know how what they’re doing fits the big picture. But there’s also an empowerment element?

Stack: There’s a psychic ownership. That’s what you want. You want them to have the ownership of the line. When you go into that meeting and you’ve got to post that line, you’ve got to actually physically walk up and say, “This is me, this is my organization.” It’s very powerful.

Kaizen: It breaks down traditional barriers between management and owners.

Stack: There are no barriers.

Kaizen: Right. People know there is a division of labor and what everybody is contributing. There is a bottom line: everyone knows it, everybody has ownership.

Stack: There are no divisions. That’s the fabulous thing about numbers: it is what it is. Everybody sees it.

Kaizen: In your two books, The Great Game of Business and A Stake in the Outcome, you explain in detail what you have come to call the “Great Game of Business.” Can you summarize its core strategy?

Stack: Here’s what happened to me. I always thought it was crazy that we would lay people off. They’d go out to the parking lot with the pink slip, and that would be the first time they knew that the company was in trouble. It always broke my heart that you had to lay somebody off. You’re affecting families and everything of this nature.

Then I came down here and then I saw the fear in everybody’s eyes about whether they should have a kid during that economic period. I questioned the whole model — somebody working for somebody else. I came out of that hierarchical organizational structure: everybody’s coming from the top down. Nobody ever, ever questioned whether people like working for somebody or not. All the studies and all the conferences and all the degrees that I eventually attained—not one was ever centered around, “Maybe people don’t like working for somebody else.”

When I began to write business plans for the banks, I went to 50 some organizations to try to borrow money because I had a horrible, horrible business plan. Because of the customers I had, nobody wanted to finance International Harvester on a receivable when they already owed 200 banks six billion dollars. So I ran these financial statements. I got angry at the banks. I got angry at the company—because the company never taught me how to run a company. They never taught me how to measure the success of the company, with the idea that 115,000 people would do their jobs and it would work: you’d have a great product, you’d have a great service, you’d have a great company.

So I promised myself that if I got this company, I would really teach people what it takes to be successful. They would never ask again whether they should have a kid or buy a car. If they can understand the balance sheet, they can sit there and say to themselves, “If you’re 89:1, you’re brain dead and you’re in trouble, so maybe I ought to hold things off for awhile; maybe I ought to make some decisions that I didn’t make in the past.” I never found a more honest way of always telling everybody what the condition of the company was. I never found a truer way of letting them know what the company was.

Once I found that, I said to myself, “Let’s change the leadership dynamics.” At the early stages, I was trying to develop an accelerated learning process for them to get it. Remember, I wrote it out 50 times and I got it. Figuring financial ratios, seeing the messages what you have to do, and listening to the bankers, saying, “This is good, this is bad.” I finally began to think like them. I felt if I could do this, then why shouldn’t everyone in the company be able to do it?

They were reluctant at the very beginning and that’s when the idea came of telling people that business is no different than Monopoly, it’s no different than sports. Business is a game: It has rules, it has scorecards, and it has an outcome. Those are the three elements of the game.

I kept thinking that if I could create this game, then instead of having an organization structure that is top-down, we would be working together at fixing the game. We wouldn’t be working at fixing each other. Remember, [W. Edwards] Deming said that the Achilles heel of the American management system is the way the Americans manage. Nine times out of ten, when we have a problem we shoot the person. But nine times out of ten, you’ve got a systems problem. But if you don’t have a system then you go after the people.

So what we decided to do was to use this theory of the game. When we had a deviation or a variance, we said to ourselves, “What are we doing wrong with the game?” Then we’d fix the game.

That became a new leadership platform. People weren’t working for somebody else; they were working for each other first. We broke it down by all of the responsibilities of the financials. Everybody assumed the financials and took ownership of them. They all came together to see what they could do for each other.

Kaizen: This is a revolutionary approach to management: Part of it is not working for other people but working for yourself. And part is that work is not a “living dead” drudgery, as you call it. Work should be fun. Another part is treating employees as people who can understand how a business works and not as cogs in a machine.

Stack: But every time we had a deviation, though, our solution to the deviation was a game. It was not an order. It was, “How do we develop something of interest so that once they fix the deviation people feel like they really created a win?” Then there was the whole conceptual idea of building winners. I saw it on the shop floors of Chicago. Once you got them feeling like winners, they don’t want that to change.

Life is tough outside of work; why make work so bad? Why not feel good? It’s not that hard. It’s small wins, too, not big wins. People will compete for pennies, they’ll compete for pizzas, they’ll compete for margaritas. You don’t have to have that much for them to be able to win.

Kaizen: You also introduced “open-book management” here. What is that?

Stack: For my lifetime, no one was ever allowed to see the financials. Even today, instead of being more transparent, we’re becoming less transparent. We’re not opening our books; we’re hiding our books even more. It’s the most ridiculous thing I’ve ever seen in my entire life.

The whole part of the Game was that they had to understand the scorecards. The first rule is that the marketplace sets the rules, so we spent a lot of time bringing the marketplace to our people. We bring it hard to them twice a year. Who is your competition? What do they make? What are their financials? What are their competitive edges?

We really, really train the people, and then we forecast. Once we forecast, we then ask the associates to vote on the forecast. Do you believe we will sell this much? You have as much information as our sales and marketing people, now you make the call. Is this the financial plan? Once we establish the financial plan, you can either hang it out there or you can live it every day.

The next part is to change the scorecards. Put the financial scorecards everywhere for them to see, and they see what they need to do to improve. If they have a lousy shipping month and it affects sales and builds inventories, then let’s get a game. Let’s figure out what we have to do. Let’s pay attention, focus on it by playing a mini game. We had the Great Game, which is the big game of building the company, to have it sustain over a long period of time. Then we had all the mini games that fix the variances and the deviations, that don’t threaten people.

Kaizen: Let’s turn to the fears and criticisms of open book management. One is that if you open your books to the employees, conflicts arise. What’s behind that fear?

Stack: I used to think the first fear was that if employees saw what the company was making they would ask for more money. That was number one. Number two is that they would think their employees would take their ideas, start their own companies or compete against them, or go to work somewhere else. I used to think that.

Later on in life, I began to realize that few CEOs really understand financials. They’re totally reliant on CPAs; they’re totally reliant on bookkeepers. They farm out a lot of the financials in the operations. They’re totally reliant on lawyers; lawyers tell them not to do it, not to share it. Their family-owned companies never shared their books with anybody else for a variety of reasons. But any downside that I have ever come across the last thirty years paled in comparison to the benefits of open books. There really isn’t a sustainable reason.

I just wrote an article for The New York Times, and I included someone I thought was a skeptic. I called a skeptic up and he goes, “Oh no, I’ve never been a skeptic. I haven’t done it for two reasons.” I said, “What are the reasons?”

He goes, “Well, one is that I’m more afraid of the unknown than the known.” I said, “What are you talking about?” He said, “Well, I’m afraid if we have bad period of time and my people see bad numbers, then they’re going to leave and they would go somewhere else, and I couldn’t handle them not knowing.”

I said, “They know anyways. They know it by your gestures. They know it by your attitude. They know it by the sales. They’re not stupid. You’re making them stupid by not sharing it with them, because they know something’s wrong. And you’re probably scaring them worse because they don’t know. And you’re not exercising the ability for them to be able to help you through that difficult period of time.”

The second one was he didn’t know how to create a fair equity bonus system inside the organization. I said, “Our bonus system is the same for everybody else. We pick one financial ratio inside the company, and then everybody is playing to beat that one ratio. That one ratio comes out of the financial process that shows where you’re weak in the company. You’ve got to have the courage to fix your weakness. If you fix your weakness, then you can go to the next year and then you’re going to have another weakness.” And he said, “Oh, so they all can make 15 percent of their salary?” I said, “Yeah, in good times when they do better than market, they deserve better than market. They can make 15 percent.” He goes, “Oh, well that answers that question.” People just don’t read the book.

I think it’s crazy, because I can’t define how freeing this is as a leadership style. I can’t tell you how free it is for a CEO, especially when I see all the CEOs out there that believe they’ve got to have all the answers, that they are the ones who can solve all the problems. They harbor this fear that it’s their family money, so they deserve all the rewards and feel employees don’t understand the risks that they take and the debts that they have.

Kaizen: So it’s freeing in one sense that you are not quite delegating, you’re outsourcing. The wisdom of crowds; you can trust your people. If they have the knowledge and the power, then it’s going to be win-win.  And it motivates them to solve problems so that it doesn’t all come back to you as the guy who has to solve all the problems.

Stack: I delegate everything. They’re very smart. They’re very educated. They know the pattern. They know it’s their responsibility.

Kaizen: There are critics who claim that open-book management leaves a business vulnerable to competitors. You don’t. Why?

Stack: I never had it happen. We run a conference to teach people what we do. My competition has never been at one of those conferences. Anyways, take the system; it’s going to be tough to duplicate the people.

You know what happens, I guess, is that when you play this Game and you really listen, everybody wants a crystal ball, but you have a crystal ball in your ratios. In the area of profitability, efficiency, and solvency there are maybe 10 to 15 different ratios in each one of those categories. You can get 15 ratios off an income statement, you can get 12 off a balance sheet, and you can get 10 off a cash flow statement. You compare those ratios to the marketplace: that tells you who is best practice; it tells you who are the big players; and it tells you what you can do relative to the practice that you’re in.

Where the courage comes in is that you’ve got to fix the ratio. If you don’t fix the ratio, then over a long period of time it’s going to affect sustainability. So, what we do is have the courage every year when we take everybody’s stories, we consolidate the financials, we compare the ratios to their industries, we find out where their weaknesses are, and we then put the incentive program to be able to fix the weakness. People are incredible; they’ll fix it. Then next year we’ll have a different weakness.

Kaizen: SRC is a big and complicated company—how long did it take for you to work out and fine-tune the Great Game of Business to your satisfaction?

Stack: I don’t think you know that you achieved the results until you look into the past. I think every year is brand new. Even though we do five-year and ten-year plans, and we do them every year. Every year is a new Game; you reinvent yourself again. You don’t realize it’s successful until you look at millionaires who have left the company, and the fact that there are new other people setting up, still having a quality life. Success is something you look at in the rearview mirror.

Kaizen: How long would you say it took you to develop a good pattern?

Stack: I’d say the pattern took two years, when it truly became a pattern. Knowing how many times you have to do it, where it can’t be boring. I think if you have a repeatable pattern, I think that is what creates the accelerated learning. I think culture’s behavior is affected by repetition, repetition, repetition. The idea is that it can’t be boring; you’ve got to figure out how to have a skill where people aren’t bored. If you can work beyond the boredom, then you’re probably going to be better than everybody else in the marketplace.

And so our repeatable pattern is twice a year the marketplace is brought to the people. Once a year they do a financial plan, going on five years as a result of that. We have weekly huddles. Our bonus programs are quarterly. So they know what to expect. In other words, every year we’ve had 58 sales and marketing meetings so far. So they know what to bring to the table, and they get better at bringing it to the table because the marketplace is always changing.

So when our people know that they’re going to have to go in front of all the people in the organization, and they have to make this presentation, and it’s going to be in six months, that means every day, after the presentations, they keep working on making the next one. So they know what to expect. And once it becomes a pattern, and once you’ve worked out all the bugs in terms of whether it’s dull or it’s boring—and that’s what you’ve really got to work on, is to create the excitement, the fun, that really, really thrilling moment where they cross the finish line—then you’ve really got it hot; then you’ve really got it smoking.

You see, what happens here is people just take a piece of it. They come in and go, “Wow, your incentive program is the best I’ve ever seen.” They’ll just put in the bonus program; they won’t provide the education in making profits.

Debt-to-equity was our first critical number — it had to be. So I had to teach everybody how they affected debt-to-equity. I spend one year teaching them debt-to-equity. Well, after one year they got debt-to-equity, and then the next year was diversification, because a janitor told us that all our eggs were in one basket, and he was right.  We had to diversify, so we went on a diversification binge.

People want a crystal ball; they don’t know they have it in front of them. It’s there. The business tells you what you really have to do, what directions you have to take, but you have to have the courage to take them.

Kaizen: Clearly your system has worked. In 1983 you had 120 employees and by 1991 you had grown to 650 employees. How many employees does SRC have now?

Stack: We have 1,200 here and another 400 overseas.

Kaizen: You paid $9 million for the company in 1983, and by 1991 the value of the company had increased by 18,300 percent. How much is the company worth now?

Stack: We’ve cashed out $57 million worth of shareholders, and the company today is worth $83 million dollars. It’s about $135 million from $100,000 but we’ve got 880 shareholders. They all had the opportunity to be owners.

Kaizen: Business Week has called Springfield, Missouri a “management Mecca” because of the thousands of businesses that have come to observe SRC’s management strategies. You also have a website with a wealth of information. What do you most want managers to take away from visiting SRC?

Stack: We really believe that this is our economic strength. We believe also it falls on deaf ears. A fraction of businesses in the United States practice this.

What’s crazy is it that it works. We see it time and time again. Now we’re living long enough where we’re seeing our kids do it. I have two daughters who own their own businesses. I’ve seen my daughters go the traditional route, and then I see them converted to the Great Game. You can tell the differences in terms of the way the business runs and the way they work and the way their associates are tied into the organizations. This is something that we’re giving back to anybody who wants to take a piece of it. It’s just something that we really see as one of the best practices.

It drives you crazy when you see the Arthur Andersons and the Enrons and everything that’s happening in our society today, and you know that it’s due to the lack of transparency. You know that if we were practicing open books those things wouldn’t happen, because too many people know about it. It’s not an inclusive group of people who are called “sophisticated.” There is a phase the SEC uses in terms of sitting there determining whether or not you should have the information or not, whether you are a “sophisticated associate.” It’s pathetic.

GE just had 18 people in here two weeks ago. I was blown away. They brought them in from as far as London, and it was an honor to have GE. One guy had 27,000 people working for him. They got it. I was amazed, they got it. I turned to the guy and said, “Look, if you want to put this as a GE practice, I don’t really care because it’s a very, very sound practice.” It’s one we need in our universities; it’s one we need in our politicians. I just see it as a significant tool in terms of economic survival. Why not teach people how to make a great company, why not teach people how to make a great university? University life is more hierarchical than International was in the 50s and 60s. I served on a lot of boards at universities, and they’re good people, but it’s crazy.

Kaizen: You have received many recognitions for your successes—you’ve won a National Business Ethics Award, been called the “smartest strategist in America” by Inc. magazine, won the National Entrepreneur of the Year Award in 1991, and many, many others. Do such recognitions add to your sense of satisfaction with how much you have accomplished?

Stack: I am the most realistic person in the world and know that in our society we eat our young. I know that I am one DWI away from total disgrace. It doesn’t matter all the things that you have built up because it can end in a heartbeat. I also know that this has really been hard, because it’s one thing to go out and consult—it’s one thing to go out and teach it—but it’s another thing to consult, teach, and then have to live it every single day, knowing that if you blow it inside this company, nobody will buy it on the outside. The pressure has been more of a concern than the praise.

I knew all these guys. I was on Tom Peters’s board, for instance. He’s one of the most brilliant guys you ever saw in your life, but he couldn’t run a company to save his life. I know Franklin and Covey, with the time-management company. These guys can’t run companies! To be able to run a company and practice what you preach is just a pain; it’s painful. You’re realistic, because you’re about a snap of a finger away from failure. You don’t get heady with anything that you’ve achieved.

Kaizen: So it’s one thing to develop a theory, even if it’s a very good theory, but it’s another thing being able to put that theory into practice? It’s another skill set to have both of those and then to walk that walk consistently now for several decades? Do you have a strong set of accomplishment? Is that your primary reward?

Stack: I have a strong sense of when you can take credit for accomplishment, and that’s after you leave an organization and it sustains for five years. This is back to the rearview mirror philosophy.

Kaizen: So that is going to be the test: to what extent is SRC a Jack Stack success and to what extent it is a Jack Stack plus a whole bunch of other people built this thing that sustained. Your big success will be when you leave five years after?

Stack: Right. The goal is to create the sustainability.

Kaizen: What is next for Jack Stack?

Stack: This is by far the best year we’ve ever had in our 28 years. It’s just incredible how well we’ve done this year, in the worst economic period. I can’t believe it. I think the real test of a company is what happened in the fourth quarter of 2008, when everybody was panicking and everybody was trying to figure out what was going to happen.

Yet this company figured out how to position itself for another ten-year run. I was so proud of this company, the way it set up a ten-year run. I have never seen a company set up for a ten-year run where it has only a few things to fix in order for it to be able to make those ten years. I’m in the final tweaking process right now, making absolutely certain. Maybe it took us 30 years to get here, but to be able to see it from a distance over a ten-year period of time.

Kaizen: What has been the best thing to you about being an entrepreneur?

Stack: I think what’s incredible is that when I came into Springfield, Missouri, there weren’t a lot of jobs. What has really transpired is how we have been able to create jobs. We created enough jobs where even our kids can stay in Missouri; they can stay in Springfield. It’s really rare. I’ve got five kids and they are all here and they’re all having grandkids. In 1979, I didn’t think you could find a job for a child in Springfield.

But now to have built this organization that has created this culture that is attracting Fortune 500 companies to Springfield. It’s really dynamic to be able to know that within a three-year period of time we could create 2,000 ancillary jobs around the 1,200 that we have here. That is mind-boggling to see the ability to create jobs.

For instance, we brought John Deere in and then we worked with them on a program. They liked the Game, they liked the people, and then they had the right to buy it out. So they bought it out and put a global operation here. This will turn into like 300 to 400 jobs. There are 250 there right now; that’s outside of our 1,200. We’re now bringing in everything—what is really cool is that we built this economic development program that is really going to provide opportunities for people.

Kaizen: What has been the most challenging thing for you about being an entrepreneur?

Stack: You don’t like to go into places in town where you meet people who didn’t make it at SRC. It’s not a very pleasant thing to do. For whatever reason, they decided to leave. It’s a small community. You’d like to have a perfect record; you don’t always have a perfect record, so you feel bad about the losses that you had in terms of people. That’s probably the most significant thing.

Kaizen: Looking back, what thinkers, writers, or consultants were most influential on your business philosophy?

Stack: I liked Herb Kelleher a lot, from Southwest Airlines. I always thought he was really good. From a politician standpoint, I liked Richard Gephardt. He was the one that took the vote when they were going to impeach Bill Clinton. He was the Majority Whip in the House of Representatives, and he was able to stand up — a tough guy. He now serves on the board of Ford and really has a passion for this Great Game. He was always a big believer in it.

My writer, Bo Burlingham, is probably one of the smartest guys you could ever run across — inquisitive. He came from very high ethics as a writer; couldn’t even compromise the guy. He was always at the truth. He drove me absolutely crazy. I come from Chicago and I could say something and understand what it means, but he could actually break it down into what it really means for someone else to understand it. He gave me a communicative ability that I didn’t really have.

But I’m sure there’s a lot of others. In my early career, I had one guy who was in the Korean War. He was a leader, and he got shot in the war and had some serious injuries. I worked for him for a long time. Anything that I ever did, I didn’t do good enough. As good as I did it, there was always one more step that I could have done. That drove me absolutely crazy. He could communicate in a way that, when you walked away, you just said, “Darn, why didn’t I think of that?”

Kaizen: What was your inspiration to challenge the odds and make American business history? Why not settle for an easier life and do more, say, bass fishing?

Stack: Listen, I don’t even look at the money. I don’t even think that I can take the wealth that’s been created out of this company. I know that I have enough that, if something happened to me, my wife would have an earned income going forward, and that’s about all I really care about. If I sat down and counted, it just doesn’t feel right. I came from a very, very good family; it worked for everything it had, and it was wage oriented. This whole idea of equity is mind boggling. I want people to understand that for every dollar’s worth of earnings they can make it eleven times multiple if they really understood it, but when it comes to myself, I don’t count with money.

Kaizen: Having made your financial goals, what motivates you to continue working hard in business?

Stack: It’s not remodeling, it’s finishing. I’m just trying to finish the picture so that it will be sustainable over that five- to ten-year period of time. Maybe it’s an impossible final act, but I think that I’m about 80 percent of the way there and I’ve only got 20 percent left. That’s the exciting piece of it.

But life deals you some really cruel blows. Until I was 40 I was scared to death. I got raised in a family with a fear of failing. Then you get to 40 and you say to yourself, “Well, the white male life expectancy is 73.” And at 40 you go, “Oh man, I don’t want to go through the next years of my life being afraid.” So you calm down. You try to get a bit more courage. You can start seeing a path through the woods. Then you begin to realize that, in the pursuit of retirement you ask “What would I do if I retire?” You get these unpleasant surprises. Because I was planning on retiring at 40 and saying, “This is it, I’m gone, I’m cashing out, I’m doing things.” Then you go to fifty, and then you go to sixty. Just see what happens when you get there.

Kaizen: About your “finishing the picture” metaphor. You have a vision of what you want to accomplish and you’re 80 percent there, so it’s that drive to finish?

Stack: I have three major projects. I’ve got two joint ventures in process. If the joint ventures turn out as well as our previous joint ventures, that will build a huge annuity for the people in the company. Their balance sheets are really strong right now; they’re just so solid. One is a three-year term and one is a ten-year term. Once we get those things working, the only thing we’ve got to do is replace some business at one of the other factories, and then they’re on that path. Those are the last three things that I think need to be done, and we can transition this thing into a younger organization.

Kaizen: What is the best advice you’ve been given from a mentor?

Stack: One of the higher laws is that you get what you give. The more you give, it’s incredible how it comes back. You can be down to nothing and give somebody a helping hand, or you can give something, and then next week something comes along that you just can’t expect. It’s simple to sit there and say the Golden Rule is “Do unto others as you would have them do unto you.” But the whole idea of paying it forward, giving it back, that’s what’s it all about.

As I wind down, that’s what I keep thinking about now: how do you keep giving it back? This process has been our way of giving it back, and to be able to make it as affordable for anybody that wants to see it, understand it, have it. It’s like the more we give, the more our company is successful.

Which is ironic because one of the reasons people don’t want to do this is they think that someone is going to steal something from them. They don’t understand that when you teach people the business, you’re teaching people debt literacy, you’re teaching people economics, you’re teaching them financial planning. You’re making that person better at home and in their own lives by teaching them what we’re trying to teach here. This is a huge, huge program that affects so many people’s lives, it’s incredible. The dividends are that people look at you as a healthy company. They look at you as, “Wow, I trust these guys.” And that’s very, very important in any business transaction that you do. It’s allowed us to have successful years, successful giant ventures, and successful organizations.

Kaizen: In closing, what advice would you give to young people just starting out in their careers?

Stack: One thing I’ve observed is that if you go to college, that the transition from your senior year to your freshman year—it would be great if you had a dream. Whether it is being on Broadway, running a music store or a retail store, you should definitely pick something you love when you go to college. Then when you’re in college, the curriculum should be centered around teaching that person how to attain what they really love. I watched my daughter go to school with this whole idea of building a retail center to revitalize downtown. Every course she took, as difficult as the course was, was always a reflection of her dream. It was amazing because she struggled in school until she had this dream. So when she went to an accounting course, it wasn’t just accounting — it had a connection.

Build your business plan. My daughter built her business plan for four years in college. She had every professor working for her. It was brilliant. Even when she went to the banks after she graduated, she did her business plan and then went back to the professors again and had them look at it and had them critique it and built it. She did fabulously in college; that was the best time in her life. Not really, because she’s doing fabulous right now. She went from that great period of time. I really think that they’ve got to have some connection. That’s why the MBA programs were built on the idea that you go out in the real world, find out what you want to do in a couple of years, then take your MBA. That’s part of it. But there is this part where we could give them one thing — whether it’s a farm, whether it is a manufacturing facility — they need some substance to be able to draw the knowledge and apply it somewhere to something.

So many kids are desperately moving from one area to another area; they’re jumping around and they don’t have any stickiness. We run an organization that’s for all the college kids in town—it’s a packaging operation where we knock down things and put the kids in. They get the Great Game. They have to do the financials every single week. What’s interesting is now, for the first time, they understand why you do engineering, they understand why you do sales and marketing, and they understand why you do accounting. It’s amazing just to have that income statement, and all of a sudden it organizes their thinking in college. They’re not just taking a course in ethics; they’re taking a course because it ties to something.

Have any dream. Make it up! Be a turtle hunter. It doesn’t matter. But have something to apply your knowledge to. It’s a simple, simple thing.

* * *

This interview was conducted for Kaizen by Stephen Hicks. For more information about Jack Stack and the Great Game of Business, see www.GreatGame.com.

Read it here.

Read the article at City Journal.

Read the article at Big Questions.

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,

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.

Bradley: Yes.

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?

Bradley: Correct.

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 (NO_X) 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.

Kaizen: Jacques Derrida, Michel Foucault?

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.

Bradley: Yes.

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.

Bradley: Yes.

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.

Stacy L. Moore on Andrew Mellon

Khetsiwe Dlamini on Richard Branson

Goran Mamic on Mayer Rothschild

Bridget Markin on Coco Chanel

On the flip side, in his book Dynasties: Fortunes and Misfortunes of the World’s Great Family Businesses, David Landes tells the story of eleven successful family businesses and argues that “dynastic businesses offer a proven route to developing emerging markets, while companies managed by unrelated professionals and funded by public investors offer mostly bad jobs and slim profit shares to local employees” (Amazon.com).