Ways & Means

Capitalism’s Limits

The lessons of Enron and other crises

By Carl Pope

More noted as an economist, John Kenneth Galbraith is also a prophet. In 1966, Galbraith told my college class that once leadership passed to those who had not lived through the Depression, the safeguards installed in its wake would be dismantled. Scandal, crisis, and economic collapses were sure to follow. "Democratic capitalism," Galbraith said, "has institutional flaws but only personal memories."

Just as Galbraith predicted, since the early 1980s we have weakened regulators’ power over markets, deregulated electricity, de-emphasized enforcement of environmental standards, and diminished the authority of state public utility commissions. Enormous economic dislocation has followed. Among the most recent results were price gouging in California, the collapse of Enron, and the resignation of the EPA’s chief of enforcement.

Those unwilling to concede that the corruption is pervasive generally blame rogue buccaneers at a handful of companies. "I really think the public does not share the judgment that there is somehow some political malfeasance here," White House Press Secretary Ari Fleischer suggested hopefully. Treasury Secretary Paul O’Neill even held up the Enron collapse as "part of the genius of capitalism."

But in an essay in the Nation, corporate critic William Greider fully grasped the Galbraith lesson: "Enron makes visible a more profound scandal—the failure of market orthodoxy itself," he wrote. "The rot in America’s financial system is structural and systemic. It consists of lying, cheating, and stealing on a grand scale."

Greider’s analysis was echoed by no less an authority than Paul Volcker, former head of the Federal Reserve Board. "The crisis in the accounting and auditing professions is not a matter of the failure of a single company," Volcker warned Congress. "You’ve got a problem with attitude here which goes to the heart of the accounting firms themselves."

The putrefaction in the financial world extends to government as well. Just ask Eric Schaeffer, the widely respected chief of enforcement for the EPA who served since 1990 under both Democratic and Republican administrations. Schaeffer resigned in February, lamenting that he was "fighting a White House that seems determined to weaken the rules we are trying to enforce."

We’ve proven Galbraith right; we’ve forgotten the lesson of the Great Depression: Capitalism needs limits. This is not a new idea. It goes back to James Madison’s concept of checks and balances and the bedrock assumption of the Constitution that no single faction or interest could be trusted to remain honest. Even though Madison could not have conceived of the modern multinational corporation, that same assumption applies.

The recent fervor for deregulation overcame decades of caution with a quasi-religious faith that the marketplace can police itself. According to free-market theology, "command and control" rules can be replaced by "market-based" mechanisms that will keep corporate accounting honest, electrical prices fair and reasonable, the air fit to breathe, and employees’ retirement plans safely invested. This anti-regulatory gospel, preached from pulpits like the University of Chicago, taught a generation of lawyers and managers that profit is not only the bottom line, it is the only line.

A fine example was once leaked to me in the form of an oil company’s "decision tree" regarding the illegal pumping of natural gas from public lands. In the best business-school fashion, managers were asked to quantify the odds—and dollar costs—of such outcomes as "government fails to discover the unpaid royalties," "Department of Justice decides not to prosecute," "judge decides to suspend the fine," "employees serve time in jail." It ended with a "return on investment" calculation, where the investment in question was lying to the government and stealing from the public.

In the field of environmental enforcement, the Bush administration has been practicing unilateral disarmament. "We are unable to fill key staff positions," charged Eric Schaeffer in his letter of resignation. "Proposed budget cuts would leave us desperately short of the resources needed to deal with the large, sophisticated corporate defendants we face." Not surprisingly, civil cases prosecuted by the EPA declined by 10 percent in the first year of the Bush administration, and criminal fines were down by 25 percent.

Nevertheless, EPA Administrator Christie Whitman laughs off lawsuits filed against her agency by environmental groups, even though, in the Sierra Club’s case, 80 percent of them are successful. "They don’t change anything we do," she says. So we have the nation’s highest environmental official saying that even when federal judges rule that her agency has been breaking the law, it doesn’t matter. What kind of signal does that send to businesses considering whether to ignore court orders?

There is a different kind of signal we can, and should, be sending. Calling Teddy Roosevelt "our greatest environmental president," Schaeffer then quoted him: "Compliance with the law is demanded as a right, not asked as a favor."

Capitalism needs limits, and it’s up to us to set them. Personal memories of the Great Depression guided the last round of economic checks and balances, which led the United States to enormous prosperity and to the birth of the environmental age. Personal memories of the California energy crisis, Enron, and the EPA should be more than enough to spur a new generation of essential regulatory safeguards.

Carl Pope is the executive director of the Sierra Club. He can be reached by e-mail at carl.pope@sierraclub.org.