»  National Review Online

February 7th, 2002

  Caveat Enron


I spent some of my formative years in the Far East, where, as Kipling pointed out, "the best is like the worst" — or, at any rate, the best can turn into the worst with amazing rapidity. One of my first employers was a gentleman in Taiwan who had made a modest fortune running a business he described vaguely to me as "import-export," which in that part of the world can cover anything from shipbuilding to opium trafficking. I found out from other sources that this particular entrepreneur — I'll call him Mr. Wu — was perfectly legitimate, and had made his pile selling cheap toys to South America. I taught English for a while to his kids at the family home, a sumptuous apartment in a well-appointed quarter of Taipei.

Visiting the island six years later, I happened to run into this very same gentleman. He was selling tourist gewgaws from a tiny stand in the street. I was flabbergasted. What happened? I asked him. Oh, he explained, he'd lost his business. There'd been a string of bad luck — a factory fire, some letters of credit gone bad, exchange rate problems … Mr. Wu was not the least bit downhearted about it, though. "Hey, see how I lucked out, getting this concession! Right near the big hotels!" He had no doubt, in his own mind, that one day he'd get rich again. He was probably right — I don't know, I lost track of him.

There you have the spirit of entrepreneurial capitalism. Now, I had better confess right away that Mr. Wu's lifestyle is not for me. I'm not one of nature's capitalists. I've never come up with a decent idea for separating my fellow creatures from their money — writing is about the least efficacious way of doing this, next possibly to shining shoes. (And it was ever thus: "Mark what ills the scholar's life assail: Toil, envy, want, the garret, and the jail." — That was written in 1749.) I can't even imagine the stress involved in making a fortune, losing it, then calmly setting out to make another one. For most of my life I've been what the Japanese call a salariman, tucked away in a cube in some big company, not being paid very much in return for not being required to do anything very risky or difficult. Hey, it takes all sorts to make a world.

However — here's the main point of the piece — I believe that Mr. Wu's experience is the core experience of life in a capitalist society. Capitalism is nothing more than economic freedom; and freedom, as anyone that has raised children knows, can never be uncoupled from risk. Oh, sure, you can shun risk, or you can go out looking for it, according to your temperament. In matters economic, as I've just confessed, I am a natural risk-shunner, a salariman. I'm not a fool, though, and I'm not a socialist either. I understand that the risk-reward equation governs everyone's life in a free society, to a greater or lesser degree. As Trotsky remarked about war: you may not be interested in risk, but it's interested in you.

Now, of course, there is risk and there is risk. In a society under the rule of law, there is legally-sanctioned risk — slot machines in Vegas, buying and selling securities, bungee-jumping — and there is the other kind: the risk that your counterparty in a business transaction might turn out to be a smooth-talking crook. Society has a right, in fact an obligation, to restrain the activities of smooth-talking crooks, so far as it's possible to do so. There is a limit, however, to how much of this society can do without shutting down entrepreneurial activity altogether. The buccaneer element is not an undesirable by-product of capitalism, to be utterly eliminated: it is the very essence of the thing. Capitalism consists of me making or buying something for X dollars, then persuading you to buy it off me for X + Y dollars.

What's a fair number for Y? There isn't one, metaphysically speaking. In a mature market, where I am one of many well-established vendors, competition and familiarity will trim down the Y to a rough equilibrium value. In a fast-moving economy with lots of innovation, though, I may be among the first to offer my product or service to the public. Then the value of Y depends mainly on the perceived desirability of whatever new thing I'm offering, and on my powers of persuasion — on buccaneer chutzpah, basically. It is at this point that the smooth-talking crooks congregate, along with a lot of perfectly honest entrepreneurs. Until the new product or service is familiar and its value generally agreed upon, it's going to take an expert to tell the crooks from the honest vendors. There may, in fact, be a period when even the experts (most of whom, after all, are salarimen — or government employees, which means salarimen squared) are behind the curve. That's when the crooks really cash in.

The place of government in all this is to keep the marketplace fair, as far as it's possible to do so. Alas, that is not very far. My own years of experience in the world of securities trading, which I'll tell you all about another time, suggest to me that the average securities trader is much smarter and way better motivated than the average auditor, and not always sleepless with concern for the folk at the bottom of the securities food-chain. (Listen to the professional catch-phrases of the trading desks. "When the little guy gets in, it's time to get out."  "There are two kinds of equity: insider equity and the other kind."  etc., etc.) Those years also tell me that bodies like the SEC, charged with regulating this most-regulated of all business sectors, can't cope with the regulations they currently have, so that if Congress were to dump another 2,000 pages of regulations on the auditors' desks, that would just be so much more underbrush for the crooks to hide in.

Not that there isn't anything that might be done to lengthen the odds against con men. I think a few more "Chinese walls" could be established without adding to the regulatory burden. It seems crazy to me that someone on the fifth floor of a securities firm can be offering investors advice on the value of securities that someone down on the mezzanine was responsible for underwriting or bringing to market. I think it's double crazy that a firm whose employees are writing code for a company's systems can be responsible for auditing those systems. (I would have loved to be responsible for auditing my own systems! How come nobody ever asked me?) There are some clean, simple things that might be done. I'd also like to see suggestions for enforcing the Mr. Wu principle: that if your business fails, you end up personally broke. That doesn't seem to happen any more in the U.S. — not, at any rate, without the intervention of law enforcement (and not much even then).

What can't be done is the purging of all risk from capitalism. That would be a contradiction in terms. And as long as risk is there, it will follow simple statistical rules, with lots of people taking lots of tiny hits all the time, then once in a while some poor unlucky schmo taking a really big hit — like meteor strikes on the surface of the moon. That's the game, that's capitalism. Love it or leave it; there are regular flights to Cuba and North Korea. Or, for that matter, to France and Germany, where the little guy is so thoroughly well protected nowadays that economic activity has pretty much ground to a halt, unemployment runs 9.5 and 8.1 per cent respectively (U.S.A. figure: 5.5), the Economist start-up index is at -0.2 and 0.4 respectively (U.S.A.: 2.0), and the last new product anyone brought to market was the daguerrotype.

So what would I say to former Enron employee Deborah Perrotta, blubbing away into her hanky before the Senate Government Affairs Committee yesterday because she'd lost $40,000 in her 401(K) plan? ("Her Dreams End in Tears" — New York Post headline.) Well, first I'd say: stop making a spectacle of yourself in public, woman. Show some good American backbone — there's a war going on, and the world, including our enemies, is watching. There are plenty worse off than you, with less to blame themseves for than you have. You didn't have to buy the frigging stock, did you? It's in the nature of dreams to end in tears; and it's in the nature of tears to stop and dry up after a while.

So suck it up, Deborah. This is life in a free society; and those grave well-fed persons on the dais in that committee room are not, on the whole, friends of freedom. Don't go to them asking for any favors. Oh, they'll give you your favors all right, if they see any votes in it: but what the cost of those favors will be to the rest of us, and to our liberties, we won't find out until it's too late. Walk out of that committee room with your back straight and your head held high. Go get yourself a little street concession close to some big hotels, and see what you can make of it.

It's a jungle out here. Most of us, however, prefer jungle to desert, and those are the only two economic alternatives the human race has yet been able to come up with. Caveat emptor.