…when it was never actually operating in a free market? Over on AintNoBadDude, the indomitable Brian quotes part of an e-mail of mine but also takes the view regarding the Enron fiasco.
I still maintain my position that Enron is a failure of free markets, but I’m more concerned with the bad impression something like this leaves in people’s minds. If nothing much happens in the way of prosecution, the case for open markets will be harder to make in these industries.
Well I certainly agree that incidents like Enron crashing and burning does not help the case for free markets, but the reason for that is folks do not seem to understand that heavily regulated markets, whilst they are certainly a form of capitalism, they are in fact not free markets, they are (obviously) regulated markets.
Thus what Enron’s failure suggests is not that free markets do not work but rather regulating a market sector like energy in the way it is currently regulated is a failure. Here is a novel idea: how about actually completely deregulating the power sector (for starters) and make the market, er, free. What is the worst that can happen? Maybe Enron will go broke if subjected to the full force of market pressures… oh, I forgot, it already did.
California’s power industry provides us with another lovely example of what happens when heavily regulated markets are required to respond to dynamic circumstances… and it ain’t pretty. Either abandon the pretence that the market is ‘free’ and in effect nationalise the power sector, or let the market do what it does best and stay the hell out of the way. The alternative, like so many half way measures, is to get the worst of both worlds: bloated corporations who do not fully control their own businesses and who are also not fully vulnerable to more agile corporate predators and new market entrants.
Regulating fixed infrastructure sectors of an economy because they are said to either be ‘natural monopolies’ or because they are ‘strategic industries’ rather misses the point: they are actually not natural monopolies if you have a large (preferably global) market of power companies. Functioning fixed infrastructure for which there is a demand does not just vaporise if the owning company goes belly up in the fish tank… other people will most certainly leap into the breach and take over the assets (plus the associated revenue streams from users), hopefully at fire sale prices, and thus life goes on. That might not be the case in Nigeria or Romania or Myanmar, but in a sophisticated and well developed Western economy it most certainly is.
If it is indeed a ‘strategic’ industry, then why encourage a few fat sluggish players to develop who, if they cock things up, fall with rather a big crash (i.e. Enron). Surely it is better to allow full global competition to ensure no player can get so damn important.
Enron in the USA and RailTrack in the UK are two classic cases in point not of ‘free market failures’, but rather of regulated market failures. If all you have to do to make things work better is to impose layers of cunningly crafted regulations, then I suppose that explains the longevity of the Soviet Union and why China is the world’s wealthiest country… oops, sorry, wrong parallel universe.
