Thursday, July 06, 2006



Although we have never really covered Enron, the death of Ken Lay brings the topic back into the spotlight. I know many of us have our opinions and feelings pretty well established about this issue, so I pose this statement:

The Enron scandal was a government failure.


I'm really not sure where the government failure comes in. Enron lied about its profits and concealed its debts so they didn't show up in company accounts.

It's easy to see why Enron executives wanted to do this (it helped keep stock prices high while execs traded company stocks on insider information). But I have trouble seeing how a "government failure" is involved.

If anything this is probably a result of the problem all corporations face: managers of a company don't always act in the interests of the owners of that comapany.
Doesn't extensive governmental involvement, like that in the financial sector, create a desired outcome and particular allocation of resources that differ from a purely private market?

Government failure’s definition is incomplete, in my opinion. It is not a purely governmental activity (all government action is not purely “public”). Government failure involves the inefficient allocation of private resources (in private markets in which it has intervened) as well the inefficient allocation of public resources (that it has either confiscated or supplied).

Should the intervening actions to alter the allocation of resources that cause unintended consequences, be blamed on those intervening agents?
Well, is there anything about government involvement in the securities industry (SEC) or the private sector in general that enables/encourages these types of outcomes?

I'm certainly not an expert, but nothing specific springs to mind. I think the fact that these kinds of events are fairly rare might indicate that there isn't a systematic failure going on here.

Of course, I could be wrong. I was never too interested in these thigns while I was in school.
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