Life in the Age of Electronics

Arthur Andersen, Enron, etc. etc. etc.: The crisis in speculative capital

The recent conviction of accounting firm giant Arthur Andersen LLP of obstruction of justice in the Enron mess has just confirmed what most Americans already suspected. The capitalist system has a serious case of rot.

The center of gravity of the economy has moved from making things, to trading money to make money. Speculation has always been with capitalism, since its very beginnings. But speculation's move to center stage could only happen in the age of electronics, with computers, robotics and the Internet.

Read a paper I recently did on Speculative Capital for a conference on globalization (PDF, 71k, needs Adobe reader).

The Enron case neatly sums up the process. Enron started out as a pipeline company and power company. They made and distributed things -- electricity and natural gas.Then Enron started to shift from the "hard assets" of pipes and power plants to an "asset light" company that made money from speculation. Jeffrey Skilling, a former financial consultant who envisioned Enron as a trading company, became the COO in 1997, and CEO in February 2000. The company pioneered trading not just in gas and electricity, but also water, metal, wood, and even weather futures. Enron ran hedge funds, and had become the fifth largest commodity derivatives trader in the country.

The whole thing came unravelled with the California energy crisis. Enron and other energy trading companies were charged (and now confirmed) with driving up deregulated electricity prices and bleeding California. Enron's stock started to slide. Enron had used the stock as collateral in its various hidden and not-hidden partnerships and loans. As its stock fell, the whole sham collapsed.

The accounting voodoo has been widespread -- Worldcom, Global Crossing, Dynegy, Vice President Cheney's Halliburton, and so on. While Enron and others are certainly tales of greed -- the Wall Street Journal reported recently that Enron executives paid themselves $745 million as the company was falling apart -- it is more than that. It poses the basic challenge to speculative capital -- can an "asset light" economy work? Or even survive?

As computers, robotics and the Internet have spread through the economy, the foundation of the economy has changed. "Fifty years ago, tangible assets such as real estate, equipment and inventories represented 78% of the assets of U.S. non-financial corporations. Today, the proportion is 53%, according to Federal Reserve data," reports the Journal. This is the result of the technology revolution. We are becoming an "asset light" economy, where companies base their operations on soft things like "intellectual property" and "good will". (Which explains what's at stake over things like Napster and DVD copying.)

Such a system needs people to believe in it. That's what "good will" is. It's the emperor's new clothes. Accounting firms are there to give confidence -- not for the average Joe or Joan -- but for other capitalists. Business Week has regularly had hand-wringing cover stories over the past six months about the peril: "Accounting in Crisis" (1/28), "The Crisis in Corporate Governance: Excessive Pay, Weak Leadership, Corrupt Analysts, Complacent Boards, Questionable Accounting" (5/6), "Wall St.: How Corrupt Is It?" (5/15), "Restoring Trust in Corporate America" (6/24).

So the push to convict Arthur Andersen, and punish the greedy executives of Enron, is, in large part, for the sake of other capitalists (and the members of Congress like Joseph Lieberman who have lost money on Tyco, Worldcom and other companies with dodgy 21st century accounting).

But if you or me lose confidence in the system, and get fed up with the plunder and rip-offs -- that poses an even bigger problem. What is particularly potent about this crisis is not just the widespread pain of layoffs (including the 7,000 workers laid off at Andersen). It is also the crisis in confidence of capitalism and the various institutions that prop it up. A new Wall Street Journal/NBC poll (reported on 6/13) reports exactly that: 74% believe oil companies manipulate oil prices; 57% lack confidence in information from corporations; more than half have a negative view of drug companies. The suspicion extends to the government and to the Catholic Church.

The economy shifts and changes, but ultimately, the possibility of making things right depends on what happens in the economy, but how you and me and the rest of us understand what's going on. It's hard to have faith in a system when you or your neighbor is laid off. Or forced to work longer and harder to keep the mortgage. Or to live with the fear of getting sick or growing old. Or...

Capitalism is a rough, brutal system. And that's why this crisis is so potent. It's ideas that are important now. Ideas that a new society is possible. And it's up to us to get those ideas out.

Jim Davis

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