Krugman's Love Letter to Markets, not to Enron

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Krugman: "My critics, ignoring the fact that I have been extremely tough
on Enron, seem desperate to find something unethical in all of this.
Sorry: there's nothing there."

But a love letter to markets for an economist is more than merely naive.

Krugman:  "Sure enough, the company's pride and joy is a room filled
with hundreds of casually dressed men and women staring at computer
screens and barking into telephones, where cubic feet and megawatts are
traded and packaged as if they were financial derivatives. (Instead of
CNBC, though, the television screens on the floor show the Weather
Channel.) The whole scene looks as if it had been constructed to
illustrate the end of the corporation as we knew it."

 We now know of course that the trading room was fake and the Weather
Channel was an inside joke. The end of the corporation indeed.

Henry C.K. Liu


THE ASCENT OF E-MAN
By Paul Krugman
SYNOPSIS: The failure of big industry and the success of Information was
never predictable

I grew up in a planned economy. Bureaucrats didn't run everything:
Small-business men were more or less free to buy and sell as they saw
fit. But those who controlled the economy's "commanding heights," its
key industries, were administrators rather than entrepreneurs,
conformists who were valued less for their productivity than for their
loyalty, whose career advancement depended on their political skill. For
ordinary workers, the system had some benefits: It was hard to get
ahead, but once you had a good job, your life was secure. Still, the
economy was often appallingly inefficient and consistently unresponsive
to consumer needs.

No, I am not an immigrant from Eastern Europe. I'm talking about the
U.S. economy of the '50s and '60s, when General Motors was the very
model of a modern major company. In those days progressive thinkers like
John Kenneth Galbraith used to ridicule economists who still believed
what they had learned from Paul Samuelson's textbook, which was that
free markets could be counted on to match supply and demand. After all,
business itself was clearly moving away from markets and toward
planning. More and more of the economy was dominated by large
corporations, and those corporations didn't place much faith in the
invisible hand. For example, AT&T owned it all--not just the
long-distance lines, but the local phone systems, the factories that
made telecommunications equipment, even the phones in your home. By
contrast, in today's cutting-edge e-businesses (see Cover Stories), the
company often owns--or rather, rents--little but brainpower.   That's a
long way from the era of the man in the gray flannel suit, when the
great business empires were not run according to the principles of
supply and demand: They were command-and-control systems, and people did
what they were told. As technology grew more complex, as big
corporations grew ever bigger, as computers made it easier to impose
centralized control, it was clear to smart people that the economy would
bear ever less resemblance to
the competitive system described in obsolete economics textbooks.

But over the past two decades the market has steadily gained ground--not
only against socialism but against
big-business capitalism. Large companies account for a steadily
declining share of employment and value added.
Moreover, even within corporations there is a growing tendency to rely
on individual initiative, on independent profit centers free to take
risks and do it their way. (True, sometimes individual initiative leads
to something that looks like mass conformity--seen one Banana Republic,
you've seen 'em all. But we're talking about management here, not
tastes.)

The retreat of business bureaucracy in the face of the market was
brought home to me recently when I joined the advisory board at Enron--a
company formed in the '80s by the merger of two pipeline operators. In
the old days energy companies tried to be as vertically integrated as
possible: to own the hydrocarbons in the ground, the gas pump, and
everything in between. And Enron does own gas fields, pipelines, and
utilities. But it is not, and does not try to be, vertically integrated:
It buys and sells gas both at the wellhead and the destination, leases
pipeline (and electrical-transmission) capacity both to and from other
companies, buys and sells electricity, and in general acts more like a
broker and market maker than a traditional corporation. It's sort of
like the difference between your father's bank, which took money from
its regular depositors and lent it out to its regular customers, and
Goldman Sachs. Sure enough, the company's pride and joy is a room filled
with hundreds of casually dressed men and women staring at computer
screens and barking into telephones, where cubic feet and megawatts are
traded and packaged as if they were financial derivatives. (Instead of
CNBC, though, the television screens on the floor show the Weather
Channel.) The whole scene looks as if it had been constructed to
illustrate the end of the corporation as we knew it.

What happened to the man in the gray flannel suit? No doubt he was
partly a victim of sex (er, I mean gender) and drugs and rock & roll-
-that is, of social change. He was also a victim of information
technology, which ended up deconstructing instead of reinforcing the
corporation. But probably the biggest force has been a change in
ideology, the shift to pro-market policies. It's not that government has
vanished from the marketplace. It's still a good guess that in a
completely unregulated phone market, long-distance companies would buy
up local-access companies and deny their customers the right to connect
to rivals, and that the evil empire--or at least monopoly
capitalism--would rise again. However, what we have instead in a growing
number of markets -- phones, gas, electricity today, probably computer
operating systems and high-speed Net access tomorrow -- is a combination
of deregulation that lets new competitors enter and "common carrier"
regulation that prevents middlemen from playing favorites, making
freewheeling markets possible.

Who would have thunk it? The millennial economy turns out to look more
like Adam Smith's vision--or better yet, that of the Victorian economist
Alfred Marshall--than the corporatist future predicted by generations of
corporate pundits. Get those old textbooks out of the attic: they're
more relevant than ever.

ME AND ENRON

SYNOPSIS: Krugman responds to an erroneous personal attack by
conservative columnist Andrew Sullivan

Some people have accused me of an ethical lapse because I served briefly
on an Enron advisory board in 1999 - even though I disclosed that
relationship the only time I wrote about the company (rather favorably)
for Fortune, back in May1999, and again the first time I wrote about the
company (in a highly critical article) for the New York Times, which I
did in January 2001. Since then I've been pretty hard on Enron, to say
the least: I criticized the firm's role in the California energy crisis,
and have not been kind as the firm's own problems have surfaced.

By the way, here's the  piece I wrote in Fortune. It looks a bit naive
now,  but it's a love letter to markets, not to Enron.
http://www.wws.princeton.edu/~pkrugman/eman.html

So what was my relationship with Enron?  I was offered a $50,000 fee for
a year's participation in the advisory board, which would entail
attending and presenting at two meetings, each of which would extend
over two days. The year I was on the board only one meeting took place;
the other was canceled because of weather.

These meetings were not about Enron business, nor were they about policy
in areas closely related to Enron business; basically they were seminars
on world affairs. From my point of view this was much like a paid
speaking engagement, of the kind that is common for academic economists,
at least those who work on issues that bear on matters of business
interest, like the state of the world economy. The only difference was
that in effect I had agreed to deliver several talks, and join in an
extended discussion of other peoples' talks.

At the one meeting I attended, I talked about the Asian financial
crisis, then still in full swing.

My critics seem to think that there was something odd about Enron's
willingness to pay a mere college professor that much money. But such
sums are not unusual for academic economists whose expertise is relevant
to current events. And there were other academics, such as the Harvard
Business School's Pankaj Ghemawat, on the panel; presumably they had the
same arrangement.

Remember that this was 1999: Asia was in crisis, the world was a mess.
And justifiably or not, I was regarded as an authority on that mess. I
invented currency crises as an academic field, way back in 1979; anyone
who wants a sense of my academic credentials should look at the Handbook
of International Economics, vol. 3, and check the index. Here's my
current  cv .
http://www.wws.princeton.edu/~pkrugman/cv.html

And I wasn't an ivory-tower academic. In 1994 I had published an article
in Foreign Affairs, "The myth of Asia's miracle", which was skeptical
about the region's economic prospects, and seemed vindicated by the
crisis. In August 1998 I had advocated temporary capital controls as a
way to deal with the crisis, just days before Mahathir put them into
effect in Malaysia. Also in 1998 I had taken on the Japanese situation,
with a series of papers that introduced the idea of inflation targeting
as a way out of the trap; "It's baack: Japan's slump and the return of
the liquidity trap" was published in Brookings Papers in late 1998.

Because of my role in the debates of the time, I was asked to advise
various Asian and Latin American countries (offers which still come in),
but declined.

I mention all this not as a matter of self-puffery, but to point out
that I was not an unknown college professor. On the contrary, I was very
much in demand as a speaker to business audiences: I was routinely
offered as much as $50,000 to speak to investment banks and consulting
firms.

When I accepted the position at the New York Times, I severed the Enron
connection, and also dropped any paid speaking and consulting that might
violate the strict Times conflict-of-interest rules.

My critics, ignoring the fact that I have been extremely tough on Enron,
seem desperate to find something unethical in all of this. Sorry:
there's nothing there.