Enron Corporate Scandal and Microeconomics

Microeconomics
Enron Corporation is an example of one of the largest corporate scandals in the history of the United States. Given a series of corporate mismanagement, Enron is regarded as a shocking example of corporate corruption in the modern business world. The company took 16 years to increase its assets from 10 billion to 65 billion, which was significantly reduced in 24 days (Gibney, 00:00:38-00:00:47). Enron’s corporate scandal has been the subject of numerous studies within the business sector as it offers significant lessons on economics and corporate management. Alex Gibney’s film Enron: The Smartest Guys in the Room provides insights on various topics that are relevant to microeconomics in relation to Enron corporate scandal.
One of the topics discussed in the video relating to microeconomics is market regulation, which is a board term used to refer to government policies that regulate the market. Market regulation is evident in the discussion regarding the energy sector in California. As noted in the video, California is one of the most regulated markets in North America. However, Enron took advantage of the existing market regulations in California relating to the energy sector to steal billions of dollars from people as it emphasized on making profits. The company identified loopholes in market regulations in California that resulted in a year-long energy crisis, which cost the State $30 billion. Ken Lay, one of Enron’s bosses, believed in capitalizing on every loophole or opening to engage in all manner of unethical practices for the benefit of the company. He viewed deregulation based on all probable profits the company could make regardless of how it would go about making the profits. Market regulation is an important factor in Enron’s case as the federal government, which regulates the energy industry in the United States, refused to intervene in California’s energy crisis. This refusal provided loopholes that the company capitalized on to engage in unethical practices.
Evaluation of Arguments
The video seemingly suggest that market regulations was a microeconomic factor that contributed to unethical practices by Enron and resulted in the corporate scandal. Market regulations basically provide a platform for the government to exert control and oversight over the market. Governments usually control market regulation through which they also determine business entities that can enter the market and pricing of goods and services in the market. While governments control pricing of goods and services, they do not directly set prices for businesses. The other relevant bodies that help shape market regulation in an economy include industry or labor groups since they also have some level of market control and oversight.
As part of control and oversight of markets, governments sometime engage in deregulation, which refers to situations when the government lessens or eliminates restrictions on industries (Amadeo par, 1). Deregulation is carried out by governments with the aim of enhancing the ease of doing business for companies operating in a particular industry. In this regard, the government eliminates regulation that interferes with the ability of a business to compete effectively. In some cases, deregulation is prompted by consumer groups when they feel existing regulation does not serve their interests. Therefore, deregulation results in the establishment of a free market in which prices are set to promote company growth, to enhance organizational efficiency, and lower costs for consumers.
As shown in Enron’s case, one of the major disadvantages of deregulation is the likelihood of customers being exposed to excessive risk-taking and fraud by business organizations. This is evident in the State of California where Enron engaged in fraudulent activities and excessive risk-taking that significantly increased its profit margins. While the film does not delve into deregulation in any depth, it highlights how it contributed to Enron’s unethical business practices and eventual collapse. Deregulation was part of Ken Lay’s ideological philosophy from the very beginning of the company. During its founding years, Enron was a real energy company providing tangible goods and services to its customers. However, the company later became a house of cards that engaged in playing financial games based on Lay’s beliefs and ideals of deregulation (Kienitz par, 5). Lay’s attitude on deregulation is first evident when Enron was two years old as two of its executives started running market scams and storing money in offshore accounts. Lay encouraged these practices on the premise that the firm’s major goal at the time was to make profits.
Deregulation of the California energy market in 1996 served as an opportunity for Enron to adopt business practices that later resulted in the energy crisis. The arguments presented in the film regarding deregulation effectively show how market regulations play an important part in economic growth and profitability. Deregulated California market resulted in Enron’s adoption of business practices that were characterized by excessive risk-taking and fraudulent activities. Gibney shows Enron’s excessive risk-taking following deregulation of the California market in two ways. First, Enron created an artificial electricity shortage through which it continued acting as a middleman. During this process, the company drained the public millions of dollars by trading on price fluctuations. Once the company could no longer use this strategy, the employed another tactic. After making profits as an energy producer, Enron purchased several power plants in the State of California and operated others for profits. These two strategies highlight the dangers of deregulation as a strategy for enhancing the operations and profitability of businesses in a particular industry. When employing deregulation, governments needs to provide support and more oversight on certain industries like the energy sector to protect customers and the public from exploitation and fraudulent activities.
Works Cited
Amadeo, Kimberly. “Deregulation Pros, Cons, and Examples.” The Balance, The Balance, 16 Jan. 2020, https://www.thebalance.com/deregulation-definition-pros-cons-examples-3305921
Gibney, Alex, director. Enron: The Smartest Guys In the Room. YouTube, Magnolia Pictures, 20 Oct. 2009, https://www.youtube.com/watch?v=BIwFO4_SWQQ&has_verified=1
Kienitz, Paul M. “ENRON: THE SMARTEST GUYS IN THE ROOM (2005).” Paulkienitz.net, Paulkienitz.net, https://paulkienitz.net/enron/smartest-guys.html