The Enron scandal was a financial scandal that was revealed in late 2001. After a series of revelations involving irregular accounting procedures bordering on fraud, perpetrated throughout the 1990s, involving Enron and its accounting firm Arthur Andersen, it stood at the verge of undergoing the largest bankruptcy in history by mid-November 2001.
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A free market describes a theoretical, idealised, or actual market where the price of an item is arranged by the mutual non-coerced consent of sellers and buyers, with the supply and demand of that item not being regulated by a government. While a free market necessitates that government does not regulate supply, demand, and prices, it also requires the traders themselves do not coerce or mislead each other, so that all trades are morally voluntary. In other words, a free market economy is “an economic system in which individuals, rather than government, make the majority of decisions regarding economic activities and transactions.
In social philosophy, a free market economy is a system for allocating goods within a society: purchasing power mediated by supply and demand within the market determines who gets what and what is produced, rather than the state. The free market system is based on risk. It is impossible to maintain free markets without risk, so we must accept and manage it. The alternative—eliminating risk from the system—is a “planned” economy. Managing risk depends on transparent, honest systems for transmitting information. Enron was a Houston-based natural gas and energy company. It delivered commodities and financial and risk management services worldwide. In late 1999, the company launched EnronOnline, trading everything from weather derivatives to coal. Enron’s CEO Mr. Lay was quoted in 2000 as saying “We’re an energy and broadband company that also does a lot of other stuff. ” Actually, the management efficiency is impaired by the spectrum of its business. Enron invested $1. 1 b in broadband business over two years but made no money.
At the time, it was the biggest bankruptcy in U. S. history, and it cost 4,000 employees their jobs. California lawmakers accused Enron of power trading
Page 2 Enron and the Free Market System Essay
back and forth with its affiliates in the state, taking advantage of the energy crisis at its height. In the process, Enron was able to drive up the wholesale price of electricity in a vain effort to forestall its inevitable collapse. “They were essentially trading among themselves. ” The trades “created the illusion of an active, volatile market,” Lynch said. In reality, they were “sham transactions. ”
The accusations made towards the top management of Enron covers a broad range of financial crimes, including bank fraud, making false statements to banks and auditors, securities fraud, wire fraud, money laundering, conspiracy and insider trading. Kenneth Lay and Jeffrey Skilling, the former chairman and CEO respectively, can be said to be just “sharp traders,” businessmen who did what the free market demands of rational players: take advantage of every loophole they could find to make a profit. Despite the conviction of a couple of bad apples at Enron, its top management is not the real culprit in this case.
The real culprit is a bad idea: deregulation of the natural gas and electric power industries. Thomas J. Donohue CEO of U. S. Chamber of Commerce says that it appears if the Justice Department lost sight of the obvious suspects—the individuals responsible for wrongdoing—and instead have wrongly indicted the most innocent of bystanders—our free market systemSee More on Capitalism