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Capitalist Reality and Creative Destruction (Part II: Enron’s Political Capitalism Play)

Enron’s revolution-always approach to energy in its latter years was Schumpeter on steroids. Adding to the company tumult was another complicating factor: Enron’s business model was dependent on political, not free-market, capitalism.

In early 2001, Enron founder and chairman Ken Lay proclaimed a new corporate vision: to become the world’s leading company. But this goal was not about beating oil majors like ExxonMobil or Chevron at their game. It was about mandatory open-access with gas and electricity transmission to trade the commodities; reducing tax bills with solar and wind investments (what GE does today with what was once Enron Wind); developing infrastructure in risky countries with government-guaranteed financing; and more.

Enron’s Business Guru

Lay’s super-Schumpeterian view of business strategy drew upon Peter Drucker’s The Age of Discontinuity, which Professor Lay taught to his graduate economics students at George Washington University in the early 1970s. But it was a quarter-century later, as head of Enron, when Lay discovered Gary Hamel, the leading business guru of the high-flying 1990s.

Also a Drucker disciple, Hamel brought the discontinuity-revolution theme to new heights. Hamel’s Competing for the Future (1994, 1996) and Leading the Revolution (2000) fueled Enron’s vision, values, and corporate culture. The admiration was mutual. “As much as any company in the world,” Hamel reported in 2000, “Enron has institutionalized a capacity for perpetual innovation.”

“Gray-haired revolutionary” Ken Lay, Hamel continued, had “helped create an organization where thousands of people see themselves as potential revolutionaries.” Hamel was chairman of the Enron Advisory Council when the eight-member outside strategy group dissolved with the company’s bankruptcy in December 2001.[5]

Revolutionary Ethos–But Execution Problems Too

The charge at Enron was “Ask Why?” An Enron logo read, “Will you change the world today?” Ken Lay’s business model was to employ and empower the best and brightest in order to capture the pools of profit that went unnoticed or unexploited by the stodgy competition.

Failures were blessed at Enron, because revolutionary firms have more misses, not only more hits. Like others in the Schumpeter-Drucker-Hamel tradition, Ken Lay might have substituted the words enterprise for knowledge, and profit for learn, in philosopher Karl Popper’s declaration that:

To avoid error is a poor ideal; if we do not dare to tackle problems which are so difficult that error is almost unavoidable, then there will be no growth of knowledge [enterprise]. In fact, it is from our boldest theories, including those which are erroneous, that we learn [profit] most.

Strategic Incrementalism, Execution Matter

Only it would not be that easy. Shooting for the very top landed Enron at the very bottom. Ken Lay’s company did not have the business model, discipline, or supermen and -women to match its grandiose vision. Schumpeter, Drucker, and Hamel could not be blamed. No company should have forgotten self-discipline in the pretense that genius trumps execution.

Path-breaking entrepreneurship must be accompanied by good management—what Schumpeter called the adaptive response after the creative response. No company, battered by the competitive gales, should abandon its compass by disregarding and abusing its accounting systems.

Furthermore, Enron’s government-enabled revolution was risky business. Government giveth, but government taketh away. And what is not grounded by natural consumer economics is on a death watch.

Enron finished, an embarrassed Gary Hamel rushed out a second edition of Leading the Revolution, removing Enron and Lay from its pedestal. Hamel had been fooled, as just about everyone else had, including virtually all of Enron’s own employees. The revolution-over-incrementalism model of business strategy was not as robust as thought when its exemplar exploded. Revolutionary ambition at Enron yielded revolutionary failure.

Incrementalism Matters Too

Political capitalism aside, there are good and bad revolutions. There must be continual improvement, or incrementalism, between sea changes. Revolution, often if not quite always, comes by steps, not bounds.

Business strategist Jim Collins enriched the Schumpeter–Drucker–Hamel view by noting how good-to-great companies were disciplined change-makers whose entrepreneurship was less about revolutionary moments than revolutionary process. In his words:

Good-to-great transformations never happened in one fell swoop. There was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no wrenching revolution. Good to great comes about by a cumulative process—step by step, action by action, decision by decision, turn by turn of the flywheel—that adds up to sustained and spectacular results.

Success was “an organic evolutionary process … a pattern of buildup leading to breakthrough.” The “doom loop,” noted Collins from his case studies, was “big programs, radical change efforts, dramatic revolutions, chronic restructuring—always looking for a miracle moment or new savior.” Collins saw greatness in disciplined thought and action, and failure in “fads and … management hoopla.” There was no silver bullet, no magic, which could substitute for sustained, well-directed effort.


Gary Hamel touted Enron as a model of successful revolutionary change. Jim Collins, while not mentioning Enron (he had not formally studied it), offered a general theory that was capable of dissecting cancerous malignancy at the very time the company was booming. Enron was an ideal type for failure in Collins’s good-to-great paradigm.  Enron is also a lasting example of the perils of political capitalism in energy as in other sectors of the economy.

NOTE: Documentation for the above can be found in Bradley, Capitalism at Work, pp. 101–103, 369.


1 Lionell Griffith { 01.03.12 at 11:19 am }

ENRON: an example of pretend doers who pretended to think supported by Government agencies filled with pretend thinkers who also pretend to do. Reality was optional and was supposed to follow their arbitrary wishes and dictates.

The hope on both sides was that the pretense would able them to avoid being blamed for unintended consequences and that Reality would give them a pass. Reality didn’t cooperate. The unintended consequences caught up with them. Unfortunately, the Government agencies got away with blaming ENRON for all the unintended consequences and continue as before. We the People will pay for real for the consequences intended or not with our fortunes, our sacred honor, AND our Liberty. Especially if we continue to pretend all is well.

2 rbradley { 01.03.12 at 1:57 pm }


Nice observations, but the mainstream continues to blame Enron on greedy capitalism rather on the mixed economy and on subjectivist doctrines that are opposite from Objectivism.

We still have work to do!

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