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The Enron Scandal: Arthur Anderson



Economists are sacred cows, but I am not an academic Hindu. Miles Seeley's wife tries to justify economists by saying they do not claim to foresee the future. Well, they certainly do, and Miles should not be so docile. He says: "My wife has a PhD in Education (Economic Education) and taught at 3 universities, specializing in teaching teachers. She told me early on in our relationship that you cannot expect economists to predict the future of anything. All they do is explain why things happened in the past. I scratched my head, wondering how it could be that a good explanation of the past could not be a predictor of the future, but apparently that is the case".

Hank Levin modified her statement: "Miles [Miles' wife] is correct in stating that most economic prediction is based upon past behavior under similar conditions. But, there are techniques for adjusting to present conditions and creating simulations of different conditions to see what the consequences might be. With respect to Enron, this is not a situation that would normally be part of economics. The Enron situation was based upon a business strategy that took the economic situation into account, but that was largely based upon various types of manipulation of accounting practices and business operations that have little to do with economics, and a lot to do with fraudulent or "highly unconventional" practices."

Steve Torok defends game theory: "I cannot leave this unanswered, since ENRON's game was nothing but an old confidence trick as introduced in an excellent presentation on C-SPAN. At the same time, for my Ph.D., I invented a three-person game called "Papillon", based on the so-called Prisoner's Dilemma" and walked into my Ph.D. defence with a game board, fully intending to have my Committee play my game ! They did not, still I passed, having to add to the introduction some 20 pages on the work of Michael Zeleny, who at that time just joined Columbia Faculty and his approach to multi-objective decision-making could be related (through my game) to Ralph Gomory's branch and bound approach to mixed-integer programming...I know this is a mouthful, still I believe that after Von Neumann and Morgenstern, Ogden Nash, John Harsanyi,etc., game theoretical approaches to economic analysis are well established. The problem is that you have to be able to change the games before you can make any difference! However, people can learn while playing repeatedly -- exactly the point of my Columbia University thesis "Value Changes, Gaming, a Behavioural Approach to Guided Negotiations and Economic Planning."

My reply: Economists certainly do claim to predict the future. In the US Government phone book there are columns of economics groups in Washington, many of them clearly involved in foreseeing the future, or at least predicting the outcome of certain policies.. My impression is that the heyday of the game theory is past. Stanford seems to have one course on it. Of course, common deceit is involved in the Enron scandal, but then whole business of derivatives, etc. is part of finance, which is taught in economics departments and business schools. You may well argue that the flat tax and income tax on a postcard were gimmicks intended to catch votes, but they were thought up by economists. Be in noted that I am a strong believer is futurology studies, but I stress their extraordinary complexity. They are a necessary basis for planning, which is part of the routine of government and all kinds of business and other groups.

Ronald Hilton - 1/27/02


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