By Will Hutton

American democracy is increasingly a fraud. Money buys votes, influence and office. Contemporary Washington makes Caligula's Rome look like a vicar's tea party. American politicians' need for business donations on a gigantic scale to win their election campaigns now pollutes the discourse of the country's public life, with business writing public policy and corrupting everything it touches. And the noxious consequences, in terms of ideas and business practice, spill over into Britain.

The bankruptcy of the energy trader Enron before Christmas with $40 billion of debts, the largest recorded in history, was spectacular. It had overstated its profits by half a billion dollars over three years and lost more still in private companies set up to enrich the coterie of top executives in schemes undetected by its auditors, Arthur Andersen. They, we learned last week, had happily disposed of potentially incriminating documents and misled Congress. In tougher times, Enron's capacity to hide what we would understand as theft was exhausted - and the company collapsed.

Now the subject of a criminal investigation by the Justice Department, the details spilling out offer a bird's-eye view of how business is done in the US, how favours are bought and how political ideas are honed to serve the interests of the political parties' benefactors. Two members of Bush's Cabinet - the Commerce Secretary and Attorney-General - have had to stand aside from the investigations because they received close to $100,000 in political donations from Enron. Chief executive Ken Lay, 'Kenny Boy' as Bush dubbed his close friend, personally gave Bush $100,000.

This was not innocent money for a buddy; Enron also greased the wheels of the Democrats. In 2000, it spent $2.4bn supporting candidates for public office in the US - $1.7bn for the Republicans and $700 million for Democrats. Enron wanted a return on its cash and could not afford just to back Republicans. As an energy trader, it needed to find markets in which to trade, which meant opening up the US's patchwork quilt of state and federally regulated electricity and gas grids to private interests; sometimes, Democrats served this purpose as well as Republicans.

Enron did not want to look like just another corporation using money to buy influence; it needed a cover story. It wanted minimal surveillance of its own operations and the maximum opportunity to enrich its directors while making paupers of its workers (before it collapsed, the directors sold $1bn of personally owned shares while forbidding its employees to sell their Enron shares in their private pension funds); energy markets opened up fast. The story was deregulation.

No chief executive was as fervent an apostle of how regulation cripples wealth generation as Ken Lay, and now we know why. Republicans, of course, were willing allies in the belief that nothing inhibits businesses more than having to respect the law of the land and accept obligations to the wider society in which they trade. But money talks, and during the 1990s Democrats became evangelists for the same set of ideas. How could they accept Enron's money, and that of dozens of other corporations, otherwise?

Thus, over the last decade, Ken Lay and Enron have bought a series of decisions that have driven the company's growth. In the early 1990s, the company ensured via the good offices of Wendy Gramm, then chairman of the Commodity Futures Trade Commission and wife of Enron-supported Texan senator Phil Gramm, that key aspects of Enron's trading should not be regulated; she was rewarded with a seat on the board.

In the mid-1990s, Enron spearheaded the botched deregulation of California's electricity grid, ensuring, amid the mayhem that would lead to black-outs and sky-high prices, that at least there was a mandatory spot market in electricity in which Enron could trade. It made sure, with Bush's election, that regulation remained favourable to Enron, helped design an energy policy based on more spot market trading and successfully lobbied for the repeal of minimum corporate taxes, the proceeds of which, had they come sooner, would have been used to plug the financial holes created by its own executives' venality. This was a much better use of the money than serving the public interest.

This was a pretty useful return on its political contributions, but Enron could not have made the progress it did without the intellectual backdrop that all regulation and taxation is bad - and that the more the US deregulated, the better its economy performed. This was, and is, balderdash. Recent work by economists, notably at investment bank Credit Suisse First Boston, shows that after making the necessary accounting adjustments and including downward revisions, productivity growth in the US has done no more than match that in Europe. Indeed, countries like France and Germany have higher absolute productivity and faster rates of growth than the Americans, despite their approach to regulation and taxation. The deregulation philosophy that enriches Ken Lay and his cronies does not necessarily enrich anybody else.

This is not a case for red tape, bureaucratic regulation or stupid rules, all of which plainly hurt the economy. It is an argument for smart regulation, an imperative if capitalism is not to degenerate into profiteering and economic cannibalism. And in Britain, we have particular reason to thank our regulators, pilloried by the business establishment (Digby Jones, director-general of the CBI and Ruth Lea, head of policy at the Institute of Directors outdo Enron in their advocacy of deregulation) and friendless in the upper echelons of even a Labour government.

For Enron was a major actor in the UK; it dominated energy trading, in particular in electricity and gas, and it took care to include a British political notable, Lord Wakeham, on its board as a non-executive director, though there is no suggestion that he has been involved in any alleged malpractice. When it collapsed, the untold story is that Britain's market-based electricity distribution system stood on the brink of collapse, too; without regulatory intervention, the country would have suffered a black out on a Californian scale. Yet the unseen and unpraised regulators at Ofgem (the merged regulator of Britain's gas and electricity markets) moved fast and effectively to ensure that other companies stood behind Enron's now defunct contracts . The lights stayed on.

Yet even Ofgem's powers have recently been reduced as part of the ceaseless quest, borrowed from the US as part of lifting the burden on business to foster 'wealth generation', to reduce and eliminate regulation. Taking our lead from the US, where companies buy political ideas to suit their interests, British politicians are following the same ideological logic but without the excuse that they need business's political donations.

Smart and effective regulation is the handmaiden of well-run markets that serve the public interest. It is time our politicians started saying so - and challenging the self-serving braying of our business lobbyists. Enron, and the philosophy that created it, stinks.

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