Free Markets, Free People

Quote of the day – Crony Capitalism edition

I think this captures my feelings about the situation:

“[C]rony capitalism” has as much to do with real capitalism as praying mantises have to do with real prayer.” – Donald J. Boudreaux, Cafe Hayek

Boudreaux is responding to an article by Gerald O’Driscoll a few days ago in which O’Driscoll took on the notion that “crony capitalism” is simply an natural evolution of capitalism.  Boudreaux had a slight nit to pick with the author but his characterization of crony capitalism was dead on.

O’Driscoll covers many of the myths that those who want to characterize crony capitalism as a problem only to be found under a capitalist system.  In fact it has little to do with capitalism at all.  It’s simply cronyism and, once you understand what is being described, it can exist under any system that has a government.

You see, that’s the one ingredient that is necessary for it to exist.

Under a free enterprise system – capitalism – the government’s job is to play referee, that is, enforce legal contracts and prevent/punish fraud.   And, there’s a certain amount of regulation necessary to exercise those functions.

But when it gets beyond those parameters, it has a number of effects which have little to do with capitalism or a free market.  When government gives up its role as referee in favor of a reciprocal relationship with those it regulates that also benefits those who run government, you have cronyism.  Obviously, a capitalist system, then, isn’t the only place it can happen.

And how does this cronyism develop?

Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect. In a paper for the Federal Reserve’s Jackson Hole Conference in 2008, economist Willem Buiter described “cognitive capture,” by which regulators become incapable of thinking in terms other than that of the industry. On April 5 of this year, The Wall Street Journal chronicled the revolving door between industry and regulator in “Staffer One Day, Opponent the Next.”

Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.

We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.

Government also tends to favor those who favor it.  And this is one of the many things which came to light in this recent financial bailout:

Crony capitalism ensures the special access of protected firms and industries to capital.

Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.

Consider the revolving door at Goldman Sacs.  Consider the preponderance of union workers at GM and Chrysler.  Go ahead and try to argue there’s no money connection between those who control the government’s purse strings and regulations and those who have benefited.

Donald Beoudreaux gives a great summary that dispels the myth that “crony capitalism” is a version of capitalism or, in fact, has anything whatsoever to do with it:

To the modern American ear, “anarchy” no longer means simply “no ruler”; instead it now means “no law” – true, free-for-all chaos.  In vivid contrast, capitalism – real capitalism – is infused with law, most of which is self-enforcing.  The manufacturer who pays his suppliers late gets poorer credit terms in the future; the retailer who cheats her customers loses business; the customer who doesn’t pay his bills can no longer buy on credit.

The chief problem with crony capitalism is precisely that it injects significant amounts of lawlessness into the economy, transforming capitalism into something entirely different and dysfunctional.  Under crony capitalism, government excuses the politically influential from capitalism’s laws.  Thus unleashed from the impartial discipline of the invisible hand, the politically influential become criminals who lie, rape, pillage, and plunder.  And that’s true lawlessness and chaos.

So don’t let the enemies of capitalism get away with calling it crony capitalism.  It’s cronyism, pure and simple, and it can and does exist with any form of government.  And increased regulation isn’t going to change that dynamic or curtail the developed system of cronyism that we now suffer under.

~McQ

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14 Responses to Quote of the day – Crony Capitalism edition

  • Yet again, you fail to understand the basics. I mean the basics of how leftists are allowed to redefine terms to confuse illuminate the debate in a favorable way to ourselves, which we must do because our intentions are so good that we can’t let silly stuff like logic or economics get in the way.

    Look, we’ve DEFINED crony capitalism to be a variant of capitalism. We own the media and education. You guys don’t get a vote on this, and appealing to definitions in musty dictionaries isn’t going to help.

    That way, we get to redirect the anger people feel at companies colluding with government to take advantage of their customers, suppliers, and lenders. We take that anger and direct it straight at capitalism.

    That’s fair, because we all know capitalism is a fundamentally flawed system that fails to provide perfection. We know, for example, that markets don’t adjust themselves, there’s no reason to believe they do.

    Then the obvious conclusion is that, since capitalism has failed, wise leftists need to take over more authority. Healthcare and financial regulation are just two examples. Yep, it’s not enough that leftists dominate the media, education, and entertainment, have recently taken over the automotive industry, and also run the welfare state. We need more power to do good. We need to take over more huge chunks of the economy. For the good of all, of course.

    There are a lot of variations in how we might do that. I prefer the following path: we sit down with everyone and have all sides debate, and then when we’ve reached consensus that government is responsible for everything and healthcare is a right and it’s immoral to support a free market in healthcare, and all that stuff, then we will take a giant step towards a leftist utopia in which wise people run things and you dense righties just have to play your traditional role as the grunt engineer types that make the details work out.

    And if you participate in the process, we’ll give you a pat on the head before we send you off to do the dirty work. Otherwise, you’ll be shut out and impotent. Well, actually, I guess you’ll be impotent no matter what because the rest of us have agreed that you’re just wrong about how to do things, but still. You should sit down with us and work everything out anyway. Stop laughing!

    Yes, the crony capitalism is just awful. And the obvious conclusion is to give us more power. I decree it.

  • From a Political Science perspective here’s the problem: both business and government has an incentive to cooperate to undercut the government playing just the legal referee.   That’s why the biggest anti-capitalists out there are business elites and big corporations, they want benefits and protections.   They have the resources to buy off government or help frame issues and shape electoral outcomes.    Real ideal capitalism is probably only possible on small scales, otherwise the power differentials screw things up.   Socialism and Communism are even worse.   Reality is you have to find pragmatic compromises, have a strong media, and an informed public.

    • From a Political Science perspective here’s the problem: both business and government has an incentive to cooperate to undercut the government playing just the legal referee. And the obvious solution to that is a whole lot more regulation and more government power and having the government simply take over things like healthcare, transportation, and energy. Because we all know the ridiculous idea that we just scale back the size and influence of government couldn’t possibly work.

      That’s why the biggest anti-capitalists out there are business elites and big corporations, they want benefits and protections. They have the resources to buy off government or help frame issues and shape electoral outcomes. That makes them mean, vicious, awful people, while the poor victimized politicians and bureaucrats they are buying off are just well-intentioned souls drawn into corruption by bad influences. Because it couldn’t possibly be the case that political elites are at fault! That’s not possible by the holy writ of post-modernism.

      Real ideal capitalism is probably only possible on small scales, otherwise the power differentials screw things up. Yep, on big scales we certainly don’t need any capitalism. Instead, at large scales, we need big government and lots of it. And that’s in no way contradictory to the point that companies buy influence and big government facilitates that. Nope. No contradiction at all, and I don’t know why you bring it up.

      Socialism and Communism are even worse, because you dense righties have managed to make those terms radioactive. So we certainly can’t talk about making government bigger and more powerful using those terms. So instead, using the magical powers of post-modernism, we re-define ever increasing government as a “pragmatic compromise.”

      Yes, the reality is you have to find pragmatic compromises, have a strong media, and an informed public. As I’ve said so many times before, that means that everyone sits down at the table, and dialogs, and comes to a pragmatic compromise that gives a greater role to government, while the dense righties public-spirited people on the right that participated receive pats on the head and some good press from our comrades colleagues in the media.

    • So nice of you to rephrase McQ’s post for those of us too lazy to read it ourselves. You trying to compete with Cliff Notes?

  • “Reality is you have to find pragmatic compromises, have a strong media, and an informed public.”

     
    Professor Erb is confused again.  Now he is citing Reality as Reality.  Paraphrasing his statement reveals its true meaning:  Reality is you have to listen to the left to find compromises which will work (those offered by the right won’t work).  If the left says it will work, it is pragmatic.  Got it?
    Have a strong media.  Strong means overwhelmingly supporters of the Liberal Narrative, as opposed to a media which speaks with many disparate voices trying to make sense of real facts and is therefore weak. How can one properly implement good government policy with weak media?
    Finally, an informed public.  Informed by the liberal elite as presented in the LN by a strong media.
     
    When you have pragmatic compromise, a strong media and an informed public everything will seem to be wonderful (well, except for those right wing troublemakers) until we run out of other people’s money.  And that is nothing to worry about.  Look at Germany.
    Have we got it, Professor?  Thanks so much for informing us.

    • Wow.  You take what I write and redefine it into some kind of wild conspiracy theory.  You are truly a post-modernist dealing in propaganda and narratives.  Reality means nothing to you.

  • The difference  between Crony Capitalism and Socialism/European style Mixed Economy?
    In crony capitalism, its technically cold be illegal or at least shameful when such collusion occurs.
    In socialism, collusion is normal, with meetings every Monday morning. Be there on time!
    Its also interesting to note that when the State gets involved directly in industry, the regulations are even laxer than with “crony capitalism” or captured regulators. France has tons of nuclear reactors – is it simply easier to apply for the environmental permits or does the State owned industry just not face much opposition from its state regulators?
     

    • you hit the nail on the head.  What has happened in many nations is similar to what happened in the 1970’s with out old tax code. The upper level tax rates were ridiculously high and would have totally wrecked the economy if they had been applied.
       
      Therefore the congress wrote all sorts of loopholes into the tax law so that business could actually operate. But it was a Byzantine mix that hid all sorts of perks for favored companies and industries.
       
      A similar thing happens with regulation. Some industries face so much of it there is no financial incentive to operate. So they move to other nations.  The government wants to save those jobs so they work up a special deal with the comapny or just take it over. Then, if there was any real need for some of those regulations you can bet that they will no longer be tightly followed.
       
      The one common denominator is of course, too much government cost and power.

  • (those offered by the right won’t work).

    Insofar as they concern chickens, I think that’s about right. Can you cite some serious compromises that the right has been offering, as of late?

  • [C]apitalism – real capitalism – is infused with law, most of which is self-enforcing.  The manufacturer who pays his suppliers late gets poorer credit terms in the future; the retailer who cheats her customers loses business; the customer who doesn’t pay his bills can no longer buy on credit.

    This is what anti-capitalists refuse to understand.  Markets, though not perfect, ARE self-regulating.  Now, it is true that “power imbalances” can eventually develop: larger companies can undercut smaller competitors, driving them out of the market; large companies can afford to ignore (to a limited extent) dissatisfied customers; large companies can pressure or outright cheat smaller suppliers.  None of us, I think, is happy with such situations because they violate the common rules of fair play.  Government has some role to play in righting these wrongs, but only to a very limited extent.  As McQ notes, government should “enforce legal contracts and prevent/punish fraud”; I would argue that some safety regulations are also useful.  But government has no business defending small companies against larger competitors, enforcing “customer satisfaction”, or attempting to determine how much money a company may make, whether it is “too big to fail”, etc.  The reason is simple: the government that can do these things for altruistic purposes can also do them for nefarious purposes.

    I shudder to think what those fools in Washington are cooking up in the way of financial regulations.  The mere fact that some major financial companies are in favor of this tells me all that I need to know: they, through their bought-and-paid-for political stooges (Chris Dodd, anyone?) are gaming the system to their advantage.  They are making sure that the regulations, even though they may be inconvenient and costly to themselves (costs that they’ll pass on to the consumer, by the way) are a damned sight MORE inconvenient and costly to their competitors.  How much money do financial institutions have to pay expert lawyers and accountants to help them navigate ever-increasing amounts of regulation?  How little can small banks and start-up companies afford to hire those sorts of experts?  Back in the day of robber barons, small companies were kept out of the market by undercutting their prices, hiring away their best workers, and (sometimes) naked violence.  The modern robber barons have a better system: they simply get Uncle Sugar to make it too expensive for any competitors to go into business in the first place.

  • “Can you cite some serious compromises that the right has been offering, as of late?”
     

    You know, if one didn’t know liberals, one might spend an hour or so researching the compromises offered by the right and building a case that they have been there all along, just ignored by the left.
     
    Then, when offered by a liberal, there is a question as to whether or not their question was merely rhetorical (this one might be – as in “yeah, like the right (being rock-ribbed bible thumpers, ideologues, etc.) would ever compromise on anything”).
     
    Then one must hope that the liberal bothers to put down his latte and return to see if his question was answered.
     
    Finally, one must then hope that, seeing the completeness and length of the answer, the liberal doesn’t click off and head for the hot tub instead of wading through the wing nut twaddle it is sure to contain.
     
    With that in mind, and being willing to give the benefit of the doubt, let me rip off an answer.  How about the offer of joining in on the Obamacare bill if it contained provisions to deal with the trial lawyers (tort reform), tax deductions for persons paying medical insurance premiums, etc.?
     
    Frankly, I believe that anyone asking that question in this context is exhibiting an attitude that could only come from being a captive in the liberal bubble where the various compromises offered by the right were not accurately reported.  Sorry.