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.