crony-capitalismPoliticians don’t come cheap. To buy one’s influence you generally need deep pockets, which is why crony capitalism tends to be the domain of “big business.” But a recent article in Slate by California restaurateur Jay Porter shows that some small business owners dream of being cronies too.

Cronyism occurs when an individual or organization colludes with government officials to create legislation or regulations that give them forced benefits they could not have otherwise obtained voluntarily. Those benefits come at the expense of consumers, taxpayers, and everyone working hard to compete in the marketplace.

Not all legislation that affects businesses and consumers is promoted by cronies. But cronies almost always attempt to hijack such legislation. Take, for example, minimum wage increases. As I’ve noted before, both sides of the debate tend to believe they are arguing in defense of the poor. But some people don’t really care about how minimum wage affects the poor – they care about how it affects their bottom-line.

Porter is a prime example of a crony who unapologetically supports raising the minimum wage because it would benefit his business:

We can talk macroeconomics all we want, but I believe most of us are going to give or withhold our support for raising the minimum wage based largely on our perceived self-interest. So with that in mind, here’s my self-interest: As a small business owner in the restaurant industry, I think a higher minimum wage is great for my business and me. Make the wage $15 an hour. Make it $20. Make it high enough that dishwashers get paid like office workers.

Here’s why. A higher minimum wage helps reduce the structural advantages large corporations have over small businesses, and that in turn helps create a context where high-quality independent businesses can thrive by overdelivering compared to our better-capitalized, but mediocre, big competitors.

This is the standard cry of the crony: “We can’t compete because others have an unfair advantage! That’s why we need an unfair advantage of our own!” Porter continues:

When individuals like me start businesses in our communities with the intent of selling quality goods and services, we quickly find that our biggest obstacle is the low prices offered by large corporations. The issue isn’t that those companies are selling the same things we are for less. The issue is that the low-priced commodities sold by superstores, warehouse clubs, and restaurant chains influence our customers’ understanding of what everything costs.

One of the first lessons you learn in business school is that you can compete on quality or price but (almost) never on both at the same time. If you have an inferior-but-adequate product or service, you must attract customers who are price sensitive. Some people care more about getting a product or service at a low price than they do with the relative quality of the product. Others, however, are willing to pay more to get higher quality. Just about every consumer in the world understands this concept (yet it still comes as a surprise to many B-School students).

That’s why Porter’s claim about how “superstores, warehouse clubs, and restaurant chains influence our customers’ understanding of what everything costs” is nonsense and can be refuted with one word: Starbucks.

At almost any convenience store in America, you can buy a cup of coffee for about one-third of the price that you’d pay at the Starbucks next door. Why, if you can get coffee so much cheaper, hasn’t 7-11 and other chain stores not influenced customers’ understanding of what coffee costs? Well, in a sense they have. They have influenced customer’s understanding of what it costs to get a relatively low-quality, no frills cup of java. But almost no one expects the coffee they get at the gas station to be the equivalent of a macchiato with vanilla syrup, steamed milk and foam, espresso, and caramel drizzle. For that you need to go somewhere like Starbucks – and pay more for the higher quality.

Porter not only seems to misunderstand this price-quality relationship, but fails to understand that it’s not really the problem with his own business:

For example, the reason it’s hard to sell a really good, locally produced burger in many markets isn’t because the product isn’t worth it; even $10 or $12 for a handcrafted product that includes 6 ounces of grass-fed beef is a steal compared with what you can buy at Applebee’s or Olive Garden for that price. The reason it’s hard to market a high-quality burger is that so many companies sell burgers so cheaply—regardless of how bad they are—that we think a burger “should” cost only $5 or $6.

Notice the switch? He claims his burgers are a better quality than what you could get for the same price at Applebee’s or Olive Garden but that consumers think a burger “should” cost only $5 or $6. He seems to imply that burgers in his market area (San Diego) sell for about $5 to $6. But if that were true, then why does Applebee’s sell their burgers for $10?

At Porter’s not-defunct San Diego restaurant, The Linkery, the price of a “grassfed beef burger” was $11.50. Yet the closest Applebee’s to his former restaurant sells a similar burger for $10.49. Why weren’t people in San Diego willing to pay the extra dollar for “6 ounces of grass-fed beef”? Could it be that Porter’s burgers simply weren’t considered all that different from what could be had at Applebee’s? Whatever the reason, it wasn’t because of skewed customer perceptions of “what a burgers should cost.”

But the true problem with Porter’s reasoning is the economic fallacy of static reasoning, the belief that you can change one variable without affecting related variables. For instance, Porter says:

Now, if the minimum wage were raised high enough, the cost of human resources would have to be borne in full by their employers, large and small. In turn, everyone will have to raise prices—and the prices the big guys charge for their products will be closer to their true costs.

A world where items are priced near their true costs is a world that we small businesses already live in. We can’t easily pass many of our expenses onto the taxpayers. We typically lack the resources and scale to make it feasible to move our production far away to cheaper jurisdictions and invest in our own subsidized transportation networks. But if labor becomes a bigger cost for large and small companies alike, the subsidies that benefit large businesses will be less relevant, and us little guys will be competing on a less slanted—though still not level—playing field.

It’s hard to imagine how anyone who has owned a business could possibly believe this is true. For starters, if the general price of labor increased, it would lead to a general increase in prices. That means burger-buying consumers would have less discretionary income and would eat out less — an effect that would hurt all restaurants, both big and small.

Also, does Porter think his larger crony competitors wouldn’t find some other way to get an advantage over smaller businesses? Small cronies will never have the resources to outcompete big cronies. To beat them requires innovation, not championing policies that would hurt the poor and other burger lovers.