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Does capitalism always become crony?

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Mark Zuckerberg has finally admitted he needs help. From the government. After years of shady dealing, data collection, and intentionally designing addictive technologies, Zuckerberg has asked the government to regulate tech.

And who do you think will help write all the regulation that “regulates” all these tech firms? Bureaucrats in Washington won’t have enough knowledge, of course, so they’ll have to get it from experts in the tech industry. Lucky tech industry. Now that Facebook and Google, et al., have such huge marketshare, it’s time to create barriers to entry and costly regulations that only big existing firms can afford.

One of the critiques of capitalism from progressives to traditionalist Catholics is that despite all the talk of free markets, capitalism always ends up in crony capitalism. Supporters of the market economy claim that this is a distortion of capitalism, and that it is government intervention that is the culprit, but this can often sound like the socialist who tells us despite the evidence from the Soviet Union, North Korea, Cuba, and Venezuela that real socialism hasn’t been tried.

How should we think about the relationship between capitalism and crony capitalism? Is it the case that capitalism always becomes captured by special interests, or can we create and maintain what Luigi Zingales has called “capitalism for the people”—a capitalism that doesn’t simply favor the wealthy and well-connected at the expense of everyone else?

The Road to Serfdom or The Road to Crony Capitalism?

Mike Munger and Mario Villareal-Diaz wrote an interesting piece on this topic in the Independent Review. 

(There is a pay wall but there is much more to this article than I am highlighting; it is worth the money. They ask whether capitalism can be sustained in a democracy and use the work of Smith and the Spanish philosopher Ortega y Gasset’s book The Revolt of the Masses, which has some profound insights.  I use Gasset’s work, especially his idea of the “spoiled child of history,” in my lectures on cultural critiques of capitalism and the victory of socialism.)

You can also listen to Munger’s EconTalk interview with Russ Roberts.

Munger and Villarreal-Diaz ask, “If real capitalism exists, is it sustainable? Or does capitalism in a democracy always devolve into corporatist cronyism?”

The reality is that companies benefit when they go to the government for help and protection.

“At some point, rational companies cut back on hiring engineers and shift their focus to lawyers and lobbyists. The use of patents, lawsuits, professional licensing, and other regulatory barriers to competitive entry into “your” industry or product line can produce enormous revenues, even though it adds nothing to the value of the product and does nothing to benefit consumers.”

It’s not just companies that benefit. So does the state. Munger summarizes the tendency toward crony capitalism in a follow-up piece for the American Institute for Economic Research: “Corporate leaders benefit, monetarily and in the short run, from negotiating favorable legislation and protection from politicians.”

Even if business leaders behave “irrationally” and leave that money on the table—remember, it’s legal to lobby, even if it’s immoral—it’s still true that politicians benefit from making businesses dependent on taxpayer handouts. Businesses that don’t play along will be singled out for “special” attention, either extra taxes or unwelcome regulation.

Capitalism for the People

They are not alone in addressing this problem. There are number of interesting books on the problems of crony capitalism. Luigi Zingales’s 2012 book Capitalism for the People, Jonathan Tepper’s The Myth of Capitalism, Tim Wu’s The Curse of Bigness, and Hunter Lewis’s Crony Capitalism in America are worth reading. They have different perspectives. Some make the case for anti-trust legislation, some think that will make the problem worse.

As Munger and others have noted, the problem of crony capitalism was identified by the father of modern economics, Adam Smith himself.

Smith wrote: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Smith argues that it would be a violation of liberty, but that law should at least be careful not to “facilitate such assemblies.”

Collusion among businessmen is bad enough. It becomes even worse when business and government collude together.  This, unfortunately, is the essence of today’s political economy—government and business working together for their own interests, what I’ve called Davos Capitalism.

Munger and Villareal-Diaz are right that “the road to cronyism leads through capitalism.” But must it always be so? And is there any solution to it? I think the answer to both questions is yes and no.

There is no way to create a perfect economy with perfect justice. As long as there are men and women involved, there will be collusion, cheating, and attempts at dishonest gain—including legal dishonest gain that excludes competition. There is no perfect solution. The best we can do is create a system and solutions that help minimize cronyism and give the widest amount of opportunity to people. This requires rule of law, personal virtue, long-term thinking, and a culture that helps foster these things.

Munger argues that along with other institutional changes we need “to empower entrepreneurs not to want to become rent seekers and to constrain state actors not to sell off rents in the first place.”

This is right, but this requires a radically different concept of the the state-market relationship that we have now, not to mention a profound cultural and moral shift that would include among other things:

  • a shift away from the faulty thinking that as long as something is legal, then it must be moral
  • a restructuring of the current regulatory regimes and the “revolving door” between business and government
  • a reduction in the power and size of the state
  • a reduction in the political power, access, and influence of business
  • a new vision of a commercial society that promotes real competition and access
  • a reconnection of economics and moral philosophy

The Economy is Embedded in Culture

Part of the problem is that we have unhinged market economies from any real consideration of morality. This applies to the legal, but unfair and unjust practice of crony capitalism in the regulated sectors of the economy.  It also applies to some of the practices in the freer, less regulated sectors, notably tech.  Those of us who support free and competitive market economies may not like to admit it, but alongside a highly regulated economy, we do have some radical free-market ideology in parts of big tech. When you combine the Silicon Valley ethos of radical autonomy, Berkley Buddhism, and morally and socially unhinged techno-utopians with a free market economy, you get, well, Google, Facebook, and what Shoshanna Zuboff calls “surveillance capitalism.” To be clear, I am not suggesting that regulation is the best answer—as I note above it will, like most other regulation, get captured and only institutionalize the corruption.

This is complicated topic with no immediate or simple solution. The commercial society grew out of a certain culture with certain beliefs and standards. A lot of what we need to do is to reframe how we think about the economy in the light of human flourishing and the common good. We also need to take seriously the effects of culture on the economy.

As I wrote 10 years ago in a piece called “Davos Capitalism: Adam Smith’s Nightmare“:

The goal of economic liberty is not a society of producers and consumers in equilibrium. Economic liberty is important because it creates space for people to live out their freedom, take care of their families, and fulfill their responsibilities. Economic freedom is necessary because it allows people to take risks and create material prosperity for a flourishing life. Economic liberty is needed because without it there can be no political liberty. Both require individual virtue and a moral culture for sustenance. Neither an adolescent culture following its whims, nor a soulless culture severed from its historical roots, from the sacrifices and struggles of our fathers whose spirit and dedication to freedom made it possible, is adequate.

Lord Acton wrote, “Liberty is the delicate fruit of a mature civilization.” We must begin anew the work of rebuilding the moral culture—one committed to truth, responsibility and a spiritual depth that the Davos Man cannot provide.

Image source: JD Lasica on Flickr License: (CC BY 2.0)

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Michael Matheson Miller

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