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Crony Capitalism: Principles (Part I)

Editor note: This post will be followed tomorrow by Part II: Crony Capitalism: Practice. On Tuesday, Robert Bradley will post on cronyism in the U.S. energy industry.

To the great economists of free trade and free markets, capitalism meant laissez faire: “Let us compete free of government help or hindrance.” To Adam Smith and David Ricardo, to Ludwig von Mises and Milton Friedman, laissez faire in the phrase “laissez faire capitalism” was redundant.

But today, opponents of capitalism such as leftist MIT Professor Noam Chomsky and sociologist Jane Jacobs believe that “crony capitalism” is the redundant phrase. They believe that capitalism by its nature involves corruption of the political process to favor one enterprise over another.

What about the American public? Earlier this year, a poll by the Rasmussen firm revealed that 39 percent of those responding consider ours to be a system of “crony capitalism.” And they are right. But that does not answer the question: Does it have to be?

Defining “Crony Capitalism”

What is “crony capitalism”? The Wikipedia definition will serve: “an economy in which success in business depends on close relationships between business and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, and so forth.”

The reign of cronyism throws into relief two radically different breeds of businessman: the one who profits by innovating, producing, cost-cutting, and serving customers—and the one who prospers by means of “pull” in Washington, the state capital, or the town hall.

Crony capitalism has been around for a long time—indeed it plagued the great era of railroad building in nineteenth-century America, when huge subsidies and land grants were given for proposed lines—some never built. But the event that put the term into the active vocabulary of the American public, I believe, was the massive government intervention in private business that followed financial panic of 2008. If, today, almost 40 percent of Americans identify our system as “crony capitalism,” we may hope that they also know—or are open to learning—about the real thing.

Capitalism is distinguished from every other economic system (such as socialism, fascism, feudalism, or syndicalism) by the nature of government’s involvement in the economy. Capitalism is the economic system that emerges when government recognizes the right to private property, private enterprise, free competition, and private profit—the right, not permission or sufferance. The term “laissez faire” is added for emphasis, to make clear that when government intervenes to limit property rights, freedom of enterprise, and trade, the system is no longer capitalism. There is a well-recognized term for the new system: “a mixed economy”—a mixture of freedom and controls. It is not “capitalism” when businesses can thrive—or die—by depending upon political influence.

Those who insist that the rich and powerful always will exert their influence to extract favors and advantage from politicians and bureaucrats may welcome this advice: Devise a government strictly limited by its constitution (as the Founding Fathers did) so that politicians and bureaucrats simply don’t have the power to help or hinder business. Then there will be no use lobbying, bribing, or putting friends into office. Do not say that capitalism is impossible without cronyism until you separate government and the economy in the same absolute way that the U.S. Constitution separates government and religion.

We see, today, the result of decades and decades of relentless efforts to erode the separation of government and economy. Businessmen themselves often spearhead these efforts; they are the type of businessmen who find it easier to get a subsidy than earn a profit, easier to shackle a rival than compete. Other businessmen fight the encroachment of regulation, the taxation of some for the benefit of others, and the erection of trade barriers to “help” home industries.

Then there is a third group: Those who say that they would like to compete with rivals on strictly economic grounds but that they are forced to “fight fire with fire.” That is, they complain that rivals have acquired an economic advantage from some local, state, or national government; therefore, they need a neutralizing assist from their own local, state, or national government. Why should they allow themselves to be quietly destroyed by coercion-wielding business rivals any more than they would allow themselves to be quietly destroyed by coercion-wielding gangsters? It is a fair question.

Can One Succeed Without a “Crony”?

There is a clear and honest choice between achievement and manipulation—in principle. But today we must take care in applying that distinction. The bureaucrats’ power to help or hinder, enable profit or inflict loss, is so pervasive—at times, so decisive—that no businessman can ignore it.

We should make distinctions, and we have a touchstone. It comes from the pivotal second section of Atlas Shrugged, where Francisco d’Anconia makes one of the most cogent expositions of an idea ever penned for a fictional character. The setting is a party thrown by one of the pull-peddlers in chief—one of the swarm of men grown rich as politicians and their cronies feast on the last of the country’s wealth. Someone throws out the hackneyed phrase “money is the root of all evil,” and Francisco replies with a defense of money that pierces to the roots of human morality.

At the climax of the speech, he says: “If you ask me to name the proudest distinction of Americans, I would choose—because it contains all the others—the fact that they were the people who created the phrase ‘to make money.’ …Americans were the first to understand that wealth has to be created.”

Is a businessman, today, who is struggling to navigate through the shoals of regulations and permissions, nevertheless engaged in the creation of new goods or services, the “making” of money? Or are his negotiations with politicians and bureaucrats the activity that in itself gets the money—through subsidies, stifling of competition, or new regulations that channel profits into his business? That should be the standard of judgment.

Consider just one example: The world today is hungry for copper to build the infrastructure of new industrial civilizations in China and India. But, to open a new copper mine in the United States or Canada, say, you need permission from environmental agencies on the federal, state (or provincial), and local levels. Obtaining these permissions can require years of costly studies to satisfy hundreds of regulatory conditions.

The judges are bureaucrats at all levels, usually under pressure from dozens of conflicting lobbies. Hundreds of millions of dollars ride on their decisions. They may be ideologically opposed to “exploiting” natural resources. To surmount their dogged opposition, you may need a politician who applauds your goal and can run interference for you. The virtuous goal is to clear the path to the production of copper.

9 comments

1 Jonathan { 08.31.12 at 11:19 am }

Zowie, I recall that when I read that scene in Atlas Shrugged I ran to get my highlighter so I could remember and quote. It was a lesson and an eye opener all at the same time.

2 Walter Donway { 09.01.12 at 11:44 am }

Thanks, Jonathan. I have never forgotten the scene or the quotation, and what is happening, today, in the United States, but also in much of Europe, keeps replaying the setting and reasons for that scene. I should mention that my article, in the version you read, is much improved by the excellent editing of my brother, Roger Donway. Cheers and thanks again for commenting.

3 Walter Donway: Crony Capitalism: Principles and Practice | JunkScience.com { 09.03.12 at 1:33 am }

[...] Part 1 Cronyism differs from industry to industry. That variation depends on the extent to which a field is regulated, on how much those regulations are subject to interpretation, and, especially, on whether government is a major payer (as in medical and hospital care) or can give or withhold the permission literally to exist (as in mining or energy production). [...]

4 Kurt Keefner { 09.03.12 at 4:55 am }

Interesting article, Walter. I suspect that there is an inherent tendency toward crony capitalism. It’s the kind of think the Founders were trying to prevent when they wrote the Constitution. I am not sure Constitutional guarantees are enough to prevent it, however. (And I also suspect that you did not mean to imply that they were enough.)

What needs to happen is for the People to acquire a deep passion for real capitalism and a passionate resentment toward anyone who would try to derail it. How these feelings could be kindled is an interesting problem in practical political philosophy . . .

5 Alan Esworthy { 09.04.12 at 2:05 am }

I gently suggest substituting the Articles of Confederation for the Constitution. The latter did indeed grant Congress the power to regulate commerce (yes, I know the meaning of “regulate” has changed, but nevertheless…). The crony capitalism we suffer with today is arguably the goal desired by Hamilton & Co.

6 » MasterResource on Crony Capitalism: Principles (Part I) Crony Chronicles { 09.05.12 at 6:01 am }

[...] part series on cronyism, and begins with an article on the principles underlying cronyism. The entire piece is well worth reading, here are a few short excerpts: The reign of cronyism throws into relief two [...]

7 Kathy Hamilton { 09.05.12 at 3:54 pm }

The term Crony Capitalism may sound a tad crass to majority oh-so-polite Canadian ears. But I’m obviously not the majority, so I hope your readers might find my Unofficial Canadian translation worthy of consideration:

Up here we have “Economic Development”. In the recent past, rumours reached cupped minority ears that there were distant grumblings about potential glitches related to perceived conflicting interests.

That was around the turbulent times when the highly skilled professionals who plan and oversee comprehensive programs that drive this hot “business improvement” field for mitigating risks and failures were also given and likewise taxpayer-funded to take on the complementary responsibilities of “Sustainable Development” promotion, planning and action plan implementations pertinent to the “community improvement” field, as well.

It now appears that government sanctioning of this marriage made in heaven (or somewhere up high enough to be majority accepted as its preferred option) has reconciled any real or perceived differences for the greater good of this pair and and ensured their capacity to meet and overcome any and all such stubborn business and community improvement challenges now or in the future – Enough for all, Forever, so it has been claimed.

8 Crony Capitalism in the U.S. Energy Industry: A Brief Review | EPA Abuse { 09.07.12 at 5:32 pm }

[...] Editor note: This post follows those of Walter Donway, who authored Crony Capitalism: Principles (Part 1) and Crony Capitalism: Practice (Part 2). [...]

9 Walter Donway { 09.08.12 at 1:51 am }

Thanks for the Canadian perspective. Sounds as though your future is assured–exactly WHAT future remains the question!

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