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Category — Corporate Governance

Gabriel Kolko and ‘Political Capitalism’

“Political stabilization … allowed men to relax, to hope that crises might be avoided, to enjoy the bountiful fortunes they had already made.”

- Gabriel Kolko, The Triumph of Conservatism (New York: The Free Press, 1963), p. 285.

“Ironically, contrary to the consensus of historians, it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.”

- Gabriel Kolko, ibid., p. 5.

Gabriel Kolko, a New Left historian who popularized the term political capitalism, and documented the role of business in initiating and furthering government intervention in the free-market economy, died this week at age 81.

I have mixed feelings about Kolko (1932–2014) as a scholar. (I never personally met him.) I grew up taking his work at face value, following my intellectual mentor Murray Rothbard. Kolko also provided a very nice endorsement of my Capitalism at Work: Business, Government, and Energy (2009): “Fascinating, comprehensive … far surpassing my own history of political capitalism in the 1960s.”

But as I studied Kolko more and more, and prodded by my esteemed colleague Roger Donway, I began to find problems in his black-and-white interpretation of applied political economy in the United States. History is a lot more messy than Kolko’s Marxian framework allowed. It was not “big business” that always resorted to the political means (versus the economic means) to success; it could be (and often was in the oil and gas industries) smaller firms that through their trade associations lobbied for, and received, special government favor.

My three iterations of Kolko go from laudatory (main text of Capitalism at Work, pp. 120–21; 160–66); to mild criticism (CAW appendix, “‘Gabriel Kolko’s Revisionism Reconsidered,” pp. 336-342); to serious reservations in this Independent Review essay, “Reconsidering Gabriel Kolko: A Half-Century Perspective.”

Readers of MasterResource who follow the wind and (on-grid) solar industries will find Kolko’s findings about crony capitalism (not his term) common sense. BUT these two industries are government dependent; consumer-driven industries have a much more complex interaction with political bodies. And it is here that Kolko’s rigid theory-to-history rather than history-to-theory approach leads him astray.

Here are some of my favorite Kolko quotations that I can generally support. Buyer beware on some of his specific examples during the Progressive period. [Read more →]

May 21, 2014   1 Comment

America’s Growth Corridors (walking away from CO2 regulation)

“Your right to vote is guaranteed. However, it seems voting with your feet is often more effective.”

The familiar Red State–Blue State map is a symbolic means of quickly communicating political preferences. The maps aren’t meant to be predictive of job, economic, or population trends, yet a recent think tank’s report suggests the metaphor may have broader significance.

The Manhattan Institute for Policy Research released in February America’s Growth Corridors: The Key to National Revival, which describes the future growth of our economy in terms of “growth corridors.”

The economic and population trends reported look remarkably like the iconic election night map with Blue States (my analogy, not the authors’) defined as strips along the Pacific and Northeast Atlantic coasts and along the shores of the Great Lakes. The Red States are those located along the “Third Coast” bordering the Caribbean, the Intermountain West, the Great Plains, and the Southeast Manufacturing Belt.

The report calls these four regions “America’s Growth Corridors,” representing 45% of the nation’s land mass and 30% of its population.

Diverging Directions

Conventional wisdom tells us businesses prefer regions with a sufficient labor pool, real estate, reasonable cost of living, relatively low taxes, and a regulatory climate conducive to business. Availability of low-cost energy has also jumped near the top of that list. It’s no surprise that recent data suggest employers uniformly favor the Red States over the Blue States when locating new businesses. However, that trend is indicative of a major economic shift now under way with the country, particularly with job creation and manufacturing of goods.

The energy industry has led the nation in job creation over the past decade. Oil and gas extraction jobs alone, predominately located in the Red States, have increased over 27% since early 2008, producing the highest number of jobs in that industry since late 1987. Moody’s Analytics reports that the oil and gas extraction industry created more than one million jobs since 2002, out of the 2.7 million jobs created across the entire country over the same period! [Read more →]

April 17, 2013   5 Comments

Cronyism on Trial: Introducing Crony Chronicles.org & Study of American Capitalism Project

“How is any American going to feel good about reforming Medicare, Medicaid and Social Security when … businessmen are making off with so many tax dollars?”

- Richard Fink (Koch Industries), quoted in Bill Wilson and Roy Wenzl,The Kochs’ Quest to Save America,” Wichita Eagle, October 13, 2012.

A major political-economy theme at MasterResource is how government intervention stifles value-creating entrepreneurship, or, in the case of mineral resources, resourceship.

MasterResource has chronicled the sorry history of government trying to turn energy losers into winners. Last year alone, this site published 60 blog-posts on the history, operation, and current politics of (government-enabled) industrial wind power. And who can forget Solyndra on the solar side, a name that might enter the textbooks as the Teapot Dome of our time.

Special government favor to wind, solar, ethanol, and battery/electric vehicle companies is a leading area of cronyism today. Coming on top of the major bailouts of 2008/2009, exposing and understanding cronyism has become a major initiative.

Crony Chronicles

Enter Crony Chronicles, which describes its mission as follows: [Read more →]

March 29, 2013   4 Comments

“THIS AGREEMENT WILL BE GOOD FOR ENRON STOCK!!” (Enron’s Kyoto memo turns 15)

Last week, a Hall of Shame cronyism memo turned 15 years old. Dated December 12, 1997, it was written from Kyoto, Japan, in the afterglow of the Kyoto Protocol agreement by Enron lobbyist John Palmisano.

Global green planners such as Palmisano were euphoric that, somehow, someway, the world had embarked on an irreversible course of climate control (and thus industrial and land-use control). His memo reflects the train-just-left-the-station mentality, as well as the specific benefits for first-mover ‘green’ Enron. Enron, in fact, had no less than six profit centers tied to pricing carbon dioxide (CO2), and seven if CO2 were capped and traded.) The story of Enron as the darling company of Left environmentalists has been well told elsewhere.)

The Washington Post broke the memo soon after Enron’s demise, showing how Enron was hardly a free-market, capitalistic company.  “[Enron] chairman Pushed Firm’s Agenda With Clinton White House.” Indeed, Enron was “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business” [Jeremy Leggett, The Carbon War (Penguin, 1999), 204.]

The Kyoto Protocol, also 15 years old this month, and now at the expiration of its 2008–2012 (non)compliance period, is predictably on life support, a topic which will be examined next week.

Here is Palmisano infamous memo, 15 years old last week. [Read more →]

December 24, 2012   No Comments

Crony Capitalism in the U.S. Energy Industry: A Brief Review

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

America’s energy industries (oil, gas, electricity) have been a bastion of crony capitalism for much of their history. Leading gas and electricity firms sponsored state and then federal public-utility regulation during the Progressive Era and New Deal. Like other so-called public utilities, they welcomed the prospect of making commission-approved “reasonable” profits in an entry-restricted environment rather than taking their chances in open-entry markets.

The U.S. coal industry also longed for federal aid. “The bituminous coal industry has been one of the most chaotic industries in the United States in recent years,” an Ohio University professor wrote in 1940. “Because of this lack of order it has recommended itself to the Nation as an industry urgently in need of social control and, as a result, it has come to serve as a significant laboratory for experiments in certain types of government regulation.” The industry was too competitive, he posited, necessitating “minimum price regulation … to prevent excessive exploitation of the industry by its consumers in other industries which are in a better position to exercise a sabotage of production.” Coal producers could not have been happier with what at least one Ph.D. economist was saying.

On the other hand, integrated and independent oil companies were against public-utility regulation. Cost-based rate ceilings were not considered compensatory for the risk of exploration and production. And gasoline service stations could hardly be cost-and-entry regulated without regulating refiners, and, in turn, producers. Still, crony capitalism roared in with the oil gushers in the 1920s. The quest for stability began with state efforts to limit oil production to “market demand”—a regulatory regime called market-demand proration—to achieve a price of one dollar per barrel (about $12 per barrel today). [Read more →]

September 4, 2012   10 Comments

Crony Capitalism: Practice (Part 2)

Editor note: This post follows Part I’s Crony Capitalism: Principles. On Tuesday, Robert Bradley will post on cronyism in the U.S. energy industry.

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).

Today, a Wall Street firm will contribute millions to the election of Democrats and Republicans, because it dares not risk lacking “access” to the White House and Congress. The firm’s “investment” has nothing to do with innovation, production, or meeting demands of customers. It may be buying protection against political power in exactly the way a restaurant owner in Brooklyn must buy “protection” when the mob comes seeking a cut of his profits. Or it may be buying the political influence to shape regulations and taxes in ways that give it an advantage over competitors.

There also are corporations virtually built on government influence, for whose executives lobbying is a “core competency.” In 2008, Fannie Mae and Freddie Mac, the biggest mortgage-financing firms in America, were publicly owned, profit-making companies, listed on the New York Stock Exchange.

They also were creations of government (designated “government sponsored enterprises”). In the run-up to the 2008 financial panic, they spent huge sums lobbying Congress to win permission to leverage their mortgage investments far beyond limits set on any private bank. They purchased and “securitized” huge numbers of mortgages from banks—enabling those banks to lend still more. Investigations into the complex causes of the real-estate bubble and the deceptive packaging of sub-prime mortgages—and thus the financial panic and recession that followed—routinely point to the role of “Fannie” and “Freddie.” [Read more →]

September 1, 2012   7 Comments

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. [Read more →]

August 31, 2012   9 Comments

Milton Friedman’s 100th: Exploring His Wisdom for the Ages (Part III: Political Capitalism)

[Ed. note: Milton Friedman's views are also explored in Part I of this series (worldview) and in Part II (energy).]

“The two greatest enemies of free enterprise in the United States … have been, on the one hand, my fellow intellectuals and, on the other hand, the business corporations of this country.”

- Milton Friedman, “Which Way for Capitalism?” Reason, May 1977, p. 21.

The above quotation is striking, not so much for the ‘fellow intellectual’ part but for ‘business corporations.’ We often think of business in the same breath as ‘free enterprise,’ right?

But on closer inspection, and with the Bush/Obama bailouts, cronyism, or crony capitalism, is in focus. And Friedman’s above Reason quotation from 35 years ago is more understandable.

I have a whole website dedicated to the subject of political capitalism. I speak on this subject regularly to groups like the Bastiat Society, a group that is “building an international society of principled wealth creators.” In many of these talks, I share the Milton Friedman quotations from below.

Political Capitalism

“With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves.”

- Lecture “The Suicidal Impulse of the Business Community” (1983); cited in Filters Against Folly (1985) by Garrett Hardin ISBN 067080410X.

“Few U.S. industries sing the praises of free enterprise more loudly than the oil industry. Yet few industries rely so heavily on special government favors.”

- Milton Friedman, “Oil and the Middle East,” Newsweek, June 26, 1967. Reprinted in Friedman, An Economists Protest. Glen Ridge, NJ: Thomas Horton and Daughters , p. 21. [Read more →]

August 3, 2012   7 Comments

Bootleggers, Baptists, and Utility MACT

The “Bootleggers and Baptists” theory of regulation, coined by Bruce Yandle in 1983 in Regulation magazine, uniquely explains what otherwise would be considered bizarre coalitions between moral crusaders and morally indifferent businesses.

In a later telling, Yandle explained how the theory

draws on colorful tales of states’ efforts to regulate alcoholic beverages by banning Sunday sales at legal outlets. Baptists fervently endorsed such actions on moral ground. Bootleggers tolerated the actions gleefully because their effect was to limit competition.

One such unholy alliance has emerged between environmentalists and some utilities in the context of the Environmental Protection Agency’s recent Utility Mercury and Air Toxics Standards (Utility MACT) rule.

Those unfamiliar with the Bootleggers and Baptists theory may conclude that those compliant energy companies are enlightened at long last. But those who know the theory will take a more cynical view.

Shakespeare once wrote, “Misery acquaints a man with strange bed-fellows.” Apparently, so does Utility MACT. [Read more →]

May 29, 2012   2 Comments

Professor Hicks’s Business Ethics Course (Loyola Chicago’s MBA class in for a real treat)

MasterResource is about energy (the master resource). But our ‘free market energy blog‘ is also about the economic system of market capitalism versus political capitalism. In fact, under the category Corporate Governance, entries can be found for

And so it was with great interest that I found out that Stephen Hicks, a Ph.D. philosopher in the Objectivist tradition, is teaching a course on business ethics to MBA students at Loyola University Chicago. Loyola’s business ethics program is considered one of the finest in the country, and, in fact, was ranked first in the country last year by BusinessWeek.

Professor Hicks is not your average philosophy professor. His thought is firmly planted in the real world, being a student of business practices, the dynamics of capitalist progress, and the dynamics of government intervention (how one regulation leads to another).  Hicks is expert in both Austrian-school and public-choice economics to these ends.

Professor Hicks’s Syllabus description follows. [

May 24, 2012   8 Comments