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Exactly What Is Crony Capitalism, Anyway?
Exactly What Is Crony Capitalism, Anyway?
December 12, 2011
Originally published in Real Clear Markets
President Obama, progressive politicians, Occupy protestors, and leftist intellectuals are having a field day attacking what they call the failures and excesses of capitalism. They declare wealth to be prima facie evidence of perfidy, making no distinction as to how it was obtained. They preach equality, not just in opportunity but in economic outcome. In their eyes, all members of the 1% are already guilty, so economic justice demands that the rich be heavily taxed, not just to lift others up, but to bring them down.
Some defenders of capitalism draw a sharp distinction between those who obtained their wealth through government favors and those who created their wealth by satisfying willing customers through free exchange. The former are called Crony Capitalists. The latter, interestingly enough, don't have a name. Let's call them Market Capitalists.
If defenders of capitalism hope to win over fair-minded fellow citizens who are honestly upset and confused, we need to define these terms and answer some basic questions. In what ways are Crony Capitalists and Market Capitalists the same and in what ways are they different? What makes the former immoral and the latter virtuous? Why are Crony Capitalists a threat to democracy and prosperity while Market Capitalists are essential to both? How is it that ever larger numbers of Market Capitalists are being corrupted, turning into Crony Capitalists? And what can we do to reverse that trend?
All capitalism is driven by greed - the desire to not only achieve economic security, but to amass pools of capital beyond one's basic needs. This capital can fuel the kind of conspicuous consumption that offends egalitarians. But it also finances investments in new products and businesses, without which the economy cannot grow. More on that later.
What makes Crony Capitalists different is their willingness to use the coercive powers of government to gain an advantage they could not earn in the market. This can come in the form of regulations that favor them while hindering competitors, laws that restrict entry into their markets, and government-sponsored cartels that fix prices, grant monopolies, or both.
Crony Capitalists are also more than happy to help themselves to money from the public treasury. This can come from wasteful or unnecessary spending programs that turn government into a captive customer, subsidies that flow directly into their coffers, or mandates that force consumers to buy their products.
Examples abound. Heavily regulated industries attract and breed Crony Capitalists, who are highly skilled at capturing the agencies intended to regulate them. Banking and healthcare top the list. Banks operate under a cartel in which the Federal Reserve fixes prices, namely interest rates. Bankers also enjoy periodic bailouts that allow them to privatize gains and socialize losses. Healthcare operates under a cartel in which the government approves new products, fixes prices, and has become the primary payer. Is it any wonder that banking and healthcare are such a mess?
The military-industrial complex long ago perfected the art of supporting spending programs far in excess of our nation's legitimate defense needs, operating under the political cover of patriotism. Much of this spending actually serves to make us less safe rather than more, a tragedy in many ways.
Agribusiness leads the way when it comes to directly looting the public treasury, operating under the political cover of helping the family farmer and securing the nation's food supply. Political fashion regularly selects additional industries to shower with taxpayer largesse. These days, the trendy color is green.
Beyond these obvious Crony Capitalists lies a slippery slope designed to attract and entrap Market Capitalists: the tax code. By setting nominal corporate tax rates high while marketing tax breaks to specific companies and industries, Congress assures itself a steady stream of campaign contributions from companies looking to lighten their tax load. While there is no shame in reducing one's tax burden from 35% to a more globally competitive 20%, is it any wonder that people get sore when some extremely profitable corporations manage to get their tax burden down to nearly 0%?
Market Capitalists do not go to Washington. They strive to please customers, not politicians. They put their own money at risk to earn their own rewards, never foisting losses on others. Because they are risking their own hard earned dollars, they are careful to invest where it makes the most economic sense, not where it curries political favor. They meet their rivals in open competition, may the best products win. They have no reason to be ashamed of their honestly earned wealth. Many are famous for their public spirit and generosity, whether it's in funding the arts or providing for those truly in need.
Market Capitalism operated unfettered for most of our nation's history, as our founders intended. Market Capitalists built our country from an agrarian backwater into the world's greatest economic wonder. Generations of immigrants, proto-capitalists yearning to breathe and work free, flocked here to build better lives for themselves and their families. Their successes are legion.
We have nothing to fear as other nations throw off the yoke of communism and socialism - and other statist schemes that come in and out fashion - and discover the virtues of capitalism, adapting it to their own people and culture. Let us meet them in the marketplace and not on the battlefield, to the betterment of all.
Instead, we have let our government grow without bound, extending its tentacles into every aspect of our lives. And we have allowed Crony Capitalism to grow along with it. Meanwhile, Market Capitalism has been battered into a defensive crouch, bogging down the entire economy. Progressives who think they can solve our problems by making government bigger and more powerful only dig the hole deeper, playing into the hands of the Crony Capitalists they claim to hate.
The only way to restore the balance so we can lift ourselves out of our economic malaise is to harness the anger of both the left and right to slash the power of Crony Capitalists and their enablers in government, while freeing Market Capitalists to do what they do best.
Class warfare is an invitation to embark on a downward spiral, fighting over an ever shrinking pie. Indiscriminately attacking the 1% rather than the specific culprits that caused our troubles is a fool's game. If we choose to play it, then we have truly become a nation of fools.