America’s Real Choice: Cronyism or Capitalism

America appears to be at war with itself, if the Presidential campaign is anything to go by. The adverts that have saturated the airwaves over the past few weeks focus on two themes. First, President Obama’s camp has taken aim at businesses like Bain Capital for allegedly outsourcing American jobs to foreign countries. More recently, supporters of challenger Mitt Romney have pounced on a remark by the President that seemed to imply that entrepreneurs owe their success to government rather than to their own initiative. These two lines of attack reflect two separate, underlying concerns among the American people. Yet they share the same solution: a return to genuine free enterprise.

The attacks on Bain Capital play on fears that “big corporations” are taking advantage of the little guy, the working man or woman. They exploit both the job insecurity that has built up since the financial crisis and the pervasive feeling that the “one-percenters” – always portrayed as corporate executives rather than Hollywood stars or trial lawyers – have not sacrificed in this economy the way the average family has. People who have had no pay raises in years see corporations receiving bailouts that allow their executives to maintain Manhattan penthouses as they transfer the job functions of average employees abroad. There is a manifest feeling of unfairness in all this.

Similarly, the attacks on the President’s remark, “If you’ve got a business – you didn’t build that. Somebody else made that happen,” reflect a different, yet equally deep concern among the American people. There is a feeling that it is difficult to make it on your own now in America, that the long-established American dream of individual success is under threat like never before. Bureaucrats and politicians seem determined to crush entrepreneurialism. If you do succeed, it is in spite of them—and even then they continue in trying to strip you of all reward.

These two concerns might seem diametrically opposed ideologically, but there is more in common to them than one might think. To begin with, the second concern is also rooted in a feeling of unfairness – that the political system targets success unfairly. They also share a common conception of “us vs. them,” in that each portrays the unfairness as perpetrated by a distinct class that does not share the values of the mainstream.

These commonalities suggest there may also be a common solution, one that identifies the same class as being at fault, and that proposes a response that both sides would find fair.

That solution is actually easy to find. The class that is holding America back is its regime of “crony capitalists.” These are not capitalists in the traditional sense. They do not make money from risking their capital, but through the leveraging of state power to their advantage – and to the detriment of their competitors. They socialize their losses by such means as bailouts, engage in cozy, mutually-beneficial relationships with regulators, and line their pockets with government grants and loan guarantees for providing politically-favoured services like “green” energy. They are quite happy to use government money to send jobs overseas, and then come back for more with the promise of American jobs when it suits them.

How does America rid itself of such a class? Emphatically, it will not do so by adding more layers of government or more regulatory agencies for the cronies to work with. In fact, there is now a well-established career path for the cronies: write the laws surrounding your industry in a lobby shop or congressional office, administer the laws in the bureaucracy, get to know all the players in the process, and then cash out and take a well-paid job at a senior lobbying position – which largely involves asking your former colleagues for even more special perks and favours. All the while, you are erecting more and more barriers against competition in order to entrench your company’s position.

So, it should become readily apparent that the answer to both concerns is what made America great in the first place: the competitive discipline of free enterprise. If you can succeed in the market by persuading consumers – not government – to buy your product or service, you should get the rewards. If you cannot, you alone will suffer the losses. Government’s only role in this process is to protect consumers from fraud, not to protect corporations – and certainly not executives – from the consequences of their actions.

The economy as a whole benefits from such free competition. Not only does innovation produce ever more beneficial products and services, but the process of creative destruction produces more innovative new firms to replace old, uncompetitive ones. Thirty years ago, the Dow Jones Industrial Average contained firms like Eastman Kodak, International Harvester and Woolworth. If cronyism rather than competition continues to have its way, there will be much less change among the top ranks of US business in the future, and supporters of the regulatory state will be to blame.