Arnold Kling  

Does This Work?

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Here is a video on Crony Capitalism. It offers a number of libertarian talking points on the issue. I agree with many of the individual points, but they are made rather quickly. The argument that regulation was intensified, not cut back, in recent decades is perhaps the most interesting and most important, but it gets only a few sentences.

My claim is that the video will sound convincing only to people who already see government as the problem. Those who think that corporations are the problem will not be persuaded. They will think in terms of campaign finance reform or more regulation or greater independence of regulators as the answer. They will view this video as the product of people who are blinded by free-market ideology and thus cannot see instances of market failure.

For people who are suspicious of capitalism, I think this sort of statement will confirm their suspicions without altering their view of government. I don't think it will win them over to the idea of limited government.

Not that I have any magic solutions for winning people over to the idea of limited government. My preferred approach is to focus on the limitations of individual humans and human institutions. I see supporters of government intervention as enchanted by an implicit sense of government perfection, and my goal is disenchantment.

For example, I like to start the discussion of health care policy by saying that each of us individually would like to have unlimited access to medical services without having to pay for them. However, we cannot make that work in the aggregate. Pretty much everyone gets that. By itself, it does not convince you (nor should it) that health care should be mostly a market-provided affair. But it takes the argument away from "greed" vs. "the right to health care" and instead frames the problem in terms of limited resources.

Along these lines, I would rather talk about barriers to entry than "crony capitalism." I would point out that when firms receive subsidies, bailouts, and regulatory protection, competition gets stifled. I would point out that as firms grow to depend on government favoritism, they naturally expand their lobbying efforts and use their clout to protect their market position. Potential new entrants find it too costly to compete, and ultimately consumers are made worse off, not better off.

In a sense, the poster child for crony capitalism might be Harvard, not Goldman Sachs. The incumbents in the higher education industry benefit from a vast array of regulations and subsidies.

For another way to discuss capitalism (and make the point about crony capitalism en passant, listen to the latest podcast with Russ Roberts and Mike Munger.

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CATEGORIES: Political Economy

COMMENTS (10 to date)
Rick Hull writes:

I usually refrain from mere back-patting in the comments, but these are important, insightful, yet subtle points being made here. Much appreciated.

mdb writes:

I have found an effective point to make with people is to ask how many comments they have submitted during the public comment period of any new proposed regulation. Then ask if they knew anyone that has every commented. Then ask if they think anyone affected by the new regulation commented. Then ask do you think the regulatees met with the regulators. and on and on. Usually their knee jerk reaction is there should be no public comment, edicts should be decreed and followed - but most see the stupidity of this even before they finish the sentence. There is no hope for the hard core believers.

Tom West writes:

I think one of the primary problems in the fight for limited government is that it is very difficult to fight against someone who claims to represent your interests and you actually chose on a regular basis (i.e. the politicians).

Businesses, on the other hand, can only claim that they serve your interests as a by-product of their primary goal - making a profit. Of course, the fact that (collectively) your patronage controls the fate of businesses probably escapes many people. What percentage of customers think they're the one's calling the shots with the majority of businesses they interact with?

Thus if you don't believe that you have any power over businesses and you believe you *do* have some control of government, are you really going to want to weaken the only thing standing between the powers that want to take all your money (and pay you nothing!) and the power that represents your interests?

It's a simplistic analysis, but I do think it reflects the rough thought process that causes limited government to have limited appeal.

John writes:

The video is titled "Cronyism," not "Crony Capitalism," but I make the observation to point out that it's still capitalism, e.g., it's not "crony socialism," for example.

One speaker on the video asserted that the only way a plutocrat could force a customer to do something against their will was to involve government. I guess he doesn't understand what makes a monopoly a monopoly.

I don't like the idea of governments regulating private enterprise any more than do "free market" advocates, but I do see an alternative, as a socialist, and that alternative is public ownership with democratic control and management.

If WalMart, health care insurers, oil companies, and the like were public institutions operating much on the model of the USPS, a measure of true democratic control would be possible, not to mention that they would provide public revenue which is an alternative to taxation. And they wouldn't need external regulation as much as democratic management policy. External regulation simply sets up adversarial conditions, and thus inefficiency. Public ownership offers the possibility of avoid that adversarial condition (where normal operations of an enterprise are concerned, at least; accountability is a different issue, but I think it also benefits from public ownership and democratic control).

I agree about human limitations - what become slippery slope arguments against government intervention. But those apply even more so to monopoly-scale private institutions in my view. And moreover, the worst case is government control of means of authority - i.e., the military. Heaven forbid the free market advocates ever realize that an entirely mercenary military is more consistent with their ideology...

BZ writes:


WOW .. where to start. Hmmm.. too much, I'll sum up:
1. Public Choice problems.
2. Incentive problems (everywhere from Plymoth, to the famous USSR saying "We pretend to work, they pretend to pay")
3. Knowledge problems (see Hayek)
.. will think of others as soon as I post this. :)

On your military point. Amen -- ever heard of a libertarian? Visit and meet some. However, as Mao and Stalin proved, how you gonna take away my freedom to contract my labor without a gun in my ribs?

James writes:


As it happens, most corporations are already subject to some amount of democratic control by their shareholders in addition to "market forces" which are really just the decisions made by the people who buy their products. I take it you don't like how that's working out.

The difference between the status quo and what you propose is that existing shareholders would be diluted and the right to vote on company policies would be extended to people who never paid for an equity stake and don't buy the product. Why do you expect better decisions to arise from that arrangement?

JKB writes:

A better poster child for crony capitalism might be Mattel. We'll assume their importation of lead contaminated toys was inadvertent, although a direct violation of existing law in 2007. It did cost them a few million but the resulting legislative action, put small competitors out of business at marginal cost to Mattel to set up a testing lab and discouraged the resell and donation of toys, increasing demand for their new products.

Assuming no intent in the first place, Mattel's actions prompted government action that damaged their competitors severely. I couldn't find a reference through Google, but I wouldn't be surprised to find Mattel PR promoting testing of toys as a strategy in their lawsuits and PR campaign.

Ted Levy writes:

John: "One speaker on the video asserted that the only way a plutocrat could force a customer to do something against their will was to involve government. I guess he doesn't understand what makes a monopoly a monopoly."

I guess he does...monopolies are defined by grants of government power. Monopolies are maintained by government prohibition of competition. See, for example, the East India Company. Here's Wikipedia: "The Company was granted an English Royal Elizabeth I on 31 December 1600...After a rival English company challenged its monopoly in the late 17th century [that is, almost a century later.]

JKB writes:


You miss one important difference between government agency/institutions and the private sector. Government institution may not do anything they are not specifically authorized to do beforehand. Some authorizing legislation has gotten broad but still they are limited in innovation and seeking new revenue streams. The private sector may do anything that is not specifically forbidden. The regulators try, possibly simple due to the world they live in, to impose the pre-authorization restrictions on the private sector. But as with the personal computer, the private sector finds areas and products the regulators miss. Note that it was a big, pre-authorizing bureaucracy at IBM that gave away the store to Microsoft.

You cite the USPS as an example. But remember, their area of business is monopolized by law, i.e., home delivery of mail. Also, folklore has it that the founder of FedEx's economic paper at Yale that was the idea for FedEx didn't get high marks, possibly a C.

As for say, government ownership of Walmart, how do you propose to accommodate the small competitors? Or do you see their being one government store like the company stores in coal mine towns?

R Richard Schweitzer writes:

Currently re-reading Mancur Olson's Rise and Decline of Nations gives a broader perpective to the "collusions" (as he labeled them) which are the defining elements of "Crony Capitalism."

It is more difficult to keep politics out of money than it is to keep money out of politics.

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