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Crony Capitalism

March 11, 2015

Many works by the great Australian sculptor Geoffrey Bartlett juxtapose contrasting elements in surprising ways, delighting the senses and challenging the intellect.

 

Likewise, I wish to surprise you with the proposition that the apparent evils of capitalism are the consequences of the principles of the social democratic welfare state.

 

Many modern business corporations do not, in fact, operate in the free market. They use government intervention to provide subsidies, inhibit agile competitors, fund their research and development, give them monopoly positions, enable them to profit from extremely risky positions, and to bail them out when they become “too big to fail”. They use lobbyists to curry favours and to buy influence. By their actions, they give capitalism a bad name.

 

But what they do is not capitalism. It is not the workings of the free market. It is coercion. It is the taxing of resources from citizens who have earned them legitimately, and redirecting them to benefit powerful friends. Some have termed it crony capitalism. That at least makes an important distinction.

 

The most egregious examples in recent history were the bailing out of the Wall Street banks and the automotive companies by the US government in 2008. Hank Paulsen, Secretary of Treasury and formerly with Goldman Sachs, falsely convinced Congress that the failure of the Wall Street banks would lead to the failure of the whole American economy. The CEOs of the automotive companies famously came to Washington to plead for government help in their private jets.

 

Why does this happen? Why do politicians provide funds, tax relief, favourable contracts, and exemption from regulations etc. to large companies?  In general, it is to help with their own re-election. Most commonly this takes the form of the funding of political parties or the promise to create jobs. Sometimes the bribes are personal.

 

In modern democracies wealth is often used to influence political decisions. Developers bribe local councillors, or planning staff, to get favourable zoning provisions. In the USA, congressmen are beholden to wealthy backers who fund their expensive election campaigns. Governments bail out large companies in trouble, ostensibly to protect jobs.

 

But there is no economic logic in this.  If large, well-managed, well-capitalised companies such as Ford, Shell and Alcoa – I single these out because, in recent years, they shed jobs in my home town of Geelong – determine that their businesses are not viable, then how does it become a good investment for our taxes?  It is no different if it is Wall Street banks, automobile companies or a chocolate factory, the effect is the same. Scarce resources are diverted to win votes or to benefit wealthy friends of government.

 

In practice, the Welfare State has not worked out as intended. Most of the benefits have been captured by sections of the middle class. The principle of allowing government to enrich some persons at the expense of others is the root of the problem. The belief that one is entitled to the property of others has led to a decline in virtuous behaviours such as responsibility, love, hope, charity, prudence, justice, fortitude, thrift, diligence, industriousness, reliability, trustworthiness, courage, civility, generosity, hospitality, duty and honour.

 

Crony capitalism is spawned by the welfare state. It is the capture of state largesse by those with power.

 

It can only be addressed by being prepared to admit that the political doctrines that have given us the Welfare State have failed us politically, economically and morally.

 

We should heed the advice of Robert Nozick:

The illegitimate use of a state by economic interests for their own ends is based upon preexisting illegitimate power of the state to enrich some persons at the expense of others.

 

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More.   Read The Fragiity of Freedom: Why Subsidiarity Matters.

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