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How the World Was Made Safe for Crony Capitalism

Tags Corporate WelfareOther Schools of Thought

11/05/2013Robert Batemarco

Editor’s Note: Beginning Tuesday, November 12, Dr. Batemarco will be teaching “The Age of Crony Capitalism” at Mises Academy. This six-week online course will examine the factors responsible for the expansion of crony capitalism at the expense of the free market.

For most of US history, crony capitalism has been in a struggle with free-market capitalism for the heart and soul of the American economy. For the past half century, crony capitalism has been gaining the upper hand. There are many reasons why, all of which can be traced to the insatiable desire of the state to gain and hold power.

As Bob Higgs has pointed out in a lifetime of scholarship, crises are the health of the state. Whether these crises are unavoidable or manufactured by the state, either deliberately or through mere bungling, the state rarely misses an opportunity to use them to its advantage.

David Stockman’s recent book, The Great Deformation, escorts the reader through a welter of ideas, institutions, and crises that the state did, indeed, use to its advantage to funnel billions of dollars from the general public into the pockets of the well-connected. Stockman’s chief culprits are the ideas of Fisher, Keynes, and Friedman; the institutions of the Federal Reserve System and the presidency; the crises of the Great Depression; the run on US gold of the late 60s; the stock market crash of 1987; and the financial crisis of 2008, to name a few.

Crises are useful to the state because they create fear and fear causes many people to agree with Theodore Roosevelt that, “In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” Acts of self-dealing that would face stiff resistance in normal times get a free pass in times of crisis, as the wrong thing becomes seen as acceptable, if not necessary. A case in point was the Reagan military build-up, predicated on an exaggerated view of Soviet offensive capabilities, which provided more money than the armed forces’ leadership knew what to do with.

Periods of easy money are also immensely fertile fields for crony capitalism. After all, the first recipients of new money benefit at the expense of the last recipients and who those first recipients are is hardly random. By keeping interest rates below their natural levels, easy money cripples the stock market’s ability to carry out its price-discovery function, which is so vital to rational economic calculation and limits its usefulness to all but speculators. In addition, easy money policy enables increased government spending and as government spending grows, so does the opportunity to divert that spending toward the well-connected.

In trying to make sense of our recent financial difficulties, a key point that most commentators miss, is that capitalism is not merely a profit system, but a profit and loss system. As unpleasant as the losses may be, they serve a therapeutic function of utmost consequence. By withdrawing that therapy, such policies as TARP, ZIRP (zero-interest rate policy), quantitative easing, and too-big-to-fail, socialize the losses of — you guessed it — the cronies of those who wield power.

As bad as crony capitalism is in its own right, it does further damage by sullying the name of free-market capitalism, the most productive economic arrangement known to man. This adds “injury to insult,” since if free-market capitalism is the cause of our problems, then the solution must be greater regulation, which generally provides even more scope for the favoritism and corruption that characterize crony capitalism.

While the problem of crony capitalism has been around since states have had favors to dispense, interest in the problem has grown in recent years. Part of this is terminology — the alliterative and finger-pointing nature of “crony capitalism” grabs the attention of general audiences much better than the more neutral sounding “rent-seeking.” But much of it is because the practice of crony capitalism has become so much more blatant in recent years, giving rise to burgeoning research on the topic. In addition to Stockman’s book, such titles asCrony Capitalism in America: 2008-2012 by Hunter Lewis; How Crony Capitalism Crushed the Middle Class and Killed the Economy: Revealing the Economics of Legal Plunder by David Gerson; Ruminations on the Distortion of Oil Prices and Crony Capitalism: Selected Writings by Raymond Learsy; Governor Richardson and Crony Capitalism by Harvey Yates, Jr.; Political Consequences of Crony Capitalism Inside Russia by Gulnaz Sharafutdinova; Crony Capitalism and Economic Growth in Latin America: Theory and Evidence edited by Steven Haber; and Crony Capitalism: Corruption and Development in South Korea and the Philippines by David Kang; to name but a few, have been published in recent years.

Of all these, David Stockman’s book stands out in that the author, as a policy insider in the Reagan administration, saw the phenomenon up close and offers a wealth of detail to which only an insider would be privy. As crony capitalism in the US seems to be attaining Goliath-like proportions, let’s hope that this David’s pen can set in motion a process that will slay the giant.

Register to attend “The Age of Crony Capitalism” here.


Contact Robert Batemarco

Robert Batemarco is now semiretired, having most recently taught economics at Fordham University.