Mises Wire

Free Market Economics and Crony Capitalism

In my last post, I made light of British columnist George Monbiot’s absurd charge that today’s free market economists and libertarians are part of an establishment crony capitalist system. A “progressive” friend of mine responded by asking: “Doesn’t big business wrap itself in the mantle of free markets? If so, aren’t exponents of free markets supporting crony capitalism? Aren’t they therefore responsible for the crony capitalist practices that beset us today?

The short answer to this question is that free market economists and libertarians are no more responsible for the willful distortion and misuse of their doctrines than Jesus is responsible for the bloody wars of religion of 16th and 17th century Europe. Adam Smith pointed out two-hundred-and-fifty years ago that business owners, especially big business owners, are not generally supporters of free markets, whatever they may claim. They find its disciplines too onerous; they try to escape them through one means or another, and subverting government through crony capitalist techniques is the tried and true way to do it.

Nor is it correct to think that crony capitalism is a particular phenomenon of our own day. Yes, it has grown by leaps and bounds in recent decades, thanks to ample financing provided by world central banks. But it has always been with us.

As I pointed out to my friend, crony capitalism is as old as the human race. It is the economic system embedded in tribalism and as such has been the dominant system for all of human history. Through the ages, powerful cronies latch onto political and economic philosophies and distort them in the process, but this is just window dressing.

The first real effort to rethink and challenge the tribal crony capitalist system came from classical liberal thinkers. Laissez faire, the economic philosophy embedded in classical liberalism, was not, as most progressives have been taught, a rationalization for oppressing workers, but rather a reform movement trying to free middle class merchants from being strangled by the economic cronyism of the courts.

Laissez faire reforms made possible the industrial revolution in the UK and US. For example, when cotton first appeared in 17th century Europe, the wealthy woolen, flax, and silk cronies persuaded the French monarchy to ban it in order to protect their own businesses. Tens of thousands of people were made galley slaves or executed for importing or selling or even wearing cotton garments in France. The same attempt to ban cotton almost succeeded at the Tudor court in England, but fell short. British cotton textiles then became the basis of the industrial revolution.

Laissez faire modified the crony system in the UK and US, but did not begin to eradicate it. As we all know, the next wave of “reform,” progressivism, took the opposite tack of increasing government control of the economy. This led to what I called in my earlier post the progressive paradox: as government takes more and more control of the economy, allegedly in order to right wrongs, it leads private special interests to put more and more effort into taking over government. They usually succeed, because government does not offer much resistance. Indeed government, whatever it says, often initiates and usually welcomes the process.

Since the 1930s, the face of progressivism in economics has been Keynesian. Despite his intellectual errors and character flaws, Keynes was never personally corrupt. He would be appalled at what is done now in his name. A few cases in point: when President Obama finally got his tax increase on the rich, in the very same bill he included massive federal giveaways to favored industries donating to him. The giveaways more than canceled any revenue gain to the treasury from the tax increases. The stimulus bill, also presented as Keynesian, directed much of its money to friendly state and local governments and friendly private interest donors. A startling proportion of green energy grantees benefiting from the that bill were also friendly political donors. Despite this and many other glaring examples, the New York Times keeps telling us that the Obama administration has been scandal free.

Neither the behavior nor the excuses are what the early progressives imagined progressivism would be. It was supposed to protect the poor and middle class from the powerful. It has done the reverse.

Mont Pelerin was not, as my progressive friend thought, convened in 1947 in order to provide intellectual cover for crony capitalist practices. This is a complete fabrication and travesty of the truth. Its members were just applying basic logic to the problem at hand: if crony capitalism represents an illicit alliance of government and private interests in the economy, the only sure way to combat it is to separate economy from state, just as our constitution separates church from state.

Does this mean that we will return to allowing child labor? Of course not. Just as churches operate within a basic moral framework, some of which is embodied in law, the economy, freed of government control, would do the same. There is no discipline more severe than market discipline, which is why businesses try to escape it with government assistance. Legal constraints together with free markets, in which producers must justify everything they do to consumers, will provide far more protection for children than laws alone, especially when the government enforcers of law can be bought.

When we think about what is licit and illicit for the government to do in the economy, the key test is pricing. If the government is controlling or manipulating or otherwise trying to influence free prices, you can be sure that a crony capitalist deal has been struck behind closed doors.

A march through history in only a few paragraphs cannot be expected to shed much illumination. But in a world in which George Monbiot loudly proclaims that free market economists and libertarians are somehow supporting crony capitalism, and is applauded by fellow progressives, it is important to step back for a moment to reaffirm the truth. The simple truth, reflected in both fact and logic, is that free market economics and libertarianism are the only possible solution for the age old plague of crony capitalism.

Image Source: Ian Ransley www.flickr.com/photos/design-dog/
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