Beyond Cronyism: Positive and Negative Privilege

Once upon a time, in the undesigned market, economics was simple. The are no mysterious mechanical forces. There is no anonymity; there is me and you and Bill and Joe and all the rest. And each of us is both a producer and a consumer ... The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer. The consumers determine what has to be produced. If a businessman does not strictly obey the orders of the public as they are conveyed to him by market prices, he suffers loses, he goes bankrupt... (Ludwig von Mises, Human Action).

You would be forgiven for assuming the captain is now the state, an engineer who knows little about rules of the sea and ropes the entrepreneur to the mast. Yet economic life is not so simple. A complicated situation arose due a sociological law described by Popper in The Poverty of Historicism: “You cannot, in an industrial society, organise consumers’ pressure groups as effectively as you can organise producers’ pressure groups”.

Concepts matter beyond words -- the philosopher Immanuel Kant showed -- because the a priori concept categories we employ tend to organise the way we see a problem. The concepts to deal with in this post are ‘cronyism’ and ‘privilege’.

My misgivings about the Crony Capitalism theme in the politics of some of the developed countries stem from it being a partial insight rather than a universal insight into the present danger.

A focus on the personalistic nature of ‘cronyism’ might take some attention away from other negative dimensions of the government-business relationship. Cronyism suggests a close connection -- “friends and associates, without proper regard to their qualifications”. Yet a corporation can lobby government for protections or subsidies without any personal exchange of favours taking place, and still the process might fail any reasonable test of impersonality, impartiality, and disinterest.

Nor can the ‘crony capitalism’ concept help explain equivalent patterns of negative privilege in the government-citizen relationship, such as welfare entitlements.

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So, an obvious replacement concept for cronyism is the entitlement to privilege.

It’s not semantic. ‘Privilege’ is a universal aspect of social relationships which threaten capitalism. Yet focusing on privilege has another and ironic advantage. It encourages the distinction between positive privileges of freedom and equality before the law, and negative privileges of restriction and protection against the market. A person positively privileged to be born in a free society abuses society by accepting negative privilege.


The Argument - it’s going to be upsetting:

The trend in the advanced capitalist societies is for virtually everybody to be actively seeking or accepting entitlements from the state to be protected from the market, or, alternatively, to be compensated for disadvantages that may result from the normal working of market competition. The almost universalistic tendency toward negative privilege is a post-socialist disease eating away at the body politic of capitalism.

The Examples:

If you look at this issue objectively and leave aside the question of whether any specific entitlement is or is not morally right or socially just, I think you will be forced to admit that in each case the issue is at root the entitlement to evade the full force of the market:

1: Government-to-Business Entitlements to Privilege
A lot of what is now called “cronyism” for electoral and ideological convenience is simply the old-fashioned policy of picking winners or growing winners with subsidies and other protections against the vagaries of the market place. Activism is ‘justified’ in the national interest. Often, however, it is the passive response to interest group pressure. In the U.S.A., whether it’s the subsidisation of ethanol production, pressures to repeal the Glass-Steagall Act, excessive penalty for personal bankruptcy and default, protections for risk investors, incentives to bailout corporations and banks, or subsidies to startups, the bottom line is that some groups and individuals get shelter from the competitive environment.

2: Government-to-Citizen Entitlements to Privilege
“Today, entitlement spending accounts for a full two-thirds of the federal budget” according to a book released today. Everyone accepts the need for a welfare safety net. Yet in fact entitlement spending goes largely to the middle class, people whose employment and retirement income is supplemented by redistributions of their own or other people’s taxes through complex deductions, rebates, exemptions, and a sea of subsidies affecting prices of all goods and services inside and outside the home. Almost everyone lives with one foot in the economy and the other foot in the state. People escape full experience of the market as consumers and producers in an artificial reality of uneconomic cross-subsidies. Welfare privileges are justified as public interest. Often, however, they only buy votes.

3: Society-to-Government Entitlements to Privilege
People have many rational reasons to vote, and they might do so for the political party that offers the most rational entitlement package in return for the privilege of bearing state authority to rule for a defined period. Many incentives operate, and one of them is for business people who enter politics to knowingly or subliminally protect the interests of their group. A grand bargain for the future may be one in which politicians and business give up their privilege entitlements in return for citizens giving up theirs. The playing field would be levelled and the threshold for entitlement to the privilege of state protection from the price mechanism and market competition would rise to the level of a modern safety net.


Thinking about the Positive and the Negative Privileges

There are some economic privileges which, if given to every person, leave every person poorer and vulnerable to system failure. There are some political privileges, which if given to every person, make every person self-reliant and prepared for system failure.

In my last post I quoted Max Weber on negative privilege, to which can now be added his comment that whenever the state finances itself through taxes that grant privileges such as exemptions or require differential contribution according to particular circumstances of property, income, occupation, or monopolistic entitlement, historically this has “contributed to the closure of social and economic opportunities, to the stabilisation of status groups, and thus to the elimination of private capital formation”.

Weber in Economy & Society defined the positive privileges thus:

“[They] are of two main kinds: The first is constituted by the so- called freedoms, i.e. situations of simple protection against certain types of interference by third parties, especially state officials, within the sphere of legally permitted conduct; instances are freedom of movement, freedom of conscience, or freedom of disposition over property. The second type of privilege is that which grants to an individual autonomy to regulate his relations with others by his own transactions. Freedom of contract, for example, exists exactly to the extent to which such autonomy is recognised by the legal order.”

Mises in Human Action said negative privileges stem from “government restrictions”:

“It is, of course, possible to protect a less efficient producer against the competition of more efficient fellows. Such a privilege conveys to the privileged the benefits which the unhampered market provides only to those who succeed in best filling the wants of consumers. But it necessarily impairs the satisfaction of the consumers. If only one producer or a small group is privileged, the beneficiaries enjoy an advantage at the expense of the rest of the people. But if all producers are privileged to the same extent, everybody loses in his capacity as a consumer as much as he gains in his capacity as a producer.”

My own description in Capitalism, Institutions, and Economic Development went like this:

"Positive privileges include property and contract rights that permit universal economic freedoms subject to rule of law. Formal rules of economic freedom are created to ensure that economic outcomes can be decided peacefully by competition and compromise among economic actors without direct intervention by the state. Negative privileges constitute prescriptions or prohibitions that relate to particularistic economic claims, and limit economic autonomy or economic freedom. If the latter are subject to rule of law, it is law created for the purpose of granting particularistic and exclusionary privileges."

Now, as in The Argument stated earlier, I’m extending the concept of negative privilege to non-needy beneficiaries of state entitlement, and retaining the positive privilege for a minimum welfare safety net. To paraphrase Mises, if all citizens are privileged to the same extent by entitlements to state protection against the market or compensation for the effects of natural risk and competition, everybody loses in his or her capacity as citizen.

I have an image in mind of The Modern State as a harassed mother or father who spends their entire life dividing up presents in a house with an infinity of children and rooms where every day is Christmas. As a child I lived in America. When we got back to England I’d sit with my dad and listen to Alistair Cooke’s Letter From America on the wireless. I have vague recollection of episodes about “pork” and Christmas. Maybe this explains the image [Cooke 2003].

So, who is going to explain to voters that if businesses and politicians are to lose entitlement privileges they, the voters, must lose entitlement privileges also?

A Grand Bargain Script: Mr Romney, we would like a successful entrepreneur like you to be at the helm steering the ship. But, don’t forget Mr Romney, We Are The Captains. Here’s the deal, take it or leave it. You promise never to do this stuff [cronyism] or this stuff [cronyism], ever. All the deputies and members of the legislature will sign a pledge to give up pork [pork] [sinful pork]. In exchange, we upstanding Citizen-Consumer Captains -- the CCCs -- will give up all this stuff [entitlements]. Done deal?;

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