The Republican Attack On Crony Capitalism (Part 1)

He appeared to talk and behave like one of those slick, cussing comfort, we-control-the-market, wheeler-dealer smiling phonies of a certain generation of the parasitic professional ‘progressive’ political class which, under pretence of noble social ideals, cultivated and gorged atop the distended belly of a now mechanically ventilated welfare-state-on-deficit-life-support. I have nothing against the man personally. I just prefer the trim, intelligent-looking, practical, and modest man-with-a-believable-vision who talked seriously opposite.

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During last Thursday’s Vice-Presidential Debate there were some awkward moments. Here’s a deflating segment which I will use as springboard.

REP. RYAN: Crony capitalism -- (inaudible).
VICE PRESIDENT BIDEN: -- months and months. They found no evidence of cronyism. And I love my friend here. I -- I’m not allowed to show letters, but go on our website: He sent me two letters saying, by the way, can you send me some stimulus money for companies here in the state of Wisconsin? We sent millions of dollars. You know why he said he needed ...
REP. RYAN: On two occasions, we -- we -- we advocated for constituents who were applying for grants.
VICE PRESIDENT BIDEN: (Chuckles.)

“I love my friend here”? That’s a statement of corny unedifying phoniness. It's not phony like crony -- 

A crony, loosely defined, is a phony friend in a negative exchange -- implying collusion -- with whom you escape from the wife for the night, play poker, fraternise with prostitutes, stagger home drunk, and -- above all -- with whom you do shady ‘business’ deals which share with karaoke and plastic flowers the characteristic of being artificial rather than natural. (In a Smithian sense, the natural market price emerges through free competition, whereas the artificial price results from collusion and cronyism).

Is it any surprise that ‘cultural’ practices which became known as “crony capitalism” and “karaoke” and “plastic flowers” (a euphemism for prostitution) originated in Southeast Asia in the 1970s, and to this fatal day maintain their close association with Frank Sinatra’s alleged “way” of doing business?

In the 1970s and 80s during the presidency of Ferdinand Marcos, secret US Embassy reports from Manila spoke regularly of “crony capitalism” in the Philippines. Revealingly, the U.S. Embassy used the concepts of “crony capitalism” and “creeping state capitalism” interchangeably.

Here begins today’s topic with deadly seriousness ….

I remain convinced that the introduction of the theme of crony capitalism into the US presidential debate is a positive development even if it winds up embarrassing the Republicans as much as the Democrats.

There are at least three reasons why all the talk of crony capitalism in the U.S.A. is positive:

.. I ..

Anything that rouses the people’s anger against personalism in government-business relations has to be positive. You might well suppose that eventually those who attack personalism in government-business relations will be forced to think theoretically and practically about the institutional alternatives to personalism, which logically involve moving forward, with renewed vigor, on the historic road toward the something-about-governance that is impersonal and rules-based (and which I have written about in previous posts). 

The stage for fresh momentum on the path to impersonal rules-based capitalism has not yet been reached. There is no evidence to suggest that the people -- let alone most politicians and intellectuals -- are prepared ideologically for the temporary sacrifices and disruptions or discombobulation it may entail.

.. II ..

Yet the evidence is that sections of the business community ARE ready and eager for the impersonal alternatives to cronyism. I listen in on their conversation daily. I hear the pro-capitalist anti-cronyism views of leading private managers and entrepreneurs aired publicly on radio, twitter, and, to name but one, in the WSJ. It is hard to fathom why progressives on the left who are able to read and have radios should find it paradoxical or beyond belief that business pleads genuinely for a level playing field.

As recent impressive evidence for my argument I offer the following: in the Wall Street Journal the businessman Charles G. Koch has delivered an impassioned rebuke to the businesses which lobby the government for many kinds of privileges.

“Trouble begins whenever businesses take their eyes off the needs and wants of consumers, and instead cast longing glances on government and the favors it can bestow … We are on dangerous terrain when government picks winners and losers in the economy by subsidizing favored products and industries. There are businesses and entire industries that exist solely as a result of federal patronage … Far too many well-connected businesses are feeding at the federal trough.”

Business support for impersonal rules-based economic governance should come as no surprise, since it was the original driving force behind the emergence of capitalism. Max Weber documented it painstakingly in his pathbreaking work on the secular transition to modern bourgeois capitalism. He said economic entrepreneurs, in the aggregate and in the long run, fought against negative privileges since the earliest days of capitalism. They still do so out of recognition that individual or sectoral privilege obtained through political connection does not help them defend their present and future interests.

Mr Koch points out that what is now called cronyism was what we used to call rent seeking. Long before either concept was invented, Max Weber referred to this negative privilege arising when:

“A certain economic or social monopoly is guaranteed, or, conversely, when privileged status groups or monopolised groups are completely or partly exempt … A private individual by skilfully taking advantage of the given circumstances and of personal relations obtains a privileged position which offers nearly unlimited acquisitive opportunities. A capitalist economic system is greatly handicapped by these factors”.

Honest upright profit makers prefer not to be forced to compete politically for arbitrary privilege. Their ambition is not to be mere rent takers at the whim of an activist state. They “demand a clear legal system” in the knowledge that their long run interests lie in competing economically rather than politically, with the support of binding contracts that function in a calculable predictable way.

Difficulties arise, however, when activist government creates discretionary stimulus and many other forms of privilege, which more or less compel business to engage in lobbying and cronyism so as not to lose competitive advantage to their rivals. Lobbying and cronyism originate in government. Business simply learns how to deal with the situation.

Good businesses may be good enough to circumvent the cesspool of rent seekers. Unfortunately, the least competitive businesses often succumb to the prostitution ring, i.e. they become artificial flowers.

.. III ..

Most important today is the following and final point. The idea that cronyism is corrupting the U.S.A. could be useful ideologically for the purpose of winning elections. The businessman Charles G. Koch has noticed recent reports indicating “two-thirds of the electorate are convinced that crony connections explain most government contracts”.

Moreover, the Rasmussen poll which Koch cites suggests “68% believe government and big business work together against the rest of us”. A clever and trustworthy political party could harness these voters to the cause of anti-cronyism.

The respected economist Luigi Zingales has written an entire book based largely on the premise that anti-cronyism is a political winner for capitalism and for the people.

……………………………….

Who could fail to be impressed by the sincerity, courage, and wisdom of the Republican attack on cronyism? In effect, they are mounting an attack on rent seeking. As such, it is intellectually sophisticated and worthy of support from Nobel Prize contenders and past winners. I think here of Anne Krueger (who was apparently the first person to use the word 'rent-seeking') as well as her loyal supporter, James M. Buchanan. With anti-cronyism so high on the political agenda in the world’s largest economy, it could be an appropriate time to award the economic science Nobel to Professor Krueger for her extensively cited writing on rent-seeking.

I’m reminded of Buchanan’s Nobel Prize Lecture, in which he said:
“If a political agent's discretionary power to distribute rents increases, individuals hoping to secure these rents will invest more resources in attempts to influence the agent's decisions”.

That, one could say, is the nefarious road to Crony Capitalism - in a nutshell. Republicans acquiesced with it in the past. Both parties have been guilty. Yet it is the Democrats who remain unperturbed and unrepentant.

The Republican attack on cronyism suggests to any American nostalgic for the upstandingness of Reagan-style conviction politics that a back-to-basics Republican politics is rising up. The people have waited a very long time for an electable political party that promises “politics without romance”.

Anti-cronyism may help win the coming election. But, will it assist in winning ongoing support which would subsequently be required for bold tasks of simplifying regulations, amending the Constitution, curtailing government activism, incentivising entrepreneurs, and strengthening markets? Possibly not. At least not directly. Something additional will be needed to maintain ideological momentum and democratic legitimacy in the context of the checks and balances of a political system that might still remain in gridlock after the election.

In a second post I aim to overview reasons why the attack on cronyism, useful and positive though it undoubtedly is, could be limiting or misleading in the context of the foremost capitalist country. If I can muster it out of thin air (the material is in a container at sea sailing to the new home where I patiently wait without furniture -- though now with internet!) the argument will be that cronyism is the symptom of a bigger ailment.

Remember, the U.S.A. is not the Philippines.

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