Of Crony Capitalism and Free Enterprise

In 1991, after the fall of the Berlin Wall and as the Soviet Union was disintegrating, the current editor of The Wall Street Journal editorial page, Paul Gigot, warned,

Freedom’s main enemy now is the corporate state, private business harnessed to the coercive power of government.
(Paul A. Gigot, “Trade’s Hamlet: Will Gephardt Do The Right Thing?” The Wall Street Journal, March 8, 1991)

If that was true in1991, it is far more of a danger twenty years later. As a result of recent legislation, including the Dodd-Frank Act, the massive stimulus program, and the huge healthcare overhaul, involvement of government bureaucrats in private enterprise has never been greater in the United States, not even close. Federal officials are being endowed with enormous power in ways large and small to reward favored businesses and punish those that are not so favored, all hidden under the camouflage of acting for the “public good.”

Under Dodd-Frank, for example, federal regulatory czars are given authority to decide what lines of business financial firms can or cannot engage in, what services they can offer to customers, how much they can pay their employees, which firms will be bailed out if they get into trouble, what information private firms must provide to federal operatives, and who gets to foot the bill for all of this federal intrusion. Similarly, under the stimulus plan, hundreds of billions of dollars in federal contracts are up for award under the skimpiest of criteria, while under the new healthcare system myriads of government boards will decide who can receive what medical services at what cost and under which conditions.

It gets worse. Because these government benefits or penalties can be exercised with broad discretion by government officials, staying on the good side of the federal task masters becomes very important. Paying attention to the views and interests of government officials in other matters, even those not directly related to the legislation, can become the key to success or failure for a firm. Certainly complaints about the exercise of government discretion will not be well received. This is not hypothetical. Already it is the rare bank that will publicly complain about a decision by the FDIC, and securities firms are noticeably shy about taking issue with decisions of the Securities and Exchange Commission.

This ability of government authorities to employ the force of government to help friends and penalize perceived enemies, and to use economic levers to do so, is called crony capitalism. Crony capitalism unfairly gives capitalism a bad name. It is Third World-like. It is also old fashioned; it is pretty much the way that kings and czars ran their economies. Free enterprise and free markets will always be at war with crony capitalism.

Under crony capitalism, ownership of business may remain in private hands, but private owners share control with influential public officials. It can pay off big time for a business to get and stay on the good side of these people—whose permission and authority are keys to the success of the business. With government favor, a firm not only can win government business, but rules and regulations can be written in ways that favor the firm and disadvantage competition in the private sector. A new upstart in an industry can find trouble getting licenses, experience delays in regulatory approvals, be subject to heavy paperwork demands, face onerous financial fees and requirements, and through a myriad of techniques find his business handicapped in ways not experienced by firms in favor with federal officials.

Crony capitalism not only corrupts the relationship between businesses and the government; it corrupts the relationship between businesses and their customers. Under free capitalism and free enterprise the marketplace is the arbiter of which products and businesses succeed or fail. The multitude of individual people in the marketplace, through their multitude of individual purchases and other economic decisions, are the ultimate judges of economic success. That is to say, that customers have the ultimate say over which firms are the winners and losers, which in turn makes them, the customers, the winners from a vigorous competition among businesses to please them. It takes protection provided by the government to shield an inefficient business from the discipline of customers and markets, and that is what crony capitalism provides.

Under crony capitalism, judging winning and losing is taken away from the market place. With success derived from the ability of businesses to curry favor with government leaders whose hands are on the economic controls, it is no surprise, then, that the growth of government interference has stimulated a dramatic growth in the need for businesses to have representatives in Washington to plead their cause. Fortunately, that right of representation is enshrined in the Constitution. But it would be a good idea to reduce its necessity by re-enthroning markets and the consumers behind them as the final judges in the economy and return our government to preserving life, liberty, and the pursuit of happiness.