fbpx

The New Cronyism of the Old Rent-Seeking State

Michael Greve’s essay vividly describes some deeply troubling trends in the relationship between the government and the economy. It provides a much needed perspective at a time when politics and policy-making are nothing if not adversarial, and more casual observers succumb to the temptation simply to choose sides without asking how we came to this ugly state of public affairs and where it might be headed. At the same time, however, I fear that Greve’s coinage of “adversarial corporatism,” however apt, will be too often misunderstood. Like “crony capitalism,” it will lead those who inhabit the shallow news-bite space (and the twitterverse that is rapidly replacing it) to conclude that corporations and capitalists must be the root of the problem.

What else to call the phenomenon that Greve describes, though? What other “isms” come to mind? Pace Mussolini (“Fascism should more appropriately be called corporatism because it is the merger of state and corporate power.”), we might be tempted to go back to calling it fascism. But that word now carries too much baggage to be useful in this context.

On the Goodness of Governance

“Populism” certainly is one of the threads that contribute to adversarial corporatism. But the word doesn’t add much; isn’t populism always adversarial? “Adversarial governance” has more promise. Despite its seductive can’t-we-all-get-along-and-share-nicely aspect, in practice governance can be as adversarial as the politics from which it springs. It seems unreasonable to oppose governance per se – even corporations need good governance, do they not? Yet we hear in phrases like “governance of the oceans,” or of outer space, a disturbing undertone of ubiquitous overbearing bureaucracy.

Consider, for example, the Tobin Project, a Harvard-centered (but not affiliated) network of scholars examining some of the same questions that Greve addresses. Its research inquiry on The Corporation and American Democracy seeks a better “collective understanding” of “what worked and what didn’t for the economy, society and polity.” (Note: to study polity is to study politics while ignoring all the blood-sucking insects.) Their premise is that “contemporary scholarship has not adequately examined the possibilities for constructive governance of the economy.” It’s tempting to ask how deconstructive governance might differ from what they propose, but let’s not go there.

Governance of the economy appears to mean subordinating economic actors to their political masters. The Tobin Project notes that “Citizens United v. FEC reignited impassioned debate on how accountable corporations are, and should be, to the democracy.” Strangely, I find the most disturbing word in that sentence to be the monolithic “the.” In the more recent Hobby Lobby case, an amicus brief filed by two Tobin scholars cautioned the Supreme Court against being too generous in granting constitutional rights to corporations.

Accountability appears not to be a two-way street, however. Tobin scholars are also tackling the problem of how to make regulatory agencies less susceptible to regulatory capture, but they don’t see it quite the way that Greve does. Elizabeth Warren was a participant in the Tobin Project. The CFPB is one of their success stories – a regulatory agency that has slipped the surly bonds of being accountable to anyone.

This is at the core of the Progressive conceit: corporations should be regarded as public utilities – effectively public servants – accountable to public agencies who themselves need to be insulated from any sort of base influences. In Ashbacker v. the FCC (1945) Justice (and former New Deal architect) Felix Frankfurter filed a revealing dissent. Surely, he argued, Congress did not intend for such an important federal agency to be distracted by having to adjudicate a petty commercial dispute between Mr. Ashbacker and Mr. Fetzer over the ownership of a radio license. Yet it cannot be avoided; when government chooses to make economic decisions, it must necessarily contend with economic interests. And then economic competition, so beneficial in the marketplace, in the halls of government becomes a mischievous force. Agency capture is best viewed as a symptom of a pathological condition; if you try to suppress the symptom without addressing the underlying pathology, you may simply make things worse.

Bootlegger and Baptist Coalitions

One way to view the contradictions of the give-with-one-hand-take-with-the-other style of governance is to recognize it as theater, designed to hold together the Bootlegger-and-Baptist (“B&B”) coalitions that sustain the administrative state. Bruce Yandle originated the theory:

Durable social regulation evolves when it is demanded by both of two distinctly different groups. “Baptists” point to the moral high ground and give vital and vocal endorsement of laudable public benefits promised by a desired regulation. . . . Bootleggers, who expect to profit from the very regulatory restrictions desired by Baptists, grease the political machinery with some of their expected proceeds. They are simply in it for the money. “Bootleggers and Baptists in Retrospect,” Regulation 22 No. 3.

Politicians, who need both votes and money to survive the electoral process, will search for ways to form effective B&B coalitions from these seemingly opposite factions. Never mind politicians; administrative agencies themselves will strive to create the demand for their services from both groups, in order to ensure their own survival. This will mean lots of ritual, and sometimes real, combat to please the Baptists, and a symbiotic, if tempestuous, relationship with the regulated industry. The cop will be visibly on the beat, and less visibly on the take.

Feudalism

Greve’s essay brings one more “ism” to mind: feudalism. What does it have to do with what he describes? Bear with me; having just read Thomas Piketty’s Capital in the 21st Century, I have been contemplating the feudal origins of capital. Piketty’s thesis is that, because returns to capital typically exceed the rate of growth (“r>g”), it naturally becomes concentrated, causing intolerable inequality. Twentieth-century wars disrupted this long term trend, but he predicts that the present century will come to resemble the eighteenth, with the bulk of capital held by only a few.

Of course, Piketty recognizes that, “The nature of capital has changed: it once was mainly land but has become primarily housing plus industrial and financial assets. Yet it has lost none of its importance.” (p. 119) And none of its allure, he might have added. For Piketty, the villains of capitalism are the idle rich – not those who accumulate wealth by entrepreneurship, but their heirs living passively off the wealth they inherit, and are able to grow without effort. But surely Piketty’s passive rentiers are relatively harmless compared to rent-seekers, who actively destroy wealth by deploying force – the force of government – in its pursuit. The book pays little attention to rent-seeking phenomenon, or, indeed, to any of the incentive effects that are the heart of economics. By focusing only on capital accounting, Piketty has missed some important lessons.

In the eighteenth century, if you held title to a large amount of land, chances were good that you also held a corresponding title of nobility. And with that, you often got a military uniform. This is because, in medieval Europe, land was acquired by conquest and defended by force of arms. To hold realty was to be part of a complex system of allegiances and alliances that were economic and cultural, and even familial; but that were also, of necessity, partly military in character. The concentration of capital in France and England did not arise from Piketty’s economic law that “r>g,” but from the logic and logistics of medieval warfare.

And at the apex of the pre-revolutionary system of property sat the crown. Rents due to landowners, and taxes due to the royal treasury, shared the same origin. In both England and France, the pattern of land ownership and the system of government traced their roots to the same violent past.

All of this – not only the form of government, but also the nature of capital – changed in the upheavals at the end of the eighteenth century. The change was most clear in America, where land was relatively cheap, the rewards to innovation and entrepreneurship were high, and the social constructs of the old world were easily discarded. The sociologist Henry Glassie described it this way: “The American pattern [of settlement was] set in rural Virginia, the world’s first purely capitalistic landscape.” (“The Rural Landscape,” Forum Journal, The National Trust, Winter 2003.)

It’s a striking phrase, but what exactly is a “capitalistic landscape,” and how does it differ from what came before? As it happens, I live in a colonial village in rural Virginia that somehow survived intact, and, along with my neighbors, I have been researching this question for twenty years. More on this topic another day, perhaps. For present purposes, I will just note that, simultaneous with the industrial and political revolutions at the end of the eighteenth century, there was a third revolution: the birth of entrepreneurial capitalism. In breaking free of the land, capital severed its link to the feudal origins of real property, in the process becoming far more fluid and democratic and productive.

To avoid the inequality that he dreads, Piketty proposes that the governments of the world adopt a global tax on wealth and on high incomes. Ironically, his remedy threatens to restore what we once painfully disposed of: that historical link between capital and violence. It promotes the notion that only those with political power should be permitted to control concentrated capital. Vladimir Putin would approve.

Here in the U.S., in the growth of the administrative state over the past century, we can see the vast rent-seeking apparatus of government gradually re-asserting its historical control of capital. But capital has changed; land is no longer important. The threat to the barons of business comes not from a foreign invasion, but from economic competition, so the relevant boundaries today are the boundaries of industries and markets. Instead of a Duke of Detroit, we get an Automobile Tsar, whose task is not to secure land, but to secure markets, suppress competition, and ensure that rents are paid to those who are part of the prevailing political alliance. Cooperative corporations will get, along with regulation, the modern equivalent of a license to crenellate: antitrust immunity, plus perhaps some immunity from product liability. The serfs will be told all this is for their protection, but in fact it is the instrument of their exploitation.

Well, we all see different shapes in the clouds; perhaps I am just projecting onto Greve’s nightmare the peculiar details of my own.

What’s to be done?

First, I need to reach a conclusion on what to call Greve’s adversarial corporatism. Despite the appeal of adversarial governance, I lean towards adversarial cronyism. It captures the idea in a brief phrase that is likely to be understood by a broader audience than the other candidates would be. And this is a concept that needs to be understood by a large audience.

Second, let’s not give up on the courts. They have their weaknesses, but also virtues that the other branches lack. Small things can produce progress. Take the series of decisions by Judge Jed Rakoff of the Southern District of New York, questioning and finally disapproving the SEC’s practice of reaching sealed settlements with banks, who pay large sums but admit no guilt. Raykoff’s interference with this practice was widely criticized as anti-business, since he argued that such egregious offenses should not be allowed to pass without a public airing of the facts. But, of course, until the curtain is pulled aside, we don’t know whether it is the defense or the prosecution that should be embarrassed by its case. The Second Circuit reversed Rakoff in a Citigroup case. In retrospect, however, many commentators are giving the advantage to Rakoff, and his challenge to the SEC is likely to have lasting effect.

Third, we should take comfort in the knowledge that cartels are unstable. Those protected by government take longer to come apart, but it can happen, and we can help. Many of us recall the era of deregulation in the seventies and early eighties, when years of scholarship by economists and antitrust lawyers produced a strikingly bipartisan political consensus that economic regulation was an unmitigated disaster. Airlines, rail, trucking, and telecommunications were dramatically transformed; iron triangles were broken, and whole agencies were consigned to the dustbin of history. Let’s do that again.

Reader Discussion

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.