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How Do You Solve Crony Capitalism?

“Crony capitalism” is the idea that politically well-connected owners of productive factors – land, labor, capital, entrepreneurial skill – can use the government’s coercive power to limit competition and increase their return on those factors. More generally, it’s the use of the coercive powers of the state to redistribute resources to specific groups and their associates.

As Gordon Tullock was fond of pointing out, while government protection is not a factor of production, it can be a factor of profit. If an owner can “invest” a certain amount to obtain government action that will generate a given amount of profit, it makes as much sense for the owner to invest that money in rent seeking as it does to invest the money in a productive activity that would generate the same level of profit. But while it’s an equal call for the profitability of the rent seeker, there is a social loss to rent seeking given that devoting resources to obtaining government protection does not produce anything to consume.

Yuval Levin over the years has heralded the call for conservatives to focus more attention on crony capitalism. In a November 3 column he suggested that the sense among supporters of President-Elect Trump that the economic system is “rigged” against them comes at least in part from the current system’s openness to well-connected rent seekers using the government to protect their markets from competition.

I suspect Levin intended the column to contribute to post-election soul-searching on the part of conservatives in light of Hillary Clinton’s then-expected presidential win. Given the attention that Trump gave the topic during the presidential debates, it’s possible that the topic might receive even more sustained attention among conservatives today than it would have if Clinton had won.

Granting that it is an economic as well as a political issue, what are the prospects of seeing something actually done about crony capitalism? It’s a big problem. Levin identifies it as a problem endemic at the local, state, and national levels. He sees it entrenched in the administrative state.

To be sure, there have been popular movements against crony capitalism in the U.S. in the past. Politicians in the 19th Century, for example, resurrected James Madison’s concerns about factional politics. One could hear politicians denouncing “partial legislation,” meaning factious legislation. Numerous states adopted constitutional provisions limiting “special legislation” in attempts to prevent legislatures from legislating factiously in favor of individuals and classes. This was a feature of Jacksonian populism in antebellum America, and throughout the 19th Century.

This feature of populist politics evolved at the state level, and then at the national level, into judicial doctrines of “substantive due process.” Judges would review the “reasonability” of legislative enactments to determine whether they advanced the common interest, or simply represented the leveraging of government power for the benefit of individual or class interest.

As is well known, substantive due process in the realm of economic policy died off in the national judiciary, and in many state judiciaries as well, in the 1940s and 1950s. (It lives on, controversially, in the social jurisprudence of the U.S. courts.)

But it is difficult to believe that crony capitalism can be taken on in a broad and sustained fashion without an expanded role for the judiciary. The incentives for sustained popular action just aren’t there: Interest groups that would receive concentrated benefits have it easier in overcoming barriers to collective action relative to the public at large, that would receive only diffuse benefits spread over a vast number by preventing or reversing any particular instance of rent seeking.

But conservative jurists and academics tend to split over the advisability of resurrection economic substantive due process. There is a long and vibrant tradition among conservative legal scholars in which they advocate the wholesale resurrection of economic substantive due process. There’s another tradition in which conservative judges, in particular, and a fair number of scholars as well, argue against the (re)extension of an activist judiciary into economic matters. While attractive in the form of abstract doctrine, it is unclear that, in application, the doctrine of substantive due process applied to economic legislation resulted in much more than indeterminate outcomes and doctrinal confusion.

The upshot is this: Even while we all can decry “crony capitalism” in the abstract — and I do — it’s not obvious what can be done systematically to root out the phenomenon. And if attempted on a policy-by-policy basis, I fear the result might be that only the less-well-connected interests would be unhinged from government protection, thereby actually increasing the popular sense the system is rigged against the common person, and potentially even increasing the amount and associated costs of rent seeking. This doesn’t mean the attempt to address the problem shouldn’t be made. But as with so much, the devil is in the details.

Reader Discussion

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on November 21, 2016 at 09:05:44 am

Very interesting; this essay makes some excellent points. I do, however, question the validity of the following statement:

"If an owner can “invest” a certain amount to obtain government action that will generate a given amount of profit, it makes as much sense for the owner to invest that money in rent seeking as it does to invest the money in a productive activity that would generate the same level of profit."

I submit that this would mean an owner is as likely to choose one course of action as he/she is the other, purely as a matter of personal preference, (i.e. one owner might have a preference to invest in politicians, while another, to arrive at the same level of profitable outcome as the first, may have a preference instead to invest in new computer systems).

It seems unlikely to me, that a business owner would invest in rent-seeking unless it was perceived the more profitable alternative to the same outcome, in the near-term or long-term.

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Paul Binotto
on November 21, 2016 at 12:03:19 pm

Solving “Crony”

With apologies to Jacques Barzun, perhaps we could “Begin Here:”

“Capitalism” is a **resulting** condition, not a system; nor **an** organization. There have been, and are, varying kinds of that condition resulting from efforts to accumulate “capital” (usually durable, transferable assets) for deferred consumption or future “production” (which would include means of violence). [One can describe, but not define “Capitlism.”]

The conditions that result from individuals (or groups) establishing relationships of their own choices in seeking their separate objectives presumably fall within Yuval Levin’s “Democratic” capitalism [a description would be enlightening] and which usually occur in circumstances regarded as “markets” amongst those participants in the relationships. The relationships come into existence and exist for the “purposes” of the participants. While the relationships may require degrees of trust, they neither require nor exclude friendships and favoritisms.

“Politics,” certainly to the extent of governance and the uses of that coercive force in a society, requires organization and the resultant establishment of relationships for the functioning of the organization. It is there that we observe the “Crony” structures of “political” interpersonal relationships, with governance and coercive powers objectives.

So, if this current condition of capitalism (infused with the “political”) **is** a “problem, “and not simply part of the Res Publica (what the populace seems to desire), then, as Yuval Levin suggests, our quest should begin with the public’s demands for, and acceptances of, multi-functional governments.
It is those multiple functions that generate multiple “organizations” with their interpersonal relationships (bureaux), which call for extensions of “crony” relationships to maintain political significance of those lives.

It is the political system, not the condition of capitalism, that generates the “Crony” relationships. Nowhere is that made more clear than in the forms of “Socialisms” (“democratic,” “market,” and “pure”) which require “organization” for purposes of social and economic objectives. The organizations require “crony” relationships to function. So, “Crony Socialism” would be redundant.

Multifunctional governments become inescapable factors in affecting the circumstances of the relationships in which the condition (and form) of capitalism results

So long as the multi-functional governments exist and continue their extensions, with public acceptance and demands (which seems unlikely to abate absent fiscal failures) the cronyism inherent in politics will continue to extend into the circumstances and relationships that result in the condition of capitalism. It’s politics and its forms that are shaping the “crony” natures we observe.

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R Richard Schweitzer
on November 21, 2016 at 12:55:08 pm

Richard:

Once again, you express so much more 'elegantly" than I (had intended to do) what the issue is here.

My simple statement would have been to "Abolish the Federal Administrative State" wherein resides the greatest assemblage of miscreant *friendships* that this nation has ever been forced to endure. In so doing we may (not unreasonably) expect a small reduction in the number of *functions* of government.

My Gawd!!!! - I can already hearing the wailing and gnashing of teeth!

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gabe
on November 21, 2016 at 15:04:45 pm

"Right, as the world goes, is only in question between equals in power, while the strong do what they like and the weak suffer what they must." Thucydides, Melian Dialogue.

"Laws are like cobwebs, which may catch small flies, but let wasps and hornets break through." Jonathan Swift, A Tritical Essay upon the Faculties of the Mind (1707).

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nobody.really
on November 21, 2016 at 16:15:32 pm

Luvv'd the Swift quote! Perhaps, Swift would argue that is because laws are crafted by those "philosophes" that have one eye pointed to the heavens and the other pointed toward the ground!

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gabe
on November 22, 2016 at 12:44:14 pm

If two options are equally profitable but one comes with higher risk, then the less risky option would be preferred. Just another element to consider.

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Pakavestor
on November 22, 2016 at 13:52:51 pm

You make a good point - thanks!

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Paul Binotto
on November 22, 2016 at 15:17:58 pm

Very simply, the capitalists cannot realistically "buy off" a politician if no one can verify how the politician voted on an act or what the politician put into it. Secrecy is just as necessary in everyday politics as it was during the Framing Convention.

The tradeoff in transparency is that it frees the politician from outside influence, but at the same time it creates opportunities for other forms political abuse by the politicians.

You have a degree of transparency that is necessary for democracy to work through accountability, or you have a lack of full accountability. Judging by the way politicians act today I think it's pretty obvious that the system is imbalanced in favor of excess accountability, which leads to crony capitalism.

How do we bring balance back to the "force" of government when the democratic public is just as bought-off as the democratic politicians?

First, a credible and substantive theory is needed, not some wonky, poorly conceived gimmicky approach to the problem. The public recognizes those and responds by not supporting them. Unfortunately, the loudest advocates of change generally propose plans of such character. Over time all proposed solutions take on a little-boy-who-cried-wolf character.

After a good plan is in place, authoritative intellectuals need to endorse it. Such persons tend to be so caught up in advocating their own theories that better ones go in one ear and out the other.

Next, the good plan needs champions in politicians. Those would be the same politicians who find great advantage in the crony capitalist system. Good luck with that.

I look to other countries to prove a good working theory. I love our system of government as it was originally designed. I'm not too hopeful about the overly democratic system it has become.

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Scott Amorian
on November 22, 2016 at 16:08:45 pm

Scott,

So much of legislating (governing) depends on consensus building (accumulating enough votes to move a piece of legislation and the necessary reliance's that a pledged vote will be tendered), I simply can't conceive how the system would work with the secret balloting you advocate. And, I wouldn't advocate changing this system to accommodate these secrecy arrangements, no matter the dividends.

So, Crony Capitalism, in my view, is preferable, if its eradication is dependent on legislative/governmental secrecy. In addition, it may sound like a stereo-typical arrogant American response, but I don't think looking to other countries for a solution is the answer to solve what is wrong with our system of governance; in fact, I suspect much of its current dysfunction is attributable to doing just that.

The United States simply has the best system of governance yet conceived - producing what few would deny is the most successful economic and political super-power in history ever to have existed; and remains so, even now in its weakened state. It's not just another system that has run its course and is no longer relevant to current circumstance. The founders and framers have given us everything in a constitution we could need to sustain this system of government at its best, we need only again become committed to it and (again) apply it according to its original design without tinkering or tweaking it to be more like, say European Democracies - these others simply have not performed as well as the United States system and no one ever predicts they may have any such potential.

The United States Democracy; Its imperfect, but it works, better than the rest.

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Paul Binotto
on November 23, 2016 at 15:19:25 pm

Actually, Paul, if you read your Constitution you can see where a certain amount of secrecy was expected as part of the "best system of governance yet conceived."

Section 5.
"Each House shall keep a Journal of its Proceedings, and from time to time publish the same, excepting such Parts as may in their Judgment require Secrecy; and the Yeas and Nays of the Members of either House on any question shall, at the Desire of one fifth of those Present, be entered on the Journal."

My legislative representatives bargain on my behalf. If I were a businessman with professional representatives negotiating on my behalf, I cannot conceive of them making public the proceedings of the negotiations. That would be stupid and irresponsible. And yet, my representatives in government are required by statute to do so, which is quite plainly equally stupid and irresponsible. The principles of negotiation apply to both circumstances.

The problem as I see it is less an issue of how the government operates, and more about cliche bad decisionmaking by the demos. Too many people believe that they must have full transparency of their legislators, otherwise "the really bad thing"(TM), whatever that happens to be today, will happen. I have a little more faith in the Framers in this case. It's the demos, not the Framers, who are mistaken when insisting on full transparency in lieu of transparency balanced with considered secrecy.

Even though the US government is arguably the best system yet conceived, we are slowly collapsing into socialism, burying ourselves deeper in debt every year, submitting ourselves to under-accountable administration, and entrenching ourselves more deeply in foreign concerns. I have grave concerns, beyond the consideration of conservatives and certainly beyond those of liberals, about the future of this nation. And I can trace at least some of the causes back to legislators who are too easily influenced by persons other than their electors--those being the very wealthy and the most politically powerful.

The Constitution was written in secret and that worked out fine. The Constitution is designed for secrecy in the legislature. Everyday business negotiations prove the value in secrecy. But the judgement of the legislature currently leans towards requiring too little secrecy when an ability to negotiate in greater confidence is called for.

Perhaps we can ask The Donald: Would you be better off doing all of your negotiation in public, or would you rather be able to negotiate behind closed doors? I think we all know how he would answer that.

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Scott Amorian
on November 23, 2016 at 16:05:20 pm

Sorry, good sir, but your several points fail to persuade me regarding the efficacy or wisdom of secret legislative balloting.

However, I do wish you a very Happy Thanksgiving.

Paul

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Paul Binotto
on November 29, 2016 at 00:30:06 am

[…] How Do You Solve Crony Capitalism? James R. Rogers, Library of Law and Liberty […]

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