Freeman

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Beyond Crony Capitalism

MARCH 20, 2014 by SANDY IKEDA

Some libertarians don’t like the term “crony capitalism.” They complain that cronyism—the use of political power for private gain—is incompatible with capitalism, so why conflate the two terms? While they may have a point, I’d like to look beyond the issue of terminology and focus on the underlying phenomenon: The problems with interventionism go far beyond cronyism.

On Facebook and other places, libertarians talk among themselves with a heavy, almost exclusive focus on cronyism over other forms of interventionism. It troubles me.

What Is Crony Capitalism?

The idea behind crony capitalism is what we used to call “special-interest politics” or the more technical “rent seeking.” The politically powerful, or those with connections to them, use that power to channel wealth from other people to themselves.

Examples of cronyism aren’t hard to find, of course. Here in New York, our new mayor wants to tax high-income earners to fund pre-kindergarten programs in public schools in order to reward teachers’ unions for their help in getting him elected. Erecting trade barriers to protect the textile industry has a long and dishonorable history. And aspects of President Obama’s Affordable Care Act (ACA) seem to have been designed to privilege well-established insurance companies, who can afford to lobby, at the expense of smaller ones who can’t.

I don’t want to go over this well-trod ground again. I raise the issue of cronyism for two reasons.

Imputing Bad Motives

First, the charge of cronyism or political opportunism assumes that those who favor interventionism do so for narrowly selfish, even venal reasons. Painting your opponents as crony capitalists puts you on the side of virtue—a free-market good guy who really wants to promote the general welfare.

Don’t get me wrong: I’m certainly not saying that free-market advocates don’t have good intentions. What I am saying is that imputing bad intentions to your opponents from the get-go may be fitting for a street fight—and I know there sometimes are street fights—but it’s a bad idea if you want constructive dialogue or debate.

F. A. Hayek explained that he dedicated his great book The Road to Serfdom “To Socialists of All Parties” not to mock his opponents but to open a conversation with them. Like his mentor Ludwig von Mises, he typically chose to treat people with whom he disagreed as men and women of goodwill. In other words, he refrained from assuming his adversaries were intellectually dishonest, unconquerably stupid, or plain evil. I know many of you will say, “But these people are evil!” Sorry, I don’t go there because it’s unnecessary, and if you want to know why, read this and this. When you foreclose honest dialogue, bullets replace ideas.

Ideas Inform Interests

Ultimately what underlies crony capitalism is bad ideas.

A common idea is that getting very rich from voluntary trade is tantamount to getting very rich from political redistribution. If the ways in which Vladimir Putin and Bill Gates each became billionaires are morally equivalent, the former mostly through threats of violence and the latter mostly by selling stuff, then what’s wrong with using aggression to get rich? Or, if they are equivalent, then can’t political power serve as a countervailing force against “economic power”? It’s easy to see how such ideas might appear to legitimize political power for special-interest pleading.

So bad intent may not always motivate even cronyism. I believe most of us, whatever our ideology, want to do good—for ourselves, our families, our friends, and our communities—most of the time. Mises wisely pointed out that the dichotomy between “interests versus ideology” is unhelpful because "it is not sensible to declare that ideas are a product of interests. Ideas tell a man what his interests are."

Thus, as Henry Hazlitt argued long ago, preferring short-term gains for a small group of people over long-term improvement to the general welfare is just a bad idea because it ultimately runs counter to the interests of those who favor it.

Other Forms of Interventionism Are at Least As Important

The second reason I’m raising this issue is that the study of interventionism also includes looking at the unintended consequences of interventionism. Interventions are subject, to one degree or another, to what are called knowledge problems. Because knowledge in both the private and governmental spheres is imperfect, it’s simply not possible to be aware beforehand of how people will respond to an intervention. Knowledge problems generate perverse incentives that tend to frustrate the intentions of even well-meaning interventionists.

Perverse incentives refer to things such as people driving more recklessly as a result of mandating airbags in all cars, which is an example I used in a recent column. It also includes the spectacle of people losing their low-cost insurance because under Obamacare their coverage doesn’t meet the new minimum standards. (NBC news reported that the Obama administration may have known this would happen, but unlike crony capitalism it’s hard to see how this particular aspect of the ACA benefits anyone systematically, especially politically.)  Advocates of raising the minimum wage to $10.10 an hour don’t realize the negative impact this increase would have on already disadvantaged low-wage workers, who will now be priced out of the labor market. For example, Time magazine reports that it could “lift 4–6 million out of poverty” but fails to mention that it could also increase unemployment by hundreds of thousands.

It’s hard to change the minds of hard-core proponents of interventionism (and of hard-core proponents of any ideology, including libertarianism) but there have been important examples. A recent one is the surprising change of heart by the activist/rock star Bono on the value of capitalism in developing countries. If changing minds through ideas isn’t possible, then I’m in the wrong business.

I don’t think I am.

I’m a Misesian on many issues, including this one. But here I’m also a Keynesian. In the closing paragraphs of his General Theory, Lord Keynes famously wrote:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. . . . I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

I worry that focusing so narrowly on crony capitalism feeds into the very human but very misguided tendency to feel contempt for anyone who doesn’t believe as you do. Of course, there are those who do mock and tease, or worse, in arguments. But if you’re facing serious opponents, it’s better to regard them as people with gaps in their knowledge (which we all have) than to dismiss them as invincibly ignorant. Better to patiently point out the weaknesses of their arguments and to listen to what they have to say.

That’s hard, but it’s the only way to win. And by “win” I mean maintaining respect for yourself and being able to improve your position by seeing the weaknesses, as well as the strengths, in your own ideas.

ABOUT

SANDY IKEDA

Sandy Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.

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