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Jewish World Review
January 13, 2010 / 27 Teves 5770
Let's Take the Crony Out of Crony Capitalism
When Judge Richard Posner, the prolific conservative intellectual,
released his book "A Failure of Capitalism: The Crisis of '08 and the
Descent Into Depression" last year, you
might have thought the final verdict was in: Capitalism caused the
economic downturn and high unemployment.
That this verdict was pronounced by someone like Posner, who is
associated with the University of Chicago and the free-market law and
economics movement, gave moral support to all the politicians who were
intent on exploiting the recession (as they exploit all crises) to
increase government control of the economy.
But what exactly is this "capitalism" that is blamed?
The word "capitalism" is used in two contradictory ways. Sometimes it's
used to mean the free market, or laissez faire. Other times it's used to
mean today's government-guided economy. Logically, "capitalism" can't be
both things. Either markets are free or government controls them. We
can't have it both ways.
The truth is that we don't have a free market government regulation
and management are pervasive so it's misleading to say that
"capitalism" caused today's problems. The free market is innocent.
But it's fair to say that crony capitalism created
the economic mess.
What is crony capitalism? It's the economic system in which the
marketplace is substantially shaped by a cozy relationship among
government, big business and big labor. Under crony capitalism,
government bestows a variety of privileges that are simply unattainable
in the free market, including import restrictions, bailouts, subsidies
and loan guarantees.
Crony capitalism is as old as the republic itself. Congress' first act
in 1789 on July 4, no less! was a tariff on foreign goods to
protect influential domestic business interests.
We don't have to look far to see how crony-dominated American capitalism
is today. The politically connected tire and steel industries get
government relief from a "surge" of imports from China. (Who cares if
American consumers want to pay less for Chinese steel and tires?) Crony
capitalism, better know as government bailouts, saved General Motors and
Chrysler from extinction, with Barack Obama cronies the United Auto
Workers getting preferential treatment over other creditors and generous
stock holdings (especially outrageous considering that the union helped
bankrupt the companies in the first place with fat pensions and wasteful
work rules). Banks and insurance companies (like AIG) are bailed out
because they are deemed too big to fail. Favored farmers get crop
If free-market capitalism is a private profit-and-loss system, crony
capitalism is a private-profit and public-loss system. Companies keep
their profits when they succeed but use government to stick the taxpayer
with the losses when they fail. Nice work if you can get it.
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The role that regulation plays in crony capitalism is unappreciated.
Critics of business assume that regulation is how government tames
corporations. But historically, regulation has been how one set of
businesses (usually bigger, well-connected ones) gains advantages over
others. Timothy Carney's book about this, "The Big Ripoff: How Big
Business and Big Government Steal Your Money", explains why Phillip Morris joined the
"war on tobacco," General Motors pushed for clean-air legislation and
Archer Daniels Midland likes ethanol subsidies.
As economist Bruce Yandle writes, "(I)ndustry support of regulation is
not rare at all; indeed, it is the norm".
If you wonder why, ask yourself: Which are more likely to be hampered by
vigorous regulatory standards: entrenched corporations with their
overstaffed legal and accounting departments or small startups trying to
get off the ground? Regulation can kill competition and incumbents
like it that way.
When will Michael Moore figure this out? His last movie attacked what he
calls capitalism, but his own work shows that it's not the free market
that causes the ills he abhors. Had he called the movie "Crony
Capitalism: A Love Story," he would have been on firmer ground.
It's time we acknowledged the difference between the free market, which
is based on freedom and competition, and crony capitalism, which is
based on privilege. Adam Smith knew the difference and chose the
What's taking us so long?
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