This term has been getting stuck in my craw lately: “crony capitalism.” It’s used by self-described libertarians I know to characterize capitalism under regulations that create a playing field tilted in the favor of oligarchs and megacorps.
The reason it bothers me is that it’s a patch to hide their cognitive dissonance. It lets them maintain their faith in the Unseen Hand of the Free Market by dismissing the real-world effects of capitalism as aberrations. I called it a distinction without a difference once, but that makes it sound innocuous. In reality, conjuring that distinction perpetuates the destruction of our world.
Amity Shlaes @AmityShlaesI still believe in markets. Markets do not fail us. We fail markets.
But I need to back up. Let’s start with the basics. Basic economics explains a market as an emergent system which efficiently determines prices of goods and services based on supply and demand. Competition incentivizes merchants to produce more and better offerings to gain an edge. The “unseen hand” of aggregated individual self-interest drives prices towards an ideal equilibrium. As circumstances change, the market adjusts automatically. Resources that can be used for more than one purpose are allocated automatically as prices adjust to compensate.
Spoiler alert: this simplified model doesn’t hold up in the real world. It’s a spherical cow model, like the epidemiological models created by physicists that led to CoV-2 outbreaks at the University of Illinois.
Economists create more complicated models to reduce the margin of error, but even those miss things, and as far as I can tell most libertarians are still running on the basic mental model. A few of the ways it doesn’t fit the real world:
negotiating power - in most transactions, one side has greater negotiating power than the other, and that influences the price. This is especially significant when only one side has the option of walking away from the negotiation altogether, such as when a pharmaceutical company sells medication that patients cannot survive without, and to a large extent in the labor market when individuals can’t get adequate food and shelter without a job.
tragedy of the commons - limited resources are exhausted to produce goods and services, and the profit motive all but forces actors (corporations or individuals) to externalize as many of their costs as possible. This means pollution is unaddressed by the polluters, and resources which can be used profitably will be used regardless of whether they should be, like fossil fuels and surfactants.
the snowdrift problem - some problems can be conceptualized as a snowdrift blocking a road. This would be a situation that would hinder many of us, and would take only one or a few of us to clear. The first person to clear it has to do the work and gains the benefit, but everyone else gains the benefit at no cost. Problems like this abound in the real world; support of open-source software is one example. Other problems are mathematically equivalent but are more readily imagined as a game of Chicken, where participants drive directly at each other and the first to swerve loses, but if no one changes course all players lose. Ecological destruction fits this frame, though at this point it requires all of the most powerful actors to swerve.
amorality - market economics is amoral; that is, it does not have or care about morals. We saw in 2008 how easy it is for moral decisions to be elided in organizations. Most individual employees participating in destructive behavior are not in a position to see the scope or change the course of it, and so the system continues. It should be pretty obvious that any two orthogonal systems (in this case, capitalism and morality) are going to inevitably encounter situations where they are in conflict. Believers in the Unseen Hand will say that the market can correct for this, as buyers exercise their moral judgment in choosing what to buy. That would only work if you assume that morally superior options are always available, and even then it would fail because of:
hidden information - the basic model assumes all actors have perfect information at all times. This is quite obviously not the case and never can be. Indeed, participants are incentivized to muddy the waters and make it harder for others to obtain reliable information, as we have seen over and over again, from cigarettes causing cancer to fossil fuels and animal agriculture contributing to climate change. In reality each actor has access to only a small fraction of relevant data at best, with the vast majority of what they have access to directly provided by people working against their interests.
anti-competitive practices - by definition a successful market competitor is one that performs better than its rivals, by taking advantage of every edge it can. Some of these will be innovations but many will be ways of either crippling competitors or exploiting of the rules of the game. That is what participants are supposed to try to do, and it inevitably leads to consolidated giant monopolistic/monopsonistic corporations, who can either buy or crush new competitors with sheer scale, or warp markets in other ways no less harmful but hidden from the direct view of consumers (see Amazon).
shifting rules - once competitors reach a certain level of clout, they can use that power to push for changes to the rules of the game, obviously in their favor. From the perspective of a giant corporation, this is the completely rational, correct decision, yet in aggregate it results in a complete collapse of the purported benefits of capitalism: innovation and improved standard of living.
boom and bust cycles - markets tend to fall into cyclic patterns, and while investors have the luxury of viewing this as simply the way things are, real people’s lives are thrown into crisis with every bust. The fitness function of the market doesn’t optimize for universal benefit.
None of these are things a free market can correct for without intervention. It’s baffling to me how someone could convince themselves that all of this is just “crony capitalism,” the result of a few bad actors (behaving exactly as the system tells them to by) bending the rules. They then go on to conclude that the rules are the problem rather than that the system needs better rules.
The other system which comes into play here is democracy, and it is always in tension with capitalism. That’s because democracy hinges on power being as diluted as possible: one vote per person, with everyone getting a vote, while capitalism inherently runs on inequality, with a capitalist class investing in the labor of a worker class to create profit for themselves, and naturally tends towards concentrations of power. When capitalism inevitably creates its winners (who will continue to win and win and win while everyone else loses, since we don’t get to start the game over as we do with Monopoly), they will subvert democracy however they can to maintain that power.
One of the most readily exploited levers in American democracy is the fact that we vote for people rather than policies, and that we vote for those people in a two-party system. When an oligarch wants some change in their favor, they don’t have to convince all of us that it’s in our interest, they only have to convince those holding public office. They don’t care which party that official declares, just that money can buy influence. And when politicians want your vote, they get to capture it not by demonstrating that everything they stand for is in your interest, just that the few things most important to you are. So the wealthy, not really caring one way or the other about how you run your life, can give you life-or-death decisions to vote on, like abortion and LBGTQ+ rights, while either way they get what they want: endless wars to funnel defense budgets into their pockets, unlimited ability to move money around the world, tax loopholes to keep their hoards safe, unrestricted anonymous financial influence in politics, continued ability to profit off of health crises, etc.
We can’t correct any of this without regulating capitalism.
We need to always be moving further and further in the direction of democracy and equality. We need to do everything we can to limit the political power of the wealthy. Abolish the electoral college, defend and expand voting rights and anti-discrimination laws, correct gerrymandering, make elections publicly funded with each candidate receiving the exact same budget and allowing no other spending on campaigns, and as much as possible we must move toward direct democracy. Let us vote on laws and policies, so that we can choose what we want á la carte rather than being stuck with the equivalent of a cable bundle that charges us for two hundred channels we don’t want in order to get the three we do.
We must correct the failings of capitalism using the only power we can: government regulation. Bust monopolies, enforce interoperability to enable tech competition, and address the problems capitalism never will: poverty, homelessness, unemployment, and the like. The base of Maslow’s hierarchy.
Because there’s no such thing as “crony capitalism.” There is just capitalism, and it can only fulfill its promise if we keep it on a tight leash.