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What we now call “crony capitalism” has gone under other terms in the past. My favorite euphemism remains popular: “private-public partnership.” It is descriptive without being too prejudicial. “Crony capitalism” is obviously a pejorative. But no matter what you call the policy, it is still the favoring of some over others, leveraging the power of the state to secure that favoritism.

It defines, in essence, an insider vs. outsider antagonism, a system of exploitation.

The policies of crony capitalism have been (and are) supported by both major American political parties; it remains standard operating procedure in the U. S. and elsewhere. And such policies — though they have taken many forms, and waver according the winds of doctrine — are not merely not new, they are ancient. Indeed, it was these policies (in the form that Adam Smith identified as “the mercantile system”) that classical political economy evolved to replace, with its early radicalism, the corruption-reducing system they sometimes called “Laissez Faire.”

Generally, people tend to support public-private partnership policies if they or their friends and family are directly benefited in some way — and don’t if they aren’t.

But since government increasingly involves itself in more and more areas, many people adapt to the system, hoping to squeeze out some advantage or favor.

The perfect egoist would desire cronyism for himself and laissez faire for all others. (That way he would be the exception, leaving others to compete for his consumer attention, offering goods and services at the lowest price or highest quality, or some combination thereof.) But stretching beyond egoism, the policy offers decreasing advantages: the idea that we can all be specially advantaged by a public policy obviously cannot work. So the egoistic approach to such practices is to work for those advantages that benefit oneself, and let opposition to others’ special privileges go as too costly to oppose.

This attitude — entirely “rational” from a narrow-interested point of view — obviously sets a ratchet into play: cronyism will increase, since the incentives to reduce it are too weak, and the incentives to utilize it increasingly present to increasing numbers of the population.

Common means of crony capitalism include

  • direct subsidy,
  • tax benefits, and
  • specialty services by the state such as condemnation of others’ private property and giving it (or selling it cheaply) to a business for development.

But the most efficient and widespread tactic of crony capitalism is regulation.

It is commonly thought amongst advocates of “more regulation” that business regulation is a public-interest enterprise that keeps businesses honest.

What is not usually understood is that most regulation is lobbied for — and even written by — businesses. Corporations. Trade associations.

Indeed, some of the most expansive regulatory regimes beloved by Progressives, past and present, have been exactly that: creations of the industries they were allegedly intended to “rule” with the proverbial “iron fist.” Prime examples include the Federal Reserve, which was almost wholly a creature of the banks, and the recent ObamaCare programs, which was heavily written by insurance companies and other major medical institutions.

Economists who study regulation are not surprised by such facts. The history is of course quite clear, with the economic policies of the ancient states (what Douglass North calls “limited access systems”) and the mercantilism of early modern nation states providing exhaustive data.

Besides, the logic is clear: regulation hinders competition. This means that regulations help some businesses at the expense of other businesses, and generally (the argument ineluctably runs) the consumer.

The political process by which regulations are pushed into law have been described by economist Bruce Yandle as abetted by a union of two disparate groups, “Bootleggers and Baptists.” This political alliance between two stereotypical actors is instructive of so much about modern government.

The disreputable, advantage-seeking businessman is the bootlegger in Yandle’s scenario — a person with a material interest to favor regulation that harms his competition — and the Baptist is the earnest, public-interested zealot who provides social cover for the scam. Yandle’s paradigm case pertains to alcohol sales and consumption, Blue Laws and Dry county prohibitionism in particular. Bootleggers, who sell illegal alcohol, benefit from moralistic “temperance” regulations. If the local tavern is closed, or the local grocery cannot sell wine or whiskey, the bootlegger gains a market foothold. And, as researchers have found, bootleggers have even been known to donate funds to the anti-alcohol political campaigns.

This scenario plays itself over and over again in politics, in every domain where regulation is proposed. Even deliberately and seemingly “pure” anti-business regulations can find support among some enterprises, simply to reduce competition. More “reasonable” (fine-tuning) regulations find even more enthusiastic support. Big businesses love reporting requirements, for example, as found in Sarbanes-Oxley and Dodd-Frank: the sheer expense of massive reporting requirements kick in early among start-ups, and only mature businesses (with some established economies of scale) can handle those expenses easily. Indeed, they limit their competition, giving those businesses more room to raise prices — since their industries are thereby effectively cartelized, with the cartels backed by the full power of the U.S. Government.

And people wonder why there is money in politics!

They are being played.


The image at top is a graph from Bruce Yandle’s recent presentation, linked to in the article.

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