Contra-capitalism: The Exit Ramp from Market-Oriented Business.

• Author: Donway, Roger S.

"If names be not correct, language is not in accordance with the truth of things." So says The Analects of Confucius. Which is why the argument set forth by Michael C. Munger and Mario Villarreal-Diaz in an article in a recent issue of The Independent Review, "The Road to Crony Capitalism" (2019), cannot be properly rebutted without a fresh set of "names" (terms, concepts).

The first name that needs to be changed is the terminus of the road, crony capitalism. That term now rarely refers to cronies in any literal sense, and it has never referred to capitalism. In the United States, crony capitalism generally denominates one form of the interventionist political-economic system, specifically, an interventionist system operated for the sake of business. Randall Holcombe, who refers to the same system as "political capitalism," said truly that "it is a distinct economic system and should be analyzed as such" (2018, x).

But Munger and Villarreal-Diaz's important suggestion is that we need more than an analysis of pro-business interventionism. We need an analysis of the intermediary process, the exit ramp, that leads executives away from a system of market-oriented commerce in a manner that then tends to foster a system of pro-business interventionism. How can we understand that exit ramp? Is it the result of interventionist ideology? Or is it rather the result of executives who cynically manipulate interventionist ideologies? The ideological explanation is familiar from intellectual histories of progressivism and the American System (Lively 1955; Fine 1969). The cynical explanation is familiar from the bootleggers-and-Baptists thesis (Yandle 1983, 1999).

Munger and Villarreal-Diaz put forward a third explanation that does away with the role of ideology. The exit ramp that leads a nation away from a system of market-oriented business and toward pro-business interventionism, they argue, results from businesses' rational decision that rent seeking is often a superior method for gaining revenue (2019, 341). To assess that explanation, however, a second name change is needed. The term rational decision must be replaced with prudential decision. Within the context of U.S. corporate management, an executive's goal is supposed to be his company's long-term financial value, and pursuing that goal is not a matter of calculation. It is a matter of prudence.

When Munger and Villarreal-Diaz's thesis is rephrased in terms of practical wisdom, a fourth explanation for the exit ramp emerges, and this essay puts forth that explanation. Rent seeking that leads a business (and ultimately a nation) away from its market orientation may sometimes represent not the rational pursuit of self-interest but the irrational pursuit of self-interest. It may result from what Aristotle called akrasia--the evasion of what one knows or senses is in one's best interest.

In his multivolume history of Enron, Robert Bradley Jr. (2009, 2011, 2018) reports that the many subversions of market-oriented business management he witnessed in his sixteen years at the company did not result from green-eye-shade profit seeking. They resulted from the hubristic desire to gain more than one had earned--which is the essence of rent seeking--and the results of that hubris tended to subvert the business's economically successful practices. (1) Where Munger and Villarreal-Diaz say that rent seeking may be immoral but profitable, this fourth explanation paraphrases Talleyrand: it is worse than a sin; it is a blunder.

What's Wrong with the Term Crony Capitalism?

Rejecting the term crony capitalism is not just a matter of words. It is a matter of the categories we use to think about things. What family of political-economic systems does crony capitalism belong to? What are its sibling systems within the family, what are its cousin systems, and how did it come to differ from them? Lacking proper categories, one cannot answer these questions, and without the ability to answer them, one cannot analyze the essence of "crony capitalism," much less the steps that lead to it and away from a market orientation.

Crony Capitalism: No Longer Cronyism

The term crony derives from the Greek term khrdnios, meaning "long-lasting," and it was initially spelled "chrony." The word originated as a Cambridge University term for a school chum, and its first recorded use was in Samuel Pepys's diary in 1665. But given that so much of the traditional British Establishment was based on "the old school tie," the term crony came to refer to any business or political contact that one could rely upon for favors because of a close personal association. In that sense, "cronyism" is similar to "nepotism" but widened a bit to include close associates as well as family.

The next step was taken in 1979 when a forty-page samizdat pamphlet detailed the patron-client mechanisms of Philippine dictator Ferdinand Marcos. Written by a young philosophy instructor, Ricardo Manapat, the pamphlet was titled Some Are Smarter Than Others (see Sunico 2017). That was a shortened version of what Imelda Marcos said to Fortune journalist Roy Rowan when he asked how the couple's friends had become so wealthy so fast. In his pamphlet, Manapat popularized the term crony as a designation for the presidential couple's intimates, who were showered with economic benefits. And within the Philippine context of that time, the term crony was appropriate. The claque around Marcos comprised about eight close associates. Manapat depicted them collectively as "the Octopus" (Sunico 2017).

But the full term crony capitalism was first coined for a Time magazine article about the Philippines, published in 1981 and called "Friends in Need," with a subtitle or kicker that read "A Case of Crony Capitalism" (Time 1981). Neither the field reporter nor the in-house writer had anything to do with the headline. It was the creation of the Time editor George M. Taber, who later admitted that after reading about Marcos's pervasive cronyism, he coined the phrase crony capitalism simply because "I have always been a sucker for alliteration" (Taber 2015). (2)

In 1984, the term was injected into the mainstream of American political discourse when Congressman Stephen J. Solarz wrote an op-ed for the New York Times, "Press for Philippine Reforms." (Solarz, D-NY, was head of the Subcommittee on Asian and Pacific Affairs, under the House Foreign Affairs Committee.) Picking up Taber's term, Solarz said: "Through the establishment of monopolies and the centralization of corruption--what Filipinos call 'crony capitalism'--the country's top leadership has siphoned off the nation's wealth on a vast and unprecedented scale" (Solarz 1984).

From 1980 to 2000, according to Google's NGram Viewer, use of the term crony capitalism increased by 16,000 percent. Much of that increase was due to the East Asian financial crisis in 1997. That crisis is now long in the past, and yet in 2021 usage of the term remains at an elevated level.

The likely explanation for the phrase's continued popularity is that pro-capitalist analysts have broadened the use of it in order to have a word with highly negative connotations that they can employ to attack pro-business interventionism. In 2013, Holcombe wrote: "Crony capitalism is an economic system in which the profitability of business depends on political connections" (542). No. It is an economic system in which the profitability of business depends on political connections to intimate personal associates. To level the charge of cronyism legitimately, one must identify the cronies involved and their personal link: Roberto Benedicto, the Filipino sugar czar, had been a fraternity brother of Ferdinand Marcos; Juan Ponce Enrile, the coconut czar, had been Marcos's lawyer for personal affairs when Marcos was a senator; Rodolfo Cuenaca, the infrastructure czar, was an early fund-raiser for and favorite golf partner of Marcos. To use cronyism as a synonym simply for pro-business interventionism is to use it as a mere devil-word.

Crony Capitalism: Not Capitalism

If the first drawback of the term crony capitalism as currently used is that it does not often refer to true cronyism, the second drawback is that it has never referred to capitalism.

In an Independent Review article in 2010, Bradley and I showed how modern economic systems can be theoretically divided into four groups by using just two axes: private versus public ownership and private versus public control (Bradley and Donway 2010). Socialism involves public ownership and public control. That is familiar. Less familiar is the arrangement of feudalism, which involves not only public ownership but also private control. The king ("the government," "the nation") is said to own the whole realm, but control of the economy is largely farmed out to the king's followers in return for service or loyalty or taxes. Capitalism, which evolved from feudalism by making the sovereign's ownership nominal ("fee simple"), represents private ownership and private control.

Historically, the next step--producing the fourth system--involved rendering capitalism's private control of property increasingly nominal by giving close oversight to the state. This system was advanced through the influence of the German Historical School on key American scholars (especially economists and sociologists) who took their degrees in Bismarckian Germany (Fine 1969, 199). The increasing influence of Social Gospel Christianity in the late nineteenth-century Anglosphere was also a considerable factor (Fine 1969, 200). The result was the dominance of a new political-economic system in the United States in the twentieth century: the increasingly public control of property combined with an increasingly nominal private ownership. This system has no settled name but has been called "progressivism," "the Third Way," "the Middle Way," and so on. Here I call it "interventionism" because the ownership of property is still...