Crony Capitalism versus Pure Capitalism.

• Author: Block, Walter E.
• Position: Essay

It is an honor and a pleasure to comment on Michael Munger and Mario Villarreal-Diaz's essay "The Road to Crony Capitalism." Their thesis is that crony capitalism is like a pox that has always infected real markets and is likely to rear its ugly head even more in the future, too (my paraphrase). I am in strong support of this proposition. I think they offer a crucially important theory. If we are to promote liberty and prosperity, we must be intimately aware of barriers to these ends, and crony capitalism is high up on the list of all such impediments.

I could go in one of two ways in my response to this paper, and I am tempted by both. First, I could cite each and every point of theirs I think is crucially important--and there are many--congratulate the authors upon them, and "pile on" (as is prohibited in football): reiterate their insights in my own words, offer more examples in support of them, and add to the references they already cite in behalf of their argument. Or, second, I could offer a critical look; there are a few points--admittedly unimportant and irrelevant to their splendid thesis--with which I disagree. I chose the second path for two reasons: it is more congruent with my own personality and intellectual perspective, and I think I can in this way make more of a contribution to the warding off of crony capitalism, a goal I fervently share with these authors.

Munger and Villarreal-Diaz begin their superb essay with the claim that the core contribution of Friedrich Hayek's book The Road to Serfdom (1944) is that "attempts to plan the economy or manage prices put the society in danger of devolving into full-fledged socialism." That, to be sure, is one of Hayek's hypotheses. But we should not lose sight of another one, a far less salutary proposition: that crony capitalism, socialism, government intervention into the economy are really not all that bad. In my view, The Road to Serfdom is a highly flawed book, in which Hayek practically gives away the entire store. To wit, he compromises on a number of issues, such as rent control, welfare for the poor, and so on. (1) In my view, Munger and Villarreal-Diaz's thesis so far remains inviolate, but they chose a poor platform from which to launch it.

Munger and Villarreal-Diaz use the phrase "a modern Hayek but of the left." This implies Hayek was of the right. I regard him as an excellent Austrian economist (Hayek 1931a, 1931b, 1932, 1935a, 1935b, 1940, 1945, [1968] 2014), but with respect to political economy he was at best a fair-weather friend of pure free enterprise (Hayek 1944,1960,1973; Hoppe 2016). Not that people "of the right" are all that enamored of economic freedom. This appellation is typically applied to conservatives. Libertarians, in sharp contrast, occupy neither the right nor the left on the political spectrum but rather entirely reject that means of conducting political economic geography (Hultberg 2005; Gregory 2006; Block 2013).

Consider this statement by Munger and Villarreal-Diaz: "Is laissez-faire simply the first step on a kind of road to serfdom, where giant corporate syndicates achieve a parallel kind of economic planning every bit as pernicious as that feared by Hayek? Of course, the planning takes the form of cartelized industry, protection from competition, and restrictions on innovation, but it is planning nonetheless."

There are some conflations here. There is nothing at all necessarily "cronyist" about "giant corporate syndicates" or "cartelized industry." Cartels and mergers that are a "protection from competition and restrictions on innovation" are of course an entirely different matter. They are the very paradigm cases of crony capitalism. But the two pairs should not be treated in any such similar manner; they are polar opposites. Cartels and large firms are just as much an aspect of the pure free-enterprise system as any other forms of business. Large size alone should not be seen as untoward from the perspective of laissez-faire capitalism--provided, of course, it emanates from achieving efficiency, satisfying consumers, and outcompeting rivals with lower prices, higher quality, better service, and so on rather than from "protection from competition and restrictions on innovation, that is, with government help." (2) Then there is that follow-up: "but it is planning nonetheless." There is nothing problematic about "planning" per se. One polar opposite of planning is, of course, economic freedom. But another is chaos. All rational people "plan" their day, their careers, and so on. Hayek (1976) was particularly brilliant on this point.

Munger and Villarreal-Diaz resort to the phrase rent seeking on numerous occasions in their essay. It mars their otherwise insightful verbiage. This horrendous phrase emanated from the highly problematic public-choice school (as discussed in DiLorenzo and Block 2017). I have no quarrel, none at all, with what it depicts: employing cronyist manipulation, seeking subsidies from government, precluding entry of competitors, and so on. But why, oh, why seize on the inoffensive, even honorific term rent? There is economic rent, which is entirely innocuous as a matter of technical economics. Then there is the ordinary use of the term, as when someone rents a car or an apartment. Equally unoffending. Why utilize such a word to depict something that is truly evil, such as crony capitalism? One possibility is that the public-choice scholars simply do not distinguish between good and evil. (3) I have no trouble with what the term rent seeking is used to stand for. I am engaging, here, in a verbal dispute, but it is paradoxically an important one. Why not, instead, call a spade a spade and refer to this phenomenon with more appropriate appellations, such as booty seeking or theft seeking or predation seeking or exploitation seeking or robbery seeking? (4)

Next, consider this statement by Munger and Villarreal-Diaz: "[P]oliticians--whether elected or appointed--find it quite useful for their own purposes to 'facilitate' exactly the sorts of assemblies of business groups [Adam] Smith warned against. Encouraging corporate dependence on the state and collecting revenues from running artificial rent-seeking contests are primary money-making enterprises of successful politicians. The result is what Smith predicted: concentrated, often highly profitable (in a purely accounting sense) corporations with enormous market power" (emphasis in the original).

The problem here is that although, yes, there are some governmental policies that do indeed lead to greater market concentration, there are others that cut in the exact opposite way. As a result, it is a highly complicated empirical issue to determine which effect outweighs the other. Also, in some years government intervention quite likely leads to higher Herfindahl-Hirschmann indices, but in others the exact opposite may well occur. The difficulty is that Munger and Villarreal-Diaz implicitly assume that the one effect swamps the other, but they offer no supporting evidence for this contention.

Peter Klein mentions

a slew of government policies that favor large, complex, vertically integrated firms: direct subsidies, of course, but also indirect benefits from intellectual property law, bootlegger-and-baptist-style restrictions on market entry, transportation subsidies, various aspects of the tax code, etc. From this [some] conclude that smaller, more "egalitarian" enterprises, such as worker-owned cooperatives, would tend to flourish under the free market. The problem is that [this] argument cuts both ways. Certainly large firms benefit from the state. But so do small firms. Corporations are under stricter antitrust and regulatory scrutiny, are more likely to be the victims of political rent extraction ..., and are subject to stricter disclosure requirements ... than their smaller competitors. Small firms benefit from state-funded incubators, SBIR [Small Business Innovation...