Dynamism as a Bump on the Road to Crony Capitalism?

• Author: Vachris, Michelle Albert
• Position: Essay

In their essay "The Road to Crony Capitalism" in this issue of The Independent Review, Michael Munger and Mario Villarreal-Diaz ask whether "corporatist cronyism" is a natural tendency of capitalist economic systems set within democratic political systems. They argue that it is possible that the lure of rent seeking in political markets is too great, especially for mature firms nearing the end of their innovation cycle. At some point, it becomes more profitable to seek rents than to innovate. "Those who can, compete, those who cannot, rent-seek" (Vachris 2014). The authors conclude that "[i]t may be the case that cronyism and the tendency to demand redistributive state interventions are features of free-market capitalism." They also conclude, however, that free-market capitalism has the feature of "a constant influx of creative individuals who demand adequate conditions to advance their productive efforts." It is this second conclusion that is the primary focus of my essay.

First, I relate the authors' conclusions to Edmund Phelps's work on dynamism. Then I explore the link between Munger and Villarreal-Diaz's argument and concepts of rent extraction and transitional gains. I present some data on the dynamism of the current U.S. economy to address whether dynamism can serve as a bump on the road to crony capitalism or not. The essay concludes with a discussion of the road back to dynamism.

Dynamism Defined

Edmund Phelps's research on dynamism can be traced back to a keynote lecture given in 2002 (published as Phelps 2006) examining why Continental Europe experiences higher unemployment rates than Canada, the United Kingdom, and the United States. He finds that countries in Continental Europe are less entrepreneurial, less dynamic, and more corporatist than the Anglo-Saxon countries. Dynamism, to Phelps, means "vitality plus direction" or "well-directed innovation" (2006, 58). He attempts to measure this dynamism using four indicators. He finds that the more dynamic countries have well-developed stock markets, low levels of red tape, low levels of coordination between unions and employers, and high levels of human-capital formation. All of these things lead to a more flexible labor market and hence to lower unemployment rates in Canada, the United Kingdom, and the United States relative to those in Continental Europe. Phelps (2007) continues this line of comparative inquiry as he applies the concept of dynamism more generally to overall economic performance and prosperity. He finds, again, more dynamism in Canada, the United Kingdom, and the United States relative to Continental Europe.

Phelps's work on dynamism culminates with the publication of his book Mass Flourishing (2013). By the time he wrote and published this book, however, he no longer viewed the Anglo-Saxon countries as particularly dynamic because most of the Western world was still reeling from the after effects of the global financial crisis. His book describes an overall decline in dynamism in many if not all Western countries. Indeed, he asks: "What happened in the 19th century that caused people in some countries to have--for the first time in human history--unbounded growth of their wages, expansion of employment in the market economy, and widespread satisfaction with their work? And what happened to cause many of these nations--by now, all of them, or so it would appear--to lose all that in the 20th century?" (2013, vii).

Dynamism, then, affects more than employment and economic growth. It also leads to general human flourishing, which is gained through individuals' engagement in challenging and rewarding work. Yes, material wealth matters, but so does the nonmaterial part of life.

The Rise of Corporatism and the Decline of Dynamism

Phelps warns about the dangers of corporatism. Corporatism leads to corruption and rent seeking, which are inefficient. "[C]ontracts are won and resources allocated on the basis of connections and bribes rather than price competition" (2006,62). Munger and Villarreal-Diaz also examine these two dangers of corruption and rent seeking. Unlike them, however, Phelps does not make the explicit case that the combination of democracy and capitalism has a tendency to lead to the development of cronyism.

Both Munger and Villarreal-Diaz and Phelps link cronyism to innovation and hence to prosperity. As Phelps puts it,

What may be the worst cost by far, however, is that corporatism may cost the economy a great deal of its potential dynamism. In operating almost intentionally to slow or resist change except when there is a consensus for it, corporatism is very poor at providing the adventure, the mental stimulus, and the succession of challenges at work on which business people will depend for their intellectual development and personal growth. And if jobs are less compelling and engaging as a result, there may result collateral damage in reduced labor force participation and diminished employee morale, leading to increased unemployment. In a very literal sense corporatism prevents the economy from being as developed as it would be under an operating system hospitable to innovation. The corporatist economy is stultifying. (2006, 62) As this statement illustrates, Phelps links the decline of dynamism to the individual. Although Munger and Villarreal-Diaz point to the...