Political capitalism.

AuthorHolcombe, Randall G.

Political capitalism is an economic and political system in which the economic and political elite cooperate for their mutual benefit. The economic elite influence the government's economic policies to use regulation, government spending, and the design of the tax system to maintain their elite status in the economy. The political elite are then supported by the economic elite which helps the political elite maintain their status; an exchange relationship that benefits both the political and economic elite.

Political capitalism as an economic system was explicitly implemented in the fascist and corporatist economies of Germany and Italy between the World Wars, and as he was leaving office, President Eisenhower warned, in 1961, of the dangers of the military-industrial complex, a manifestation of political capitalism. The idea of the differing interests of the elites and masses has a long history in political science and sociology, but has been less recognized in economics. Economics tends to use individuals as the unit of analysis, so is oriented toward recognizing that different individuals have different interests, rather than that groups of people might work together to further their interests, and that group boundaries might be determined by social divisions. However, an examination of the academic literature in economics shows that the building blocks for a theory of political capitalism are already in place. This article draws together several strands in the academic literature to show how they can be woven together to understand political capitalism as a distinct economic system.

The Concept of Political Capitalism

Political capitalism is a concept introduced by Max Weber (1922) to describe the political and economic systems in ancient Rome. However, Love (1991: 4) argues that Weber did not fully develop the concept: 'Whereas Weber developed the ideal type of rational capitalism to a high degree, ... unfortunately the same cannot be said of his concept of political capitalism." Love defines Weber's concept as "the exploitation of opportunities for profit arising from the exercise of political power (ultimately violence)." In a more modern setting, Kolko (1963) adopted the term to describe the American political and economic systems that developed during the Progressive Era, which he dates from 1900 to 1916.

The conventional wisdom on the Progressive Era is that government imposed regulation on business to limit the ability of those with concentrated economic power from using it to the detriment of the masses. According to Higgs (1987), the Progressive Era represented a change in American ideology. Prior to the Progressive Era, Americans viewed the role of government as protecting individual rights. Progressives expanded that view and held that government should look out for people's economic well-being in addition to protecting their rights.

Government regulation of concentrated economic power, according to the conventional wisdom, was a part of looking out for people's economic well-being. Kolko (1963: 2-41) challenges the conventional wisdom, noting:

Progressivism was initially a movement for the political rationalization of business and industrial conditions, a movement that operated on the assumption that the general welfare of the community could be best served by satisfying the concrete needs of business. But the regulation itself was invariably controlled by leaders of the regulated industry, and directed toward ends they deemed acceptable or desirable.... It is business control over politics (and by 'business' I mean the major economic interests) rather than political regulation of the economy that is the significant phenomenon of the Progressive Era. This is what Kolko calls political capitalism. (1)

The concept of political capitalism has been recognized in political science, although not as a dominant paradigm and not under that name. It has not been as much a part of mainstream economic thought, although the building blocks for political capitalism are well-accepted by economists. Some recent work in development economics has recognized a similar concept, concluding that poor countries remain poor because the elite who control the political and economic system retain low-quality institutions for their benefit, at the expense of the general population. For example, Acemoglu and Robinson (2012) categorize political institutions of nations as inclusive or extractive, with inclusive institutions producing prosperity while extractive institutions are controlled by an elite to enrich themselves at the expense of the general population. Political capitalism recognizes that the elite design and control political institutions not only in poor countries but in rich countries, and they design those institutions for their benefit.

Political capitalism is more than just an explicit recognition that politics influences the economic system--an idea that is well-recognized in the public choice literature. Rather, it is a system in which the political and economic elite design the rules so that they can use the political system to maintain their elite positions. The idea has gained some credence in more popular analysis of the economic events of the early 21st century. Government bailouts of firms following the recession of 2008, subsidies to firms with political connections, and even Federal Reserve policy that has aided the banking industry have been called "crony capitalism." Likewise, the Occupy Wall Street movement that began in 2011 recognized the concept of political capitalism, calling the beneficiaries of favorable government policies the " (1) percent" and contrasting diem with the "99 percent" who were often left to bear the costs of policies that favored the 1 percent.

Political Capitalism as an Economic System

Economics as a discipline has not explicitly recognized political capitalism as an economic system for several reasons. The issue is not the failure to use that term, but rather the failure to recognize the concept as fitting within an analysis of comparative economic systems. Up through the 1980s, comparative economic systems was an area of inquiry within economics, mainly focused on a comparison between capitalism and socialism--that is, between a market allocation of resources and government allocation of resources. Loucks and Whitney (1973) is typical of a comparative economic systems textbook of the time: it has one part on capitalism and four parts on socialism. Adams (1955) includes fascism as an economic system in addition to capitalism and socialism. The major question was whether government planning was a better way to allocate resources than markets, with the caveat that all real-world economies have elements of both.

Comparative economic systems as an area of study fell out of favor after the collapse of the Berlin Wall in 1989 followed by the breakup of the Soviet Union in 1991. Capitalism had won the intellectual battle because of the breakdown of socialist economies, but there was still a substantial role in economic analysis for evaluating how a market economy might best be regulated for the public interest. The proof of the uniqueness and stability of general equilibrium by Arrow and Debreu (1954) demonstrated that under the right conditions markets would allocate resources optimally, but for various reasons those conditions are unlikely to exist, leading to what economists call "market failure." A substantial literature explains how market failure can occur and derives conditions under which public policies can correct various market failures.

Capitalism, as an economic system, was depicted as a system of markets in general equilibrium, supported by government interventions designed to correct for market failures. Within that corrective framework provided by government, resources were allocated through markets in capitalism, as opposed to socialism, where resources were allocated through a government plan. No economy allocated resources only through markets or only through government planning, so a comparative systems approach could analyze the degree to which mixed economies were differing combinations of market allocation and government planning. Capitalism, in the comparative systems approach, incorporated government as an institutional feature that would stabilize markets and improve on the efficiency of resource allocation.

Comparative economic systems, as an area of economic inquiry, fell out of favor in the 1990s. Central economic planning was no longer given serious consideration as an alternative economic system and the focus of economic systems shifted to economies in transition--that is, formerly socialist economies that were making the transition to capitalism. The old comparative economic systems question about capitalism remained, namely, what types of government oversight are required to allow a capitalist economy to function efficiently?

Government oversight does not always work as perfectly as it is described in theory, everybody knows. In the capitalist system, there are information problems and incentive problems that lead government intervention to create rent-seeking losses, regulatory capture, and other maladies. Those problems lead to additional challenges for designing policies that can use the visible hand of government to direct resource allocation more efficiently. Still, economists depict market activity in the capitalist model as maximizing behavior on the part of private sector actors within the framework of the institutional constraints designed by government.

Political capitalism is a different economic system. As Kolko (1963) describes it, private sector actors are not merely acting within the framework given by government constraints, the "major economic interests" are designing the constraints under which they act, so that they can retain their dominant positions. The economic elite recognize that the creative...

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