How Economic Regulation Causes Cronyism and “Regulatory Capture”

Kronies action figures - They're Konnected!I’m very much pro-capitalism. However, I agree with Bernie Sanders and many of his allies on the American Left about something. I agree that cronyism is a serious problem in the US. Businesses should not get special favors and money from the government that they didn’t earn. But where Bernie and friends seem to think the solution to cronyism is more government regulation and control, I think cronyism is a symptom of too much government regulation and control. I think the solution is purer capitalism, which means freer markets. In this essay, I’ll explain why I think this, and how I think government regulation of the economy causes cronyism, lobbying and “regulatory capture.”

Let’s start by observing a correlation: Cronyism and lobbying tend to show up in the most regulated industries, not the least regulated. Finance in the US is heavily regulated–by no fewer than eight federal agencies–and the government protects and bails out big banks. Pharmaceuticals are controlled by the FDA, and the FDA often keeps smaller competitors out of the market. Whether a sports team can build a stadium is practically controlled by the city government, and team owners typically get a bonanza of special deals and subsidies from the city. Cronyism was virtually non-existent in the less-regulated tech sector, until the government pursued the anti-trust case against Microsoft. Now, Microsoft has a division in Washington D.C. for lobbying purposes. (Apple and Google now both lobby, too.) In general, retail stores are not very heavily regulated, and there’s not a significant issue of cronyism in that field.

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What I’d Like to See Gary Johnson Say to Bernie Sanders Supporters

Gary Johnson - Let Gary Debate - #letgarydebateWhat I want to see presidential candidate, Gary Johnson, say to those who supported Bernie Sanders in the Democratic primary:

So Bernie Sanders and I mostly agree on what are generally called “social issues.” We both support gay marriage, drug decriminalization, the right of a woman to choose abortion, etc. Where we differ is in what is generally called “economic policy.” Bernie wants more taxes and regulations on “millionaires and billionaires.” He says that large gaps in income and wealth are “wrong, immoral, and not what America should be about.” But why? When someone makes more money than I do, and he does it honestly, without stealing and without government favoritism, I say “Good for him” or “Good for her,” not “How dare that person be rich; I’m gonna cut that bastard down to size with taxes and regulations.”

But high inequality is inherently bad economically, you say? It contributes to stagnation? There’s no good reason to think so.

Studies that supposedly show that higher inequality reduces growth generally find tentative results that are very susceptible to the authors’ biases. They generally tend to ignore the fact that there are different kinds of economic inequality that there is strong theoretical reason to believe have very different impacts on growth. For example, there is the sort of inequality that results from government favoritism, as in the Saudi royal family and the Russian “oligarchs,” and the sort of inequality that results from free and voluntary trade, as in the case of Steve Jobs and Bill Gates.

When we look at the big picture, we find that many countries that have high wealth inequality also have high GDP per capita and high economic growth. If we look at West Germany and East Germany in the 1970s and ’80s, we see two very culturally and geographically similar societies. West Germany was a relatively free market with relatively high wealth inequality, while East Germany was a society where the government tried to enforce wealth equality. West Germany was clearly better off than East Germany, economically.

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Socialism is Not “Worker Control of the Means of Production”

"There is only one way to shorten and ease the convulsions of the old society and the bloody birth pangs of the new - revolutionary terror." --Karl Marx

Karl Marx – The man who has influenced the thinking of socialists around the world more than any other.

I often hear socialists say that socialism is “democratic worker control of the means of production.” But is it really? In this essay, I’ll explain why it’s not, and why the issue of socialism vs. capitalism is a moral and political issue of property rights, rather than an economic issue of “modes of production.” Obfuscation and confusion aside, this ultimately holds true whether the socialism under consideration is classic Marxist socialism, “libertarian socialism,” or whatever other sort of socialism you want to name.

In a mostly capitalist country, like the US in the 1880s, there are many different kinds of business organizations: There are for-profit corporations, non-profit corporations, sole proprietorships, partnerships, credit unions, retailers’ cooperatives, consumers’ cooperatives, and employee cooperatives. That’s right, worker cooperatives can and do exist in what Karl Marx would call a “capitalist society.” Examples of consumers’ cooperatives include REI in the US and “The Co-op” in the UK. Examples of employee cooperatives include the Cheese Board Collective in Berkeley, California, the Rainbow Grocery Cooperative in San Francisco, and the Citybikes Workers’ Cooperative in Portland, Oregon. These latter three are companies where employees own and control the means of production in their company, democratically.

If “socialism” meant “worker control of the means of production,” as in a co-op, then people are perfectly free to have “socialist companies” under a laissez-faire capitalist government that protects private property rights.

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Bernie Sanders and the Injustice of “Democratic Socialism”

This essay is Part 3 of a three-part series on socialism:

Bernie Sanders Talking

Bernie Sanders

In the first essay of this series, I took socialism, as defined by the Oxford English Dictionary, and showed why it is immoral (unjust) in theory and in its “purest” practice. Then, in the second essay, I explained why, in the real world, attempts to approach pure socialism have always resulted in oppressive, dictatorial governments with high degrees of corruption. (Again, as explained in the second essay, worker-owned cooperatives cannot generally be called “socialism.”)

In this essay, I’ll discuss partial socialism, as it presents itself in the Scandinavian countries of Europe, (like Sweden,) in the US, and in the 2016 presidential campaign of Bernie Sanders. Some people will say that pure socialism is impractical and/or inconsistent with human nature, but still think that there should be a “balanced” mixture of socialism and capitalism. Capitalism, they think, mustn’t be “unfettered,” but rather must be reigned in by government regulation and welfare programs. This they will often call “democratic socialism” or “social democracy.”

I’ll explain why partial socialism and welfare programs are unjust and destructive of people’s well-being.

Socialism Lite

Once again, from the Oxford English Dictionary, socialism is defined as:

A political and economic theory of social organization that advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole.

But “the community as a whole” is not a single entity, and does not think with a single mind. There is not even a single, definite organization encompassing “the community as a whole.” So it can’t really do anything or own anything. In socialist practice, “the community as a whole” is taken to be represented by government. (And as I explained in Part 2, the logic of socialism means that this government doesn’t even have to be “democratic,” in the way that term is often understood. At least in the Marxist version, it can also be represented by an informal government, consisting of organized gangs of proletarian thugs with guns–this is Marx’s “revolutionary terror.”)

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Why Socialism is Morally Wrong: The Basis of Property Rights

This essay is Part 1 of a three-part series on socialism:

Socialism-raised fists-black on red backgroundSocialism has become more popular in the US recently, at least as a term people use for their political beliefs. Bernie Sanders and many of his young followers claim to be socialists. But what is socialism, really, and is it a moral system or an immoral one? Is it practical or impractical?

In this essay, I will give the definition of socialism as dictionaries and its most committed advocates understand it. Then I will take socialism in its “purest,” most “noble,” most economically reasonable form–which many socialists claim has not been refuted by history–and show you why it is both immoral and impractical.

The Common Definition of Socialism

The Oxford English Dictionary defines socialism as:

A political and economic theory of social organization that advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole.

If we are talking about full socialism, as its serious advocates mean it, the “regulated” here is redundant and should be taken to mean complete regulation and control, which is effectively the same as ownership. In a fully socialist society, “capitalists”–those who own “the means of production, distribution and exchange,” like factories and grocery stores–are abolished. Everyone in the society is a “laborer” or “worker,” in the broad sense of “someone who works for wages,” (what I’ll sometimes call a “wage-worker,” as opposed to someone who earns profits from private ownership.)

The “community as a whole” exercises control through some form of governmental institution. In different socialist theories, this may take the form of anything from local direct democracies, to national or worldwide governments of central planners, allegedly representing the collective will of the “working class” (proletariat.)

(In light of this, I will say up front that Bernie Sanders is not a socialist in the full sense of the term: he doesn’t advocate the outright abolition of capitalists. I will have more to say about what he actually is, in Part 3 of this series.)

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New Book Out Today! Equal is Unfair, by Yaron Brook and Don Watkins

Equal is Unfair: America's Misguided Fight Against Income Inequality, book coverIt seems like virtually everyone on the political left is talking about income inequality, or inequality of wealth. From Paul Krugman, to Rachel Maddow, to Elizabeth Warren, to Bernie Sanders, to President Obama. They all condemn high levels of income or wealth inequality as unfair and economically destructive.

But what if they’re wrong? What if high income inequality is a good thing for prosperity? What if it’s necessary for the greatest improvement in the lives of the poor? What if the campaign against inequality is actually immoral?

There’s an important new book on income inequality that was just released today. It’s called, Equal is Unfair: America’s Misguided Fight Against Income Inequality. Here are some videos from the authors on the issue of income inequality. The first chapter of the book is also linked below.

The videos:

Bernie Sanders and the Inequality Gimmick:

Who Cares About Inequality?

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“Equal is Unfair – The Inequality Advantage”: A Talk by Yaron Brook

Should economic inequality (inequality of wealth) in a capitalist system concern you? Is inequality of opportunity a problem that needs a governmental solution? Is it fair or just that some people make more money than others, or inherit wealth from their parents?

I found this video so powerful that I had to share it in its own post on my blog. In this video, Yaron Brook is both reasonable and passionate when he speaks about one of the central moral and political issues of our time: inequality. He also answers questions from his audience at the University of Exeter after the talk.

Stick around for the Q&A for Dr. Brook’s view of what legitimate equality is. (Hint: It’s the same type of equality meant by the Founding Fathers of the United States.)

Also, look for Yaron Brook’s upcoming book, Equal Is Unfair: America’s Misguided Fight Against Income Inequality, co-authored with Don Watkins.


Related Posts:

Socialism and Welfare vs. Justice: Why Inalienable Private Property Rights are Required for Justice

On Fairness and Justice: Their Meanings, Scopes, and How They Are Not the Same

Wealth is Created by Action Based on Rational Thought

The Role of Profits in Free-Market Capitalism, and Why High Profits are Good for a Company’s Workers

How Business Executives and Investors Create Wealth and Earn Large Incomes