The Crony Capitalism Claim

The latest issue of First Things, which isn’t even highlighted on their website yet, features an article by Acton Institute Director of Research and “Tea Party Catholic” extraordinaire Samuel Gregg entitled “Catholic Blindness.” Without getting into the details of the piece here (that’s for another time), let me note that for those who have followed the general trajectory of Acton’s apologetics for free markets and small government, the article doesn’t break any new ground. In fact, it’s more-or-less an advertisement for Actonism and perhaps part of a campaign to ramp-up interest in Acton University for 2015. Anyway, lurking behind Gregg’s pro-market apologia and, indeed, most of the ideological rhetoric that emanates from the Acton Institute is the specter of crony capitalism, an intentionally slippery concept that is mean to instill fear in the hearts of anyone who believes there is a legitimate—indeed necessary—role for government in the operation of the economy. I call the concept “slippery” because it can be, and often is, quietly expanded and retracted over the course of a single exposition in order to meet an array of critical challenges. Moreover, as I will discuss more below, it is far from clear that crony capitalism describes a new phenomenon—one which is distinct from capitalism per se or, at least, any form of capitalism which has actually existed in the real world. There’s apologetic utility in that. For if every critique of capitalism is not a critique of “real capitalism” but only “crony capitalism,” then the espousers of “real capitalism” are free to continue promoting their ideology without fear of falsification. The irony, of course, is that Actonites and other free-market apologists—including Gregg in his First Things article—perpetually point to real world examples of what they claim is “real capitalism” (not “crony capitalism”!) at work to empirically defend themselves. And this is where the expansion and contraction of the crony capitalism descriptor really comes into play.

Before proceeding further, let me define what I mean by the “broad” and “narrow” uses of crony capitalism. In the narrow sense—which might also be called the “nefarious sense”—crony capitalism is the use of government regulatory authority which benefits particular industries, or particular firms within a given industry, at the expense of the public at large. (For the purposes of this post, my use of the term “regulation” encompasses all forms of government intervention in the economy, including the taxing power, direct and indirect subsidies, and trade barriers such as tariffs and quotas to shield domestic industries from international competition.) That this narrow form of crony capitalism is a real phenomenon is generally undisputed. The problem is that it isn’t new. As early as the 1950s and 60s regulatory economists and public-choice theorists drew attention to the problem of “regulatory capture” whereby industries and firms which are being ostensibly regulated in “the public interest” were in fact directing the terms of their own regulation in order to keep new entrants out of the market while collecting “windfall profits” (a somewhat vague term generally taken to mean “profits in excess of what they would likely receive in a competitive environment”). While various iterations of capture theory ran into various empirical and theoretical problems, its basic insight into the nature of industrial regulation was one of the spurs of the deregulation movement that really took flight in the United States with the 1978 Airline Deregulation Act (pun intended). However, it didn’t take theorists very long to note that what transpired in the 1970s and 80s was less about “deregulation” and more about “regulatory change.” For the airline industry, the Civil Aeronautics Board (CAB) (R.I.P. 1984) may have no longer been tightly overseeing domestic rates, routes, and services to the benefit of a handful of well-connected airlines, but the Department of Transportation (DOT) soon emerged as a regulatory authority which could be, starting in 1992, directed to granting antitrust immunization for legacy international carriers such as United, Delta, and American to cartelize the transatlantic and transpacific markets with European and Asian partners. If the DOT is today participating in crony capitalism, then surely the CAB was as far back as 1938 when it was established under the Civil Aeronautics Act. So what’s changed?

When Actonites and other free-market apologists use crony capitalism in this narrow—but hardly new—sense, it’s difficult not to give them a sympathetic ear. There is nothing laudable about rich, established firms using government authority to give themselves a leg-up over potential competitors at the expense of consumers, whether those firms are airlines or global financial firms. The problem with accepting this narrow definition, however, is that it is quickly broadened at the apologetic level to encompass not just particular examples of regulatory capture, but any government regulatory involvement in the marketplace past, perhaps, a de minimis level to cover furnishing a limited number of public goods (e.g., roads) and resolving certain collective action problems (e.g., national defense). (Some hardcore free-marketeers such as anarcho-capitalists reject even de minimis regulatory intervention.) Even if not all forms of government regulation necessarily reveals itself as crony capitalism in the narrow sense, all regulation is potentially so. (“Regulatory power tends to corrupt…”) No notice is paid, though, to how real or likely this potentiality is across the economy as a whole. It’s better to be safe than sorry, as they say, and it’s “theoretically possible” that even a slight amount of regulatory intervention can create distortions in the marketplace to the illicit benefit of the few over the many.

It is important, indeed essential, to keep these different uses of the term crony capitalism in mind when engaging with Actonites and other free-market ideologues. Acknowledging the truth of narrow definition does not mean accepting the broad definition, at least as far as holding hard-and-fast to an absolute anti-regulatory mindset. (I am leaving to the side here the question of whether or not the current schema of regulatory authority in the United States is desirable. Much of it isn’t, but that doesn’t mean regulation is per se undesirable.) More critically, acknowledging the truth of the narrow definition does not mean believing that there is or ever could be a “pure capitalism” which is forever free of cronyism. In fact, such a pure capitalist economic ordo has never existed—a fact which leads one to wonder how or why Actonites can lean on historical examples of capitalism “at work” in order to advance their free-market cause. Were not all of these historical examples littered with narrow cronyism? Or if they weren’t, they were at least packed with broad—that is potentially narrow—cronyism. Perhaps an Actonite would shoot back that capitalism is powerful enough to “transcend” or “overcome” cronyism and that whatever the various historical benefits of capitalism under the crony banner, those benefits would have been greater—maybe exponentially greater—without government regulatory intervention. That claim can be easily reversed. Perhaps it was the existence of government regulatory intervention which sufficiently constrained and tamed capitalism enough to ensure the so-called benefits of capitalism and that things would have turned out significantly worse without regulation. Free-market ideologues don’t like to dabble in that counterfactual.

In closing, let me note that this post hardly represents my “last word” on the crony capitalism claim. There are a number of nuances with regard to how that claim is advanced, though I am suspicious that it contains any theoretical firepower. The term, by its very name, lends apologetic and polemical firepower to those who hold up some idea of pure capitalism as the only legitimate economic ordo for ensuring material prosperity, along with ancillary benefits such as contributing to social harmony and international peace. Some might call that sort of thinking “utopian,” and they’re probably right.