Crony Capitalism - know your enemy

People often dismiss capitalism as some kind of evil when they see the negative impact of crony capitalism, which is understandable. But crony capitalism is a poor description of the disease, because cronyism has nothing to do with capitalism as such. 

Crony capitalism is not about free markets - but undermining them. It's about becoming powerful enough to directly influence government policy in your own [commercial] favour. 

The thing is, in a capitalist society competitive pressure dictates that the bottomline is the only line. Hence, as soon as it makes sense to influence government policy in your favour, then that's exactly what you will do. Cronyism is not just a potential - it's an inevitably.

A good example (and don't quote me on this): I understand that in New Zealand we pay as much as 3x what we should for building materials, specifically due to cronyism. So how does that work?

Major construction firms influence government by lobbying them to introduce new licencing demands on materials. These licenses heavily favour New Zealand made products over Chinese (and other) products. There's always a do-gooder rationalisation for the changes, of course. The big firms tell government ministers (who are naturally naive) that we need new licenses for safety reasons, or other, which can seem plausible on the face of it, yet, the real reason for the changes is to drive forward a protectionist regime so that New Zealand firms don't have to compete with highly affordable imports - that is, importers who do not have licenses or will have great difficulty obtaining them.

Why do big construction firms, and others, do this? Because they can. Their lobbyists are hired guns whose job is specifically to drive government policy in the direction that favours their clients. If they can do it - they will do it. It's their job. My point again is, we should never be merely suspicious of cronyism - we should expect it. It's commercially academic.

Unions do the same thing. They are a special interest group like any other. Insofar as unions have leverage to influence government, they too will use it. That's their job. We see this most explicitly with teacher unions. Though their hearts bleed for the children of course, their exclusive job is to represent the interests of their paid members - that's teachers, not students.

Another example of a most insidious form of cronyism can be seen with New Zealand's Telecom company, shortly after it was privatised. Telecom made grand donations to both the Labour and National parties, during each election cycle. The effect? Well, he who gives can always take away. It didn't matter which political party gained power, neither would undermine Telecom's monopoly status. Of course this tactic was calculated by Telecom. It made commercial sense - so they did it. It protected their monopoly status at the time and won them historic profits.

Our country, and the world, is more infested with cronyism than ever, and we have the greatly bloated regulatory regimes to prove it. 

I believe that the biggest reason why we have this deep infestation of cronyism, which is so hard to reverse, is because too many people only want to bitch at it rather than properly understand it - and deal with it. Hence the political gravity against it is not there like it should be. 

People seem to think they can morally shame big players out of the practice of cronyism, which is absurd. Cronyism is not their morality - it's their responsibility. They owe it to their shareholders. Again, the only line is the bottomline.

Dealing with cronyism demands transparency, strict limits on political donations, and probably more important than anything we need decentralised government so that the forces of inter-state competition can hold anti-competitive practice to account. (see here for my article relating to this).

Crony capitalism is going nowhere until we think in these terms. It's a deeply politico-systematic problem that requires proper diagnosis, leading to real solutions. Oh, and the solution is not socialism. Socialism (as we know it) is pretty much crony capitalism taken to its zenith - that is, it represents the total destruction of competition and the complete centralisation of power.

A final note. Much cronyism has been with us for so long that we do not even see it for what it is. Over a hundred years ago, institutional schooling as we know it was driven forward by industrialists - not popular demand. The original intent was to create an army of "economic soldiers" for the big industrialists at the time. But alas, when you're born into cronyism you don't always see it for the intrusion that it is. We may only see it as the 'gift' that it isn't. Especially when everyone else sees it that way.

Cronyism has also had an impact on education through the licensing system. It is perverse, for example, for a dentist to charge you hundreds or even thousands of dollars for a 2-hour job pulling your tooth out. But the licensing system, originally driven my union interests, has ensured that you need to spend a decade in university to win the privilege of performing that straightforward low-risk operation. In truth, ten years in a university was never needed for dental work. The hyper-inflated educational prerequisite works as a barrier-to-entry to allow wages for dentists to radically inflate. Again, we think this is normal, but it was never a real public demand. The same can be said for probably most tertiary education today, in fact.

-Andrew Atkin