Crony Capitalism or Real Capitalism?

I think many commentators exhibit a case of cognitive dissonance & bias when it comes to the questions of the sustainability of capitalism…

Many commentators exhibit a case of cognitive dissonance & bias when it comes to the questions of the sustainability of capitalism & the euphemism ‘crony capitalism’ aka real existing capitalism. The norm for many is to deny the historical reality that cronyism has always existed and proclaim that it in fact is not capitalism but some government induced grotesque mutation of the idealized capitalism envision by Adam Smith & David Ricardo. An idealized capitalism in which oligopolies & monopolies do not exist and perfect competition between small-medium sized producers holds sway.

Putting aside the fact that this idealized capitalism has never existed and that modern capitalism shows no signs of it ever emerging. We can focus on the notion that it is governments that beget cronyism. I think it’s natural for supporters of free markets to fall into this conclusion but with a simple analysis we can deduce that this is a causally & logically wrong assumption. To start, logically, most people including free marketers would agree that some form and degree of government is necessary be it for protection against fraud, property rights, or restitution etc. There is no escaping this fact otherwise there would be no market or economic progress. Secondly, regardless of the type of government (except in the cases of state ownership) when looking at the outcome we call cronyism we should remember that it is the effect of some cause which some would deduce is the government. However, that is only going back half way through the chain of causality. Though governments are the enablers of this outcome to an extent there is a further factor in the chain and that is the private economic actors within the economy i.e. companies. It’s the companies in the first place who start the chain of causality that leads to what we call cronyism expressed as companies->government->outcome. Since it is the motivation or incentives stemming from market competition that drives companies to seek an advantage. While governments act as the mediators between companies and the outcomes they seek. To illustrate this chain of causality just look at the process of money in politics.

That last comment brings up another point. That a solution is to further separate the economy from politics (as if the extent that it already is in terms of economic policy & discourse isn’t enough). That is something that is inherently impossible in real existing societies. For example consider that an economy & markets are obviously composed of individuals dealing with each other and interdependent. Without human interaction whether political or commercial in nature those two categories lose meaning. While it is possible in academic economics and theory to abstract away politics and focus on the economy in reality the two are inseparable. As any economic question is at the same time a social question (labor, regulations, property rights, contracts between individuals etc.) and thus political. This is true logically and empirically from history and our own experiences.

So what ultimately drives the emergence of cronyism? I think it is reasonable to claim that it is competition itself and the fact that there is variance in the wealth, capital etc. of the actors competing against each other along with the opportunity to “corrupt” the political system in which they operate. By corruption we can mean a multitude of options such as: political contributions, bribes, installing one’s own agent in government, personal favors, job offers, lobbying etc. The fact is that in societies dominated by money as a means of obtaining access to goods, resources, status and in sum power along with “free” markets the result will always be cronyism or to put simply real and existing capitalism.

Then how can we avoid the problem all together? Given the analysis laid out above I think the only real solution to the problem of the concentration of economic power and its control of politics and thus socio-economic outcomes perceived as “cronyism” is to minimize or remove the ability of a few economic actors to amass the economic power that is used to bend governments to their interests at the expense of the interest of all. To do that we need to understand the vehicle by which their power is derived from and that is the business itself whether a factory, retail, or office. Once that is understood the answer is not more regulations, state ownership, or less government etc. but democratic ownership of the business itself by those who work and manage the business i.e. the employees all the way from the lowest employee in the business to the CEO. Such an organization & governance isn’t new it is called worker cooperatives. Worker cooperatives along with consumer cooperatives (to balance supply & demand) are the key to not only reducing vast inequality but also to hardening and protecting a democratic government (of course this only makes sense with democratic forms of governments) and the public’s interests.

A few details about cooperatives. In most worker cooperatives their is a ratio in the bylaws that dictates the differential range of wages for all the employees. One cooperative might have a wage ratio of 1:15 which would mean that the highest paid employees (say a CEO) can not earn more than fifteen times what the lowest paid employees receive. Another aspect is that cooperatives do not have (shocker) shareholders outside of the firm since each employee in essence owns one share and no more. Besides allowing that would defeat the purpose of the business being organized as a democracy. Furthermore, cooperatives can be as large and hierarchical as any traditional transnational corporation as shown for instance by the Mondragon corporation from the Basque region in Spain. In that case a cooperative is more akin to a representative democracy in which a board chosen by the employees or filled by employees hire the executive level employees. There is rich variety in how cooperatives organized themselves which adds to its flexibility. Removing large shareholders and short-term (share price) focused executives who directly or indirectly, through various intermediates, obtain political influence and thus favorable laws, subsidies etc. is the only way of avoiding in the first place and permanently (unlike regulations/laws) the economic outcome dubbed cronyism.

As to the funding of new businesses or the acquisition of capital for expansion without stocks or traditional investment? Well that can be taken care of with bank loans (preferably from public banks), or a single tax on existing businesses (removing all other business taxes), and even private investment facilitated through contracts that do not bequeath ownership granting stock but provide a guarantee of priority to the income of a firm. There are many other ways to fund new enterprises and provide capital for the expansion of existing businesses all of which can be combined in some manner to reach the desired result.

A qualification to the above would be that within democracies campaign financing should exclusively come from a public fund and that official campaigning (political speeches, debates, political ads) should only be accessed through publicly owned channels like public radio & television stations available to all. So as to negate the most direct and obvious ways that private money corrupts the political system to influence political outcomes.