For years, I’ve used the term crony capitalist to describe businesspeople who choose to earn profits by lobbying for subsidies and government regulations suppressing competition. My critics pointed out that crony capitalists are not capitalists.
My critics are right, and the distinction matters. Crony capitalism has no resemblance to real capitalism.
Conflating the two words gives capitalism a bad name. No wonder “70% of millennials say they’d vote for a socialist.”
In his book, The Meaning Revolution, economist Fred Kofman provides a clear definition of cronyism:
“Cronyism is a political and economic system in which the government is controlled by corporations and intervenes in the market using its coercive power on their behalf. Crony businesspeople thrive not because they serve their stakeholders but because they exploit the power of the state, circumventing the discipline of the free market.”
Crony businesspeople partner with politicians. “While capitalism channels personal ambition into the service of others, cronyism channels personal greed into abuse.” Kofman explains how:
“Crony politicians crush competition by handing out special permits, government grants, and tax breaks to those whom they favor, and by imposing tariffs and restrictions on their competitors and consumers. Crony corporations take inordinate risks fearlessly, knowing that if they win, their earnings will be privatized, but if they lose, their losses will be covered through bailouts and special aid packages.”
Cronies have no skin in the game; their losses are covered. Nasim Taleb points out “The largest fragilizer of society is a lack of skin in the game.” Cronies pursue coercive policies that make markets more fragile, less able to learn from trial and error, and less able to cope with unexpected events. Taleb adds, “I want the entrepreneur to be respected, not the CEO of a company who has all the upsides and none of the downsides.”
The result of cronyism, Kofman explains, is the destruction of economic value: “Crony businesses make money not by profiting in the economic market through their value-adding services, but by profiteering in the political market through value-destroying takings.”
Cronies operate from a win-lose mindset; entrepreneurs have a win-win mindset. When cronies win, someone else must lose. When an entrepreneur gains, so can others.
Cronies seek to increase their wealth at the expense of others; entrepreneurs seek to increase their wealth by serving others.
Android competes with iOS. Both platforms have led to the creation of thousands of successful app businesses. Without those synergistic businesses, the value of Android and iOS plummets.
Perhaps your home has an Instant Pot on the kitchen counter. In 2008 Dr. Robert Wang, a Chinese immigrant to Canada with a Ph.D. in Computer Science, followed a rule of all successful entrepreneurs: Give customers what they want, not what you have.
Customers wanted a new gadget that could help them make nutritious home-cooked meals in much less time and with a minimal learning curve. Yes, Dr. Wang created wealth for himself; but he did so by improving others’ lives, including a small economy of cookbook authors showing how to use the Instant Pot for every cuisine. Win-win.
It is cronies who seek via coercion to give the consumer what their company has and not what the consumer wants. Ethanol-laced gasoline is a good example. Government mandates its use; consumers have no choice but to buy it. Ethanol hurts both consumers and the environment. Crony ethanol producers win; everyone else loses.
Financial industry cronies demand more monetary easing and create asset bubbles.
Business and airline groups are asking the U.S. government to develop vaccine immunity passports. If tribal medical identities fracture America, cronies will be to blame for codifying our worst instincts.
Why do I write worst instincts? Some argue that government needs to protect us against the unvaccinated. Isn’t that a good instinct? Let’s carry out the logic of the protection argument. Of course, this question is absurd, but should the obese be banned from flying? The obese are more likely to develop a severe case of Covid-19, and Covid-19 vaccines offer less protection to the obese. Sugar consumption is among the factors that suppress the immunological system, making sugar eaters more likely to be carriers of disease. Should government grant sugar-free consumption passports?
Without government codifying a medical caste system, airlines and other businesses that voluntarily implement vaccine immunity passports may lose more business than they gain. In the January 2021 forecast issue of The Socionomist, I wrote this:
“I’ll be observing if an American caste system develops around immunity passports and vaccination status. In the Hindu caste system, your societal rank depends upon your perceived purity. Contact between a lower caste and higher caste never purifies the lower caste; it can only contaminate the higher caste. Under a medical caste system, will the proclaimed “pure” demand no contact from those who make different medical choices? If so, businesses such as airlines, supermarkets, and restaurants, and employers will face tough decisions.”
Given a segment of the public’s insatiable demand for safety, will lockdowns morph into a ubiquitous request for “vaccine papers please”?
Cronies are Not Lovely
Lovely is the word Adam Smith used in his book The Theory of Moral Sentiments to describe individuals who are “worthy of being loved” because of their character. We create our civilization by how we live our lives.
Since profiteering cronies employ coercion, they do not live moral lives. Kofman is blunt, “Crony businesspeople…are rapacious, predatory, and immoral.” Immoral cronies deform markets. To Kofman, “Crony businesspeople are not capitalists; they are Mafiosi.” He contrasts cronies from capitalists:
“Capitalism doesn’t operate this way. In free markets under the rule of law, businesses don’t profit by being callous, manipulative, and greedy—although behaving that way may give them short-term advantages. Businesses really profit over the long run by being empathetic (understanding their customers, employees, and other stakeholders), compassionate (serving them), and equitable (being fair to them).”
Outside the political markets of cronyism, we are naturally lovely to each other. The economic marketplace brings out the best of us, our loveliness. We are more successful both personally and professionally when we turn, as Steven Pinker puts it, to the “better angels of our nature” which orient us towards cooperation.
In the Wealth of Nations, Smith famously instructs, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
Smith is not pointing to selfishness as the underpinning of capitalism. Kofman explains, “Capitalism is the alchemical crucible in which humanity transforms its base instincts into gold:”
“Capitalism works even when people are unconscious and driven by selfish desires. Even if an entrepreneur is no moral hero, capitalism will turn him or her into a servant of society. Property rights and free exchange distill self-interest into service, making it necessary to enter the marketplace with an intention to help.”
By employing coercion, greed runs unchecked. Cronies deform economic markets by disabling the safety mechanism that disciplines markets. Kofman explains:
“The safety mechanism of capitalism, the one that disciplines the potentially rapacious ambition of a company or an individual, is the possibility of opting in or out of any transaction—guaranteed by property rights and free exchange. Once legal coercion blocks this safety switch, the whole system derails. If people are coerced (illegally, as in crime, or legally, as in politics) into participating in transactions that they would prefer to avoid, “natural selection” in the ecosystem breaks down.”
Real damage is done when opting out is not an option. How do we repair the damage inflicted by cronyism?
In his book, The Essential Adam Smith, professor James Otteson asks us to adjust our mindset: “We have to treat each other with respect, and not presume that either of us is more important or more worthy or more deserving than the other.”
Every person, Smith pointed out, “has almost constant occasion for the help of his brethren.” “The best way” to benefit from the assistance of others, Otteson writes, “is by offering to do something for the other person that that other person values.”
In the spirit of Adam Smith, Otteson argues that society functions best when “we meet one another as peers, as moral equals, and to make offers to one another that either of us is free to decline.” This “opt-out option,” Otteson writes, “disciplines us from any notion we might otherwise have had about merely trying to steal from or defraud one another. And because each of us desires mutual sympathy of sentiments, we desire to conduct ourselves in ways that others will approve of.”
Otteson illustrates the Smithian win-win moral code that would be crony kryptonite:
“So when we seek our meat from butchers, our ale from brewers, and our bread from bakers, we make them offers that recognize that they are our equals, that they have interests and obligations of their own, and that our interests and obligations do not trump theirs. Our desire for their meat, ale, and bread—which after all they had to make with their own labor and time and resources—does not trump their right to decide on their own what to do. In these circumstances, then, how are we going to get their meat, ale, or bread? We will have to treat them the way they want to be treated, and we will have to offer them something they might want; for their part, they will do, will have to do, the same for us.”
Kofman puts it this way: “Capitalism creates a force field that channels personal ambition toward support for others, and it organizes society for cooperation through the division of labor, and through innovation toward the satisfaction of the needs of its members.”
Win-win outcomes arise from the capitalist mindset that others are peers whose freedom to opt-in or opt-out of any transaction we respect. Such a mindset orients us towards service and away from coercion. The crony mindset rationalizes exploiting the power of the state to profit by coercion and is anything but lovely.