The Occupy Wall Street (OWS) movement has focused a lot of attention on private wealth creation through the exercise of government power -- what we might more familiarly call "crony capitalism."
These protesters and I may differ on a whole lot of things - perhaps even most things - but we share the same disdain for this sort of individual enrichment through one's access to government.
Where I think the OWS folks go off the rails is their assumption that this sort of cronyism represents the true beating heart of capitalism, and that most of those who are in the top 1% most wealthy have become so due primarily to this unfair exercise of power.
The core of capitalism has nothing to do with, and is in fact inherently corrupted by, the exercise of state power. At its heart, capitalism is one simple proposition -- free exchange between individuals based on mutual self-interest. There is no room in this definition for subsidies or special government preferences or bailouts. The meat and potatoes activities of crony capitalism are corruptions rather than features of free markets. Where state power to intervene in economic activity does not exist, neither does cronyism.
Believe it or not, the Occupy movement reminds me of nothing so much as 1832. Flash back to that year, and you will find Federal officials with almost no power to help or hinder commerce... with one exception: the Second Bank of the United States, a powerful quasi-public institution that used its monopoly on government deposits as a source of funds for private lending. The bank was accused of using its immense reserves of government cash to influence elections, enrich the favored, and lend based on political rather than economic formulae (any of this sound familiar?). Andrew Jackson and his supporters, the raucous occupiers of their day, came into office campaigning against the fraud and cronyism at the Bank.
Jackson, much like the current OWS folks, was a strange blend of sometimes frontier anarchist and sometimes tyrannical authoritarian. But in the case of the Second Bank, the OWS movement could well learn from Jackson. He didn't propose new and greater powers for government officials to help check abuses of the existing powers -- he proposed to kill the Bank entirely. Eliminate the source of power, and men can no longer tap it for their own enrichment.
Unfortunately, the progressive Left which makes up most of the OWS movement has taken exactly the opposite approach over the last century or so, expanding government powers and the scope of state economic institutions and thus the greatly increasing opportunity for cronyism. In fact, most of the interventions that make crony capitalism possible are facilitated and enabled by the very progressive legislation that the progressive Left and the OWS protesters tend to favor. Consider some examples
Antitrust: Justified as consumer protection, it's hard to actually point to any case in history where consumers were protected from monopoly pricing (Standard Oil's kerosene prices, for example, were dropping right up to its breakup). Today, antitrust law is mainly used by politically connected corporations to try to check their more successful rivals. Microsoft was convicted, for God sakes, for offering too much free stuff to consumers.
Licensing: Milton Friedman once wrote, "The justification offered is always the same: to protect the consumer. However, the reason is demonstrated by observing who lobbies at the state legislature for the imposition or strengthening of licensure. The lobbyists are invariably representatives of the occupation in question rather than of the customers. True enough, plumbers presumably know better than anyone else what their customers need to be protected against. However, it is hard to regard altruistic concern for their customers as the primary motive behind their determined efforts to get legal power to decide who may be a plumber."
Protectionism: The Left nearly always supports strong trade protectionism -- OWS, for example, tried to shut down west coast ports. But protectionism is one of the worst forms of cronyism. In most cases, only a few politically connected companies benefit from tariffs and import restrictions, to the detriment of all consumers and most industries who must pay higher prices for their inputs.
Economic Management: Progressives want the government to take an active hand in managing the economy, and in today's context, in preventing economic downturns. But every bailout -- and every rich banker who has kept his millions despite making losing bets, at the expense of taxpayers -- is directly attributable to this impulse. True capitalists would have let the 1% go bankrupt. It was a progressive-left President who bailed them out.
Picking Winners: Progressives, particularly of the technocratic bent, always feel like they can better optimize the economy top down than the markets can bottom-up. They love to pick winners and losers, halting private oil production (for example) while subsidizing windmills. But picking winners generally turns out to mean "giving money to rich investors," with taxpayers pouring billions into the pocket of wealthy, politically connected owners of companies like Solyndra.
Green Energy: It's incredibly illuminating that the largest maker of light bulbs, GE, actually supported the Federal light incandescent bulb ban. Why? Because traditional light bulbs are a commodity product with little profit. The government ban, which was carefully crafted in collusion with a GE CEO who had special access to the President, forced consumers into higher-price, higher margin products where GE had technological and other barriers in place to keep out competition. And don't even get me started on ethanol, a disaster of an environmental program opposed by both Left and Right but kept alive because mandates and subsidies benefit well-organized farm and big Ag groups.
Consumer Protection: A couple of years ago, we had a mild media tempest around some lead toys that Mattel had sourced from China. In response, Congress passed a comprehensive set of regulations and controls that imposed incredibly expensive inspection and reporting duties on toy makers. Those progressives really showed Mattel who was boss, right? Well, in fact, Mattel and a few large toy companies were exempted from the most burdensome regulations, being allowed to self-police. The real costs fell disproportionately on Mattel's smaller competitors, such that the law turned out to be a huge boost to Mattel's competitive position.
Employee Protection; A while back, Maryland was considering setting minimum wages in the retail sector. The law was aimed primarily at Wal-Mart, the perennial whipping boy of the Progressive left, who supposedly kept employees in a state of quasi-serfdom. Guess who came out in support of the measure? Wal-Mart. It turns out that the wages in the law were set about where Wal-mart was already paying employees, so its main impact was to hammer a number of lower cost competitors that were starting to dog the company. As with Mattel, the law would strengthen the position of larger retailers with huge stores (that yielded very high sales per employee) versus smaller competitors.
Obamacare: Remember all the rhetoric from Progressives and President Obama about how the health insurance companies were making outsize profits and he was going to give them what-for? Well guess who ended up strongly supporting Obamacare? That's right, the health insurance companies. Again, you have to strip away the progressive rhetoric and look at the fundamentals. At the end of the day Obamacare forces, with threats of fines and imprisonment, every American to buy the health insurers' product. Government purchase requirements for ethanol worked so well to enrich Archer Daniels Midland, just think what it can do for health insurers!
I want to end with a parable. There was a town with 5 districts, and a central water supply that served them all. Historically, there had never any problem with the water supply, but someone suggested there might be a shortage one day and that shortage could be better managed by the mayor rather than the cold and heartless operation of markets. So the town built a valve manifold that controls the water flow to the five districts, and gave the mayor control.
Almost inevitably, the city soon had a scandal where the mayor was accused of adjusting the flow so his friends and favored districts got more water, and his enemies were starved. So the town created a board to oversee the mayor's management of the water, but the same thing happened again. So they created a statistics organization and science-based rules to guide the board's decisions, but the same thing happened again. They tried czars-for-life and citizen boards and elected councils and unelected bureaucracies made up of water experts -- but the results were always the same. As long as the power to coerce the flow of this valuable resource existed, someone would tap into that power for their own benefit. So in the end, the town removed the valves and the power to control the water, and the problems with cronyism and fraud went away.
The OWS protesters aim a great deal of vitriol at business people who successfully feed at the government trough, and I am happy to join them in this endeavor. But adding yet more government powers -- and putting more economic activity under the government umbrella -- only serves to create new and potentially larger troughs. The more that can be gained (or lost) by government action, the more time and money some people will be willing to spend to control those actions. The only way to really stop corporate cronyism is to remove the troughs altogether, to get rid of the ability of the government to pick winners and redirect resources through coercion.
Postscript #1: This article is essentially an elaboration on an article I wrote here a couple of weeks ago on campaign finance law, where I wrote
The ultimate problem is not campaign finance laws but the degree of power that has been taken upon itself by the state. The government routinely exercises the power of life and death over businesses and industries. With this much power for the taking, it is inevitable, regardless of election finance laws, that someone is going to try to wield the power, either to get a subsidy or a special exception or perhaps to block a competitor.
Postscript #2: The one potential silver lining to the last three miserable years of governance has been that we might finally put to rest the notion that all of the problems described above are merely the fault of having the "wrong guys" in office. As the meme goes, if only my guys were running the state, these things would never happen. This argument has always been threadbare, as we have seen the same kind of organizational capture and cronyism through generations of leaders and multiple regimes of both major parties. But Progressives finally got their guy, Barack Obama, into office. And despite the endlessly tedious excuses that all his problems are the fault of Bush or Congress or the Republicans or all those people who are not-Obama, its pretty clear that the cronyism lives on. Goldman and Bank of America and AIG and GM and Chrysler all still exist today enriching the same executives because of Obama's largess. And the PPACA, or Obamacare, is likely to be one of the richest playgrounds of all time for lobbyists, who have already been kept busy obtaining special exemptions from the law for the politically connected.
