How to destroy crony capitalism
January 19, 2015
The recent Oxfam report on inequality and the ‘top 1 per cent’ is riddled with statistical errors. Worse still, its proposed solutions risk harming the poor through ill-conceived government interventions.
Nevertheless, current patterns of wealth distribution raise important questions about ‘crony capitalism’ and the extent to which concentrated special interests have succeeded in rigging markets to benefit themselves at the expense of the wider population.
As might be expected in ‘state-capitalist’ economies characterised by high public spending and pervasive regulation, it would appear that a significant proportion of the ‘top 1 percent’ do indeed owe a large part of their fortunes to special privileges granted by governments.
Several powerful ‘crony capitalist’/protected interest groups can be identified, including:
- Elements of the financial sector propped up by quantitative easing, monetary inflation more generally, bailouts, taxpayer guarantees, regulation, tax breaks, government-imposed monetary systems, state borrowing etc.
- Beneficiaries of government contracts, who are often well connected to the political and bureaucratic elites who determine official spending priorities.
- Landowners whose property was stolen by the state and then transferred into private ownership. This category would include many of the European aristocrats who still make up a significant proportion of their national rich lists, but could also be extended to include mining, energy and agribusiness enterprises benefiting from government land-theft around the world.
- Property developers, often well connected to political elites, who are able to gain permissions that are unavailable to the general population due to planning and building regulations, and who profit from the resulting scarcity value. They may also be indirectly subsidised by taxpayer-funded transport infrastructure and regeneration grants.
- Enterprises dependent on state protectionism in the form of illegitimate ‘intellectual property rights’ such as patents.
- Professionals whose lucrative jobs depend on regulation and/or whose high remuneration relies on occupational licensing. Examples include lawyers, doctors and accountants.
Some of the individuals and firms benefiting from special privileges could of course also thrive in an unhampered market economy based on voluntary exchange – but it seems likely that a high proportion of the above groups would either be eliminated entirely or see a major fall in their relative wealth in the absence of state protection.
The precise impact on overall inequality would depend on the social structures that evolved under a system based on free exchange. However, it is clear that both patterns of wealth distribution and absolute levels of wealth would be very different if markets were freed. Crony capitalism, special-interest influence and rent-seeking behaviour tend to undermine genuine wealth creation. Accordingly, the emergence of ‘distributional coalitions’ is a serious problem for contemporary ‘state capitalism’.
Tackling the cronies will not be easy, but identifying some of the most egregious special interests provides a useful starting point. A combination of honest, free-market money and deregulation would destroy the privileges of the financial sector. Dramatically shrinking public spending would undermine the government contractors. Scrapping patents would subvert that insidious form of protectionism. Planning liberalisation would reduce the advantages of crony-capitalist property developers. And land restitution (which raises many difficult issues) might start to address the widespread government-corporate theft of individual and communal property. Finally, abolishing occupational licensing would bring much-needed competition to state-protected professions.
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