Right Reason

Change is Hard

 

Not a half-year out of his presidency, Barack Obama is already filing to the trough laid out by corrupt system of crony capitalism. This September, the former president will be paid $400,000 to address Cantor Fitzgerald’s healthcare conference. Matthew Yglesias reacts over at Vox:

That's so much cash, for so little work, that it would be extraordinarily difficult for anyone to turn it down. And the precedent established by former Presidents Bill Clinton and George W. Bush, to say nothing of former Federal Reserve Chairs Ben Bernanke and Alan Greenspan and a slew of other high-ranking former officials, is that there is nothing wrong with taking the money.

Indeed, to not take the money might be a problem for someone in Obama's position. It would set a precedent.

Obama would be suggesting that for an economically comfortable high-ranking former government official to be out there doing paid speaking gigs would be corrupt, sleazy, or both. He'd be looking down his nose at the other corrupt, sleazy former high-ranking government officials and making enemies.

Which is exactly why he should have turned down the gig.

There should be nothing wrong with a rich politician who has earned his wealth on the free market before entering politics. There is also nothing wrong with high-skilled politicians and bureaucrats alike being paid a wage that reflects their contribution to the general welfare. However, there is something gravely shameful about former politicians and bureaucrats using their influence in order to make profits by doing little more than providing their customers’ with prestige and influence than they would not have otherwise had. This is nothing less than prostituting out the presidency's prestige for Mr. Obama's own enrichment.

It’s very easy to speak eloquently about change. However, it’s very difficult to change when it’s your own skin in the game. We are now seeing how much Mr. Obama really cares about changing American politics when he's the one having to abstain from the champagne and luxurious vacations. 

Adam Smith on Davos

 

 

What would Adam Smith think about the Davos World Economic Forum? He wouldn't think well of them and he would certainly see the forum, with its fleet of private jets, as a threat to liberty. From The Wealth of Nations:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together; it ought to do nothing to facilitate such assemblies; much less render them necessary. (WN: I.x.c.27)

 

Where the Davos men congregate, liberty can, really, only be threatened. Liberty isn't about rich businessmen being able to get their way. It's about people not messing with one's stuff. It's about people being able to interact with each other as equals under the rule of law. Does Davos stand for that?

Davos isn't a symbol of the commercial society, it's a symbol of the special access that the Davos men have to the corridors of power throughout the world.  Inequality per se isn't the issue. The issue is whether the rule of law has been corrupted to favor some at the expense of the many. On such issues, whether it be too-big-to-fail or by regulatory capture, the élites of Davos aren't the posterboys the commercial society neither needs nor deserves. 

John Maynard Keynes: Advocate of Crony Capitalism?

 

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.

- Dwight D. Eisenhower, "A Chance for Peace"

 

As the clouds grew darker over Europe following Germany's invasion of Czechloslovakia in March of 1939, John Maynard Keynes took to the radio to argue that the return of tensions between Germany and Britain brought with it a silver lining: Expenditures on arms would contribute to aggregate demand which might alleviate problems of unemployment in Britain:

It is not an exaggeration to say that the end of abnormal unemployment is in sight. And it isn’t only the unemployed who will feel the difference. A great number besides will be taking home better money each week. And with the demand for efficient labor outrunning the supply, how much more comfortable and secure everyone will feel in his job. The Grand Experiment has begun. If it works–if expenditure on armaments really does cure unemployment–I predict that we shall never go back all the way to the old state of affairs. Good may come out of evil. We may learn a trick or two, which will come in useful when the day of peace comes.

A recording of Keynes' speech can be found here. The outcome of that experiment, though, wasn't governments figuring out new means to rationalize their economies and to manage aggregate demand to maintain full employment. There were many outcomes to that experiment, including  helping the development of the Postwar Consensus, but the most important one wasn't felt in Britain, but in her ally, the United States. That outcome was the gestation of the military-industrial complex. 

 

Dwight D. Eisenhower was right. Good did not come of evil; instead the evil persisted and become stronger in peacetime. The squandor of the United States' resources in useless armaments programs became a part of America's own postwar consensus that the United States had to become an active participant in world politics lest the Soviet Union triumph. Eisenhower criticized this development of a perrenial aramement industry in his 1961 Farewell Address:

A vital element in keeping the peace is our military establishment. Our arms must be mighty, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction.

Our military organization today bears little resemblance to that known by any of my predecessors in peacetime, or indeed by the fighting men of World War II or Korea.

Until the latest of our world conflicts, the United States had no armaments industry. American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the defense establishment. We annually spend on military security more than the net income of all United States corporations.

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

Rather than aramaments providing the knowledge of how to manage an economy, araments became its own interest, and ensured the development of a new pattern of crony capitalism in America. War shall ever be the friend of the crony capitalists, and workers will always suffer the costs of a little bit less butter on their tables to satisfy the appetities of the gun producers. War simply shall never be for the health of the commercial society. Those who argue otherwise don't understand its essence as a system of cooperation rather than as a system of production. 

 

End the Export-Import Bank

 

 

On September 30^th, Congress will to vote on renewing the Export-Import Bank’s mandate. For almost eighty years, the bank has been giving credit subsidies to foreign buyers of American goods. Whether that mandate to subsidize exports has been for the general welfare is questionable. 

 

According to its advocates, the bank provides a valuable service by leveling the playing field. Even if Congress had scruples with supporting an institution as blatantly mercantilist as the Export-Import Bank, other nations like China would not, and if the United States did not support the bank, its economy would lose jobs to those nations who were willing to subsidize exports. In  addition, at least according to its mandate, the Export-Import Bank is not supposed to finance projects that could have otherwise found financing on the private market, and the bank could therefore be construed as a reaction to the market failing to provide such projects with capital. 

Yet, there are many reasons to doubt those arguments. In “There Are Better Ways to Help American Exporters Abroad Than the Ex-Im Bank”, Veronique de Rugy argues against the view that the bank serves as therapy to a market failure. She shows that more than half of the bank’s subsidies have no justification, and shows that the bank only assists with two percent of American exports:

 
 

Moreover, as de Rugy shows elsewhere, the exporters that the bank supports are primarily large corporations, like Boeing, with ties to the Federal government:

  

Rather than being an institution which supports American business against the threat of foreign mercantilism, the bank provides help mostly with no justification, and mostly to large corporations who certainly aren’t about to go out of business because of foreign competition. Really, the Export-Import Bank is merely a mercantilist institution in which bureaucrats within the bank, with no skin in the game, get to arbitrarily decide where to invest in the economy. How they invest in exporting businesses isn’t determined by the calculus of profit and loss, but how the bureaucrats within the bank interpret their mandate, and interpret what is in everybody else’s best interests. Such behavior introduces the very real possibilities for malinvestment and political patronage, which is certainly not in everybody’s best interests. The Export-Import Bank isn’t fighting fire with fire; rather, it is an institution which provides support to those with connections to the government, and which unnecessarily meddles with the free market. 

 

Though Congress will likely extend the Export-Import Bank’s charter, the United States would be better off if they ended it. It’s an institution of crony capitalism which enrich the few that they protect at the expense of a, uncountable number of consumers, and should therefore be swept aside in the service of universal benevolence. More importantly, free trade is a simple and obvious way for increasing the prosperity of every human being on earth. Obstructions to free trade, like the Export-Import Bank, are simply artificial obstructions to humanity’s prosperity, and should be swept away like we would sweep away other artificial obstructions. 

Laissez-Faire Capitalism Is Not Crony Capitalism

 

The objections which the various schools of Sozialpolitik raise against the market economy are based on very bad economics… They blame the market economy for the consequences of the very anticapitalistic policies which they themselves advocate as necessary and beneficial reforms. They fix on the market economy the responsibility for the inevitable failure and frustration of interventionism.

- Ludwig von Mises, Human Action

In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed – the proceeds from successful entities are given to failing ones.

- Ron Paul

 

 

In a recent opinion column in The New York Times, “Inequality Is Not Inevitable”, Joseph Stiglitz argues that the vast amount of inequality found in the United States isn’t a product of economic laws which we have no control over, but rather a product of dysfunctional politics. He argues that corruption and a decline in solidarity have ensured that American citizens are no longer able to secure a fairer America - one corresponding more to the Universal Declaration of Human Rights - than we have now.  

Even though he emphasizes the importance of politics and correctly recognizes that America has a crony-capitalism problem, Mr. Stiglitz does very little to actually suggest specific policies to ameliorate the difficulties he writes about. The reason for that is that the fails to identify the very real cause-and-effect relationships which are causing the problems he is dissatisfied with, yet he fails to provide an understanding of them. Namely, that the reason the Federal government is so corrupt is that there are so many opportunities for cronies to manipulate the system and thereby enrich themselves. Although he writes about the problem as one of practical politics rather than technical economics, he fails to adequately address the technical problem of crony capitalism which needs to motivate any viable. 

 

Despite what Mr. Stigliz suggests, laissez-faire capitalism isn’t the cause of the corruption within the Federal government on these matters; in fact, the corruption is possible because it doesn’t follow such policies. If laissez-faire capitalism is anything, it corresponds to the natural system of liberty that Adam Smith describes in The Wealth of Nations, that state of affairs in which the sovereign has no other duties but to defend the nation from outside belligerence, to protect the nation from belligerence within, and to erect those necessary public works. There is wiggle room for certain aspects of policy, but that wiggle room excludes such vast redistributive efforts as bailing out Bear Stearns or General Motors.  

In fitting fashion, Mr. Stiglitz ignores that the very maladies he rallies against aren’t caused by laissez-faire capitalism; instead they are caused by the government creating opportunities for profit from government favor. He fails to consider that human beings are natural entrepreneurs who will sniff out every possible profit opportunity. Just as profit opportunities create vast patterns of specialization and trade within the commercial society so too they create similar patterns with respect to the government and the cronies. 

What separates these patterns, though, is that they aren’t created by providing products people are willing to spend their scarce money to acquire, but they are acquired through political patronage. The market is thereby perverted from a system of profit and loss, in which those firms that supply the market with its most urgently desired products survive and those who don’t disappear, into a system of crony capitalism,  in which those who yield political favor get to cheat profit and loss. Under such a régime of crony capitalism, there is no guarantee that those firms which survive are those firms which are most valued by the consumers. 

 

The problems Mr. Stiglitz associates with capitalism as it is today aren’t problems with the natural system of liberty; rather, they are problems which originate when the government has the power to take from some to give to others on a regular basis. Though legislators may very well intend to help a specific set of people like the poor, their actions create opportunities for those clever enough to exploit the given system for their own benefit. As we all know good intentions don’t guarantee good outcomes. The “rent-seeking society we have gravitated toward, in which the wealthy obtain riches by manipulating the system” is only possible outside of the society of natural liberty, and in a society in which the government has the power to make some rich at the cost of others. 

The Federal government does indeed have a massive corruption problem, but that problem is because of how regulation is put into effect. For example, the Securities and Exchange Commission has the duty to regulate banking, and largely does so by hiring the experts in the field, which just so happen to be the very bankers the SEC is supposed to regulating. Regulators who spend a long time learning the regulatory craft in DC are paid a fortune to then inform Wall Street banks how best to profit from those regulations. Do those bankers help the banks to provide better services to their consumers? Not so much. Instead, they tell the banks how they can make money by manipulating regulations by hiring the very people who once enforced them. At that point, the criteria for succeeding as a bank is no longer about the approval of the customers, but rather the approval of the Federal government and that’s problematic at best. 

Blaming bankers for seeking the SEC’s favor is like blaming a dog for barking. It’s going to do little good. Place the blame where it deserves: that there are channels by which the government can take from some to give to others. Leave the natural system of liberty out of the accusation. 

 

Selfishness may be one of humanity’s great curses, but we cannot blame selfishness for the failure of political systems just as we cannot blame gravity for airplane crashes. There are always going to be vicious people who would impoverish those in need for their own betterment. We cannot expect them to be virtuous. The problem of policy isn’t so much to make people more virtuous as it is to ensure that policy can function despite people being vicious. Policy should be made with a full understanding that there is vice like greed in society, and it should be made so that it isn’t robust to that vice. That isn’t simply a matter of practical politics, but of technical knowledge because one has to know how greed influences political systems to design policies robust (better yet antifragile) to it.  

As much as Mr. Stiglitz emphasizes that alleviating inequality is a problem of practical politics, he gives no solution as to how to ensure that his political vision can withstand the vice of humanity. He rallies against the greed of bankers without actually saying how policies can be better adapted to that fact. Repeating “politics is overrun with money” is a well-rehearsed cliché, not a viable solution to the Federal government’s corruption. The same thing is true for saying that such a system of social democracy works for the Nordic nations. This is America, we’re talking about, not Finland, Sweden, or Norway. What works there may very well not work here, for reasons like different demographics and histories. Overall, though “Inequality is Not Inevitable” identifies problems Mr. Stiglitz has with American society, it fails to provide any means of actually fixing politics, and he fails to account for the human condition when doing so.

  

The problem with American capitalism is that regulations have opened up avenues for profit opportunities which involve entrepreneurs manipulating public policy for their own betterment. Regulators and politicians now have such control over who gets what in the economy that it is now advantageous for people to court the opinions of those within the government. 

If we desire to end the régime in which businesses can enrich themselves by manipulating the system, then we must move towards the natural system of liberty in which businessmen simply have no incentive to buy government favor since the government has no real means of enriching whole classes of people. That, and not the desire for a fairer America, is the best remedy for the corruption within the Federal government, and the overwhelming power cronies have over American politics. 

State Capitalism: Robust as Ever

 

From The Economist’s Schumpeter column “Leviathan as capitalist":

It is now 25 years since Francis Fukuyama published “The End of History?” and ignited a firestorm of debate. Today there are many reasons for thinking that he was wrong about the universal triumph of liberalism and markets, from democracy’s failure in the Middle East to the revival of religious fundamentalism. But one of the most surprising reasons is the continuing power of the state as an economic actor: far from retiring from the business battlefield in 1989, the state merely regrouped for another advance.

Survey the battlefield today and you can see state capitalism almost everywhere. In China companies in which the state is a majority shareholder account for 60% of stockmarket capitalisation. In Russia and Brazil companies in which the state has either a majority or a significant minority stake account for 30-40% of capitalisation. Even in such bastions of economic orthodoxy as Sweden and the Netherlands state-owned enterprises (SOEs) account for 5% of market capitalisation. The Chinese and Russian governments show little sign of wanting to surrender control of the commanding heights of the economy. Privatisation seems to have ground to a halt in Brazil and in India (though its new government may revive it). There has been talk of the French government taking a stake in Alstom or part of its business—adding to the stakes it and Germany hold in Airbus and the one France recently took in Peugeot.

What should one make of the revival of state capitalism? 

I don’t think that we should we be talking about the revival of state capitalism. The triumph of liberalism has been exaggerated in liberalism’s own post-70s renaissance. Great victories like President Carter’s Airline Deregulation Act aside, state capitalism has never really been put into full retreat. Freddie Mae and Freddie Mac, for instance, have been greatly involved in the American housing sector. State capitalism has continued to thrive despite the liberal tide, and that state capitalism has been so robust I don't think should surprise anyone. 

 

After all, what is there to eliminate state capitalism? If state capitalism disappeared, then there must have been some extinction mechanism responsible for that disappearance. Yet, there are no such reliable mechanisms out there. For state capitalism to abate requires a political crisis in which the leviathan’s legitimacy and ability to operate is challenged.  

In state capitalism, the state, talking about it singular agent, acts as would an investor in a free market. The leviathan dons a business suit and goes out into the economy with swagger to invest where it sees fit. Compared the private businessman, who is limited by the cash in his pocket and the loans he can muster, the leviathan almost have an unlimited supply of capital it can pour into its investments. It can reach into other people's pockets to support its enterprises. Has a railway gone bankrupt? Throw more money into the venture. Can a steel factory no longer pay its workers. Throw more money into the venture. Need capital to invest in a new project? The response is similar.  

 

For a state-capitalist venture to go teats up takes a political crisis. There has to be some shift in politics requiring that the leviathan no longer have the legitimacy to reach into other people’s pockets. Whether it has been caused by budgetary concerns or concerns of the legitimacy of what the state is doing, there must be a crisis for state capitalism to wither. Yet, most don't mind the state capitalism, otherwise known as crony capitalism, in their midst because it doesn't cost them much. State capitalism in otherwise liberal nations - and there is a lot of it, as The Economist points out here and elsewhere - survive by the principle of diffused costs and concentrated benefits. The leviathan can benefit a few at the cost of many without those many really caring.

When a private enterprise has outlived its utility to other people, there is little that can be done to prevent its extinction. Death comes for all, and that holds true even for Fortune 500 companies. For death to come for capitalism, it requires a change in politics, and that is much easier said than done. Bad legislation and regulations have a way of carving out niches for themselves which become reasons for their own existence. As Oscar Wilde once wrote, the bureaucracy is expanding to meet the needs of the expanding bureaucracy. 

 

Tragically, there is not much that liberalism can do to fight that growth because of the principle of diffused costs and concentrated benefits. As long as voters are rich enough that they won’t mind that crony capitalists taking the dimes from their wallets, state capitalism will thrive even in a liberal society. That the leviathan continues to act as a capitalist shouldn’t be a surprise, and it’s continued existence is all but assured. 

A Primer on Crony Capitalism

 

The Kronies!

 

 

 

Heads they win. Tails you lose.
Forget the rule book. They make the rules.
Wanna compete? You'll be rejected.
Get with the Kronies. They're Konnected!

 

Of Progress and Kleptocracy

 

As society progresses, there is the need for land and stocks of capital to produce make possible the opulence of life which defines the bourgeois world. Within a hunting-gathering band, people can get by just with what they are able to secure for themselves with labor alone. Tools like axes and bows in wide use, but fitting the nomadic lifestyle of hunter-gatherers, these tools are personal items which can be kept on the person of their owners, and there is very little accumulation of tools actually going on.

With accumulation and the ownership of land comes the opportunity for kleptocracy in those societies. The necessity of there being lands and stocks of capital goods for which people are the residual claimants of opens human society to the exploitation of those claims for ill. Such manipulation can come in the form of the idle landowners being able to secure power for themselves within Parliament through the manipulation of rotten boroughs or the mafia extorting protection money from trifling shop owners. Both result in people who are contributing little to others being able to secure power and resources for their own benefit, and both would be impossible in a hunting-gathering society. The progress of society from the conditions of the hunting-gathering band therefore create the conditions in which corruption and kleptocracy can flourish largely because of the existence of settled lands, and valuable stocks of capital goods.

 

However, we should not proceed from that conclusion to a longing for the egalitarian hunting-gathering band. Kleptocratic elements are inevitable in any human society with any material advancement. As such, they should often be accepted simply as part of the  costs of opulence and prosperity rather than as a plague which must be exterminated at any costs. Sometimes it is even refreshing when corruption is clearly corruption rather than as passed for something more pure. Take the Federal government, so many of its employees go on to work for private companies that are able to use the tacit knowledge those new employees have of the Federal government for their own profit. It’s corruption on a massive scale, and it is even more blameworthy because those responsible simply won’t be honest about what they’re doing, but continue to masquerade as benevolent officials. 

Crony Capitalism: A Problem of the Government's Making

 

We shouldn't be surprised.

 

This is certainly a problem, but its solution is not that the government and its officials need to involve themselves in the economy in order to take down massive companies and vested interests within the economy, the problem is that the government allows them to continue to thrive. The most pertinent example of this is how the United States has saved massive banks on Wall Street from their doom despite the questionable practices and foolish investments the banks made. Most recently it was TARP, but in the 1990s it was the rescue of American creditors when the Clinton Administration granted the Mexican government a $20 bn loan and the rescue of Long-Term Capital Management with a $3.8 bn bail-out from Greenspan's Federal Reserve.

 

Losses and failure are the natural mechanisms that force organizations that no longer serve people's most urgent demands to go out of business. They are the forces that make it possible for new ideas and new ways of going about business to rise to the top for it ensures that those who are doing things right don't have to persuade those who are doing things wrong. Instead, they merely have to wait for those who are doings things wrong to go out of business. Though profits certainly have a more prominent role in the functioning of a free-market economy than losses do in the popular mindset, losses play just as important a role. Just as profits reward those companies that are servicing the demands of consumers and provide incentives for others to imitate the practices of the profit-making firms, so losses punish those that don't and provide others an incentive not to use their practices.

When the government jumps in to prevent firms from taking staggering losses and prevents them from going out of business, they are disrupting the proper workings of the markets just as when they prevent firms from making profits. Companies that are making a loss must go out of business lest the scarce resources within society be committed towards uses that do not produce the goods demanded by consumers. In addition, whereas the failure of those companies would have provided an opportunity for companies with new ideas to take the place of those that failed with an incentive to try new approaches and to allocate their scarce resources in a different fashion than failed companies, the rescue of those companies by the government just serves to bolster business practices that are not in conformance with people's desires. It should come to no surprise to us just how dysfunctional American banking has been over the past decade when we keep in mind that the banks leading those practices have been bail-out whether by the Federal government or by the Federal Reserve. When the stakes are tail I win, heads I loose nothing (and still leave with a lot), there is no reason not to take the bet.

 

Crony capitalism is certainly a problem in the United States as well as the entire world at large. However, it is not a crisis of capitalism; it is the foreseeable consequence of the government interfering with the workings of an organic system that is governed by its own abstract principles. Even the issue of money in politics, often the subject of much tearing of garments by modern progressives, is so obviously a consequence of a businessman's ability to influence the government yielding him profit. When the government does things like diverting funds from TARP in order to benefit Detroit car-makers or when a Federal bureau can prevent Boeing from moving production from one state of the union to another, it pays dividends to have influence within politics. The decried phenomenon of money in politics is then just a natural result of when political decisions can influence the path resources take within the economy.

The answer to all of this is not for the government to take a harder stance against crony capitalists; to the contrary, it is for the government to stop producing the environment in which crony capitalists thrive. The government needs to be an impartial spectator to the day-to-day affairs of the American economy. It needs to allow companies, even companies as important to America's past as General Motors, to fail and it needs to allow those captains of industry that have made bad decisions to harvest their crop of losses. After all, there is another captain waiting to take the wheel, this time with new ideas. Only then will it no longer be profitable for businesses to invest in favor from the government and only then will the problems of crony capitalism within the American economy be mitigated.