Why Cronyism Doesn't Explain the Free Market's Unpopularity

As a member of the hard left, I can say with some authority that not all hard leftists are down on free markets — if they are actually free, i.e., competition on a level playing field among approximately equal players, rather than leaving the influential (privileged) free to do as they please, the social consequences be damned.

The hard left distrusts big business because as many businesses get larger and more influential, they seek a leg up by hook or or by crook, and eventually legitimate profit-seeking as a reasonable return on capital turns toward rent-seeking and crony capitalism. This tends toward monopoly capital and plutocratic oligarchy, a prelude to corporate statism.

The hard left is not terribly comfortable with strong central government either and prefers decentralization, since centralization of power is difficult to control once usurped. However, the left also recognizes that they cannot count on big business to deal fairly and openly, and only the countervailing force of government has the power to keep big business in line. But there is always the possibility of state capture through influence.

Moreover, Hyman Minsky has described the stages of the financial cycle, ending in Ponzi finance. Greenspan left the banks to self-regulate and the predictable happened. In this case, Fed “independence” was a disadvantage, since there were no electoral consequences.

The chief reason that the hard left is willing to trust big government more than big business as gatekeeper is that government is at least subject to the electorate on a regular basis. Business never is.

The greatest difference I see between the hard left and the hard right is the hard right sees society as an aggregate as individuals while the hard left sees society as a social system in which relationships of individuals and groups to each other and the whole are as significant operationally as individuals as elements of the system. As a result, the left emphasizes community, empathy, and shared goals, in addition to individual liberty within the bounds of reciprocal rights and responsibilities, and equality as absence of privilege.

Tom Hickey: Thanks for a very good comment. There are parts I disagree with, but they are things that can be discussed without antagonizing anyone.

I wish all discussions between free market economists and the “hard left” would be this good, instead of the mudslinging fests you usually read on blogs.

@ Tom Hickey:

I would echo Artturi’s comments about your post. Maybe there is little room for philosophical agreement on your last point, but I would like to comment on the one prior to it:

The chief reason that the hard left is willing to trust big government more than big business as gatekeeper is that government is at least subject to the electorate on a regular basis. Business never is.

What do you think about Arnold Kling’s ideas about dynamic efficiency? Monopolies may indeed not be responsive to consumers, but high prices create incentives for innovation on the supply side which often destroys entrenched monopolies after a period of dominance. An historical example is the railroad companies; a more recent one is Microsoft (which seems to be dying a slow death amid more competent competitors on several fronts). This kind of innovation is by nature difficult to regulate (since it is new, and the law moves slowly), so even an unholy alliance of government and monopolist may have difficulty restricting entry. Though the innovator may eventually gain market power too, it must offer higher value to customers than the previous monopolist.

Why do I think this is better than (or should not be supplemented by) antitrust policy, implemented by politicians disciplined by elections? I’m not sure I have a coherent theory, other than the usual libertarian ideas about public choice and natural rights. Maybe an argument could be made that politics is less dynamically efficient than private markets because politicians respond to median voters and are therefore insensitive to changing preferences in most of the electorate. But in any case, I do not think it is accurate to say that big business are not subject to powerful long-term constraints.

Asterix comic book “The Mansions of the Gods”: the Gauls benefit from trading with one another, but lose from trading with Romans.
Caplan needs however to explain us one thing: what’s the origin of the “anti-Caplan bias” that I’ve been observing among some economists?

If the public is dead set against free markets, and simply unaware of cronyism, then why wouldn’t making people aware of cronyism yield more benefit?

It should be a slam dunk! Government itself is a monopoly.

Government is by far the largest and most powerful monopoly in virtually every nation (except for a few failed states, like Somalia or Yemen)

Being so far left that I am slamming into the far right, I would like to share a story. During the bubble I tried to sell a piece of property for four times what I paid for it. Those who say they didn’t see a “bubble” were temporarily blinded, I guess. I succeeded in selling the house in the spring of ’08 for three times what I had paid for it in 1990. I placed the money in a small bank that had recently opened in a nearby town directly across the street from a BOA branch. A manager there told me the bank was going public soon and that I could buy shares at a set price because I had an account with them. I did just that. After the IPO, the stock bounced up thirty percent. Since the bailouts the stock has languished at twenty per cent above IPO, not bad ,but over two years what once was thirty and climbing is now ten percent ROI year over year for two years. Not bad, but had that BOA been allowed to fail, my little bank may have grown, the stock may have doubled, maybe not. BOA is still there across the street. The big boy in town, and like I learned in high school, the big boys, the faster boys, get picked for the teams. The football team, the basketball team, the baseball team, the track team. They get bailed out! Out of class, out of detention, out of homework. You could call this system a “free market”, but sometimes, it looks like a “rigged market” to me, “team players”. As long as you are a member of the team you get treated differently, “bailed out.” The little bank will grow, it will just take longer. A lot longer than it could have, a lot longer than it should have. Just because some of us are blind, doesn’t mean everyone can’t see.

The government works for *your* benefit while a company in the market works for *its* benefit.

“But that’s not true!” many may reply. However, that doesn’t matter. Most people look at the first order claim and leave it at that.

And that, simply enough, is why people trust government over the markets. Motive (okay, claimed motive) matters.

I have to say that as a newcomer to the study of economics, these conversations are very interesting…both sides. However, the reality is that without good information, good decision making is a crap shoot. For ‘free markets’ to work as described by its proponents there is a level of economic literacy required by those who are engaged in the markets. Otherwise, the population is taken advantage of by any means necessary because the goal of any capitalist is to produce profit. It is very important for the citizens of this great nation to understand the importance of education, not just as a ticket to higher income, but as a check against the INTELLECTUAL ABUSES of a uneducated population.
I believe that the aims of neither the government or of big business particularly align with an Enlightened America.

I would submit that the very nature of government is corruption. Its real purpose is to protect the assets and power of those who possess them. They accomplish protection by corrupting free markets. Regulation succeeds in limiting or eliminating competition far more than it protects consumers.

To echo other comments: Very little commerce in our country meets the true definition of free markets. When people object to “free markets”, they are really objecting to the inevitable changes in fortune that markets bring about, regardless of their “free” or “distorted” nature.

My own opinion is that if people had a good understanding of what a truly free market is, they would object far less.

It is obvious to any observer that market rewards are not very equitable. In a free market, producers compete for consumer patronage. Failure is punished while success can lead to lavish rewards. The big problem for most people is created by the distribution of compensation.

Most people have a naive utopian expectation of the world. When it comes to compensation most individuals expect to see a normal distribution because production output is dependent on individual effort. Because most people put in time doing their job they expect to be compensated in a similar fashion to others who are making the same effort.

But that is not the way the real world works. In a free market compensation is scaleable because output is not limited to effort. While the compensation of doctors, dentists, call girls, teachers, university professors, policemen, and journalists is limited by the amount of time they have to put into their jobs, the market imposes no such limits on investors, writers, artists, publishers, producers, etc. It allows James Cameron to make billions for the same amount of work that would provide a few hundred thousand dollars to a university professor, and for an accurate quarterback who can make the right reads and has the arm to make the required throws to earn in one year more than the average university professor would earn in a lifetime.

That brings me to a subject that Leo Strauss and Ludwig von Mises considered essential when trying to explain human action; thymos. Most people have no clue about the subject because thymos, that irreducible part of human nature, that made men act and think as they do and was an essential part of the human soul, is not discussed much in the modern classrooms. Yet, it used to be considered an essential part of human action because it is part of our emotional makeup.

Most people will consider the way that markets distributes wealth unjust. It is certain that the university professors who makes around $100 K a year won’t look kindly to one of his drop-out students making billions by coming up with an idea that gained broad acceptance among consumers. Teachers who are unfamiliar with marginal utility will argue that the markets are broken. They will say that they should be paid more than jocks who can run fast and throw a football because teaching children is more valuable than paying some game. Journalists who see men and women of average intelligence make billions because they happened to come up with one idea will tell readers that the markets are unfair. Many people who were quite good at many subjects will find it demeaning that they are working for people who were are generally mediocre but happened to be better than they are at one thing. (Why should a person who averaged five As, and one B+ be working for a person who got Cs in most subjects and an A++ in just one?)

To sum it up, the anti-market sentiment is easy to explain. It is triggered by a natural emotional response in people who are hard wired to react to the mismatch between their ideal view of the world and reality.

“The public would still deeply resent markets even if government stopped playing favorites. Indeed, the public’s complaint is often that the government fails to play favorites when it should.”

But prosaic observation shows us that firms have the highest free-market aversion, far above of people. The firms’ survival is a fundamental reason why free-market institutions, almost surely, would converge to institutions favoring business (as actually it is). Political engagement and lobbyism are direct consequences of that fight. As political colossi (in comparison to a person, as consequence of their economic power), their influence on laws and regulations is inevitable. In this configuration, the people’s benefit is, at the best, an erratic and unintentional externality. In other words, free-market institutions are unstable, and each time some of these ideas are implemented, along of the time, furtively, essential parts of these reforms are reverted in favor of lobbyists and political campaign supporters (firms), resulting in a system devoid of rights for consumers, and full of guarantees to several business sectors (as actually it is).

So, it is not the public, but the firms, the reason of why is so difficult to change this arrangement.

@ Hume: Interesting point

@ Troy Camplin: Yes, there may be an evolutionary, tribal basis for these feelings. Friends of mine who hate Bhagwati never have a good answer as to why they do not object to the outsourcing of jobs as long as it’s automated robots instead of foreigners now doing the same work for less.

@ Dan Weber: “But markets are vastly better at serving non-tiny minorities than governments are. If 1% of New York loves your pizza, you will prosper. If 1% of voters think you are awesome, too bad.”

What a nice, easily understood way to explain things.

Unfortunately, many people I know would love to make their neighbor eat the kind of pizza they, themselves, prefer. OK, so maybe they don’t go that far. But they do honestly think that they should be able to force others to act in the manner they think is appropriate. It’s like a little kid saying, “Mom, make Billy do it this way!” (Of course, there’s a bit of hypocrisy as they hate it when others force them, but they don’t really think of it that way.)

On a more humorous note, it reminds me of the following:

“Governor Stevenson, all thinking people are for you!”

“That’s not enough. I need a majority”

TheVictor: “My point is that whether its ‘voting with dollars’in the instance of corporate accountability or changing our representation in DC to lessen ‘government intervention’, the results do not change absent a population that understands their own economic reality.”

You are still missing the point.

To understand what the government does requires overlooking all their activities. This is the task that requires understanding of politics and economics. Nothing similar is required to understand if a person is getting a good deal from a business or not.

The only similar situation with business relates to things like the environment or corruption. But those are questions about side-effects. For the government all questions are of that sort.

There is no “unaccountable corporate citizenry”. Businesses are accountable to the only people they should be accountable too – their shareholders.

Tom Hickey focuses on big business as many do, but individuals and small businesses seem to me to mostly treat customers worse than big business and of course Governments treat me even worse (that might be because I am not poor, the poor do get some free stuff from gov.).

Current,
If you are saying that my comparison is irrelevant in a unionized labor market context, I agree, but in a free-market context (free of unions, small government, deregulation, etc), it is the most relevant comparison for the institutional dynamic onward.

hacs: “If you are saying that my comparison is irrelevant in a unionized labor market context, I agree, but in a free-market context (free of unions, small government, deregulation, etc), it is the most relevant comparison for the institutional dynamic onward.”

I’m not sure I understand your point.

I don’t know why you think that a free-market should be free of unions. Obviously unions are part of a free market – just as businesses are.

Hume,

Bhagwati’s comment was this: we might benefit from receiving stolen goods, but that doesnt make it right. If the actions of foreign countries amount to something along these lines, should a libertarian support trade with these countries?

Interesting point.

Counter-point: how far down this road is it rational to go? Is it even possible to define objective standards for guidance? Because if we start looking really close, I expect we may not find anyone pure enough to trade with.

Which leads to an interesting side bar. The Left’s vehmence against the Christian Right has been a big knee-jerk for decades. Yet there’s a (post-modernist?) theme I often hear in Leftist circles, particularly writers, where they like to tell stories that basically show “everyone is a slime ball when you get right down to it, nobody is really pure and good”. Now if that isn’t the theory of Original Sin warmed over, I don’t know what it is. And I smell the same gist coming from Global Warming alarmists. “Earth and Nature, good. Man, bad.” It’s just Original Sin reincarnated.

Despite their differences, the Left and Right have some really strange similarities (which you would be better off not point out to either side, lest they both turn on you at once).

Current,

Research into the developing world has shown that countries where officials have a great deal of discretion in their decisions underperform compared to countries where they have less discretion.

Good point. However,

Preventing intervention from happening is not a futile endeavour, it has worked in the past.

while this is true (it worked here in the US of A too once upon a time), there are in fact reasons why corruption would seem almost inevitable. My theory on this:

Suppose you are born in poverty, but you work hard and smart and have a little luck along the way too. You build yourself a business empire and become reasonably wealthy.

Your next concern is making sure that you will always stay that way. You will be naturally in favor of any laws that will help make that so. The rich always want to make sure they stay rich. Which is in direct opposition to the poor and ambitious, who would like the doors to stay open so they can make their way up the ladder.

The social order, no less than the government, is a self-polluting proposition in the long run. As are certain software operating systems, which periodically need rebooting or they just won’t work right (or sometimes even at all).

Somebody needs to figure out how to build a reset button into government. So far, we’ve had to rely on collapse of the existing order, and hope that the next one is better.

Troy,

I’m not sure what you mean by spontaneous social order. What social orders are *not* spontaneous? Communism aside.

I also don’t know what “alienated” means. The people I’ve heard complain about being “alienated” by the market, are people who cannot imagine what their lives would really have been like in feudal Europe. There are many among us who somehow imagine that older age was “better”. As someone who’s read too much history, I’m still trying to understand where this funny notion comes from. These people complain that what they have now is not enough, yet they really think they want to be Medieval peasants?

Capitalism is new on the time scale of recorded history, but I don’t buy the line that people are objecting just because “they aren’t used to it yet”. More likely, people have forgotten (or never knew) what life had to offer before we had free markets.

I’ve known people who rail against “the market” for (I believe) the simple reason that they expect to be higher up the social (or even economic?) ladder by tearing down the existing order, and replacing it. Note that “replacing” it these days inevitably means some kind of more socialized order.

Opportunists who hope to benefit by tearing down the old and commandeering the new, have been around forever.

I’ve known people who railed against “the market” for the simple reason that they didn’t want to have to work really hard, yet they also didn’t want to be poor. Sorry this will offend some Lefty’s, but there really are a significant number of poor people who are the cause of their own problems (I grew up among them, but did not stay among them).

I’ve also known many, many people who railed against “the market” out of sheer economic ignorance. The foreign trade issue is a perfect example, for many people do not see the fact that they’re better off buying cheap Chinese made goods than not.

I’ve also known people who I suspect are against “the market” because, this is what they’ve been taught in school since the time they could remember anything. The socialist-leaning bent in the US educational system is nearly as consistent as it is persistent.

I don’t believe there’s one simple answer to the question of why people are against the market. But if I had to bet on there being one dominant factor, my money would go down on the “poor to no education” slot.

MernaMoose: “Your next concern is making sure that you will always stay that way. You will be naturally in favor of any laws that will help make that so. The rich always want to make sure they stay rich. Which is in direct opposition to the poor and ambitious, who would like the doors to stay open so they can make their way up the ladder.

The social order, no less than the government, is a self-polluting proposition in the long run. As are certain software operating systems, which periodically need rebooting or they just won’t work right (or sometimes even at all).”

I agree to some extent. The problem though here is that you are presuming that the fact that the rich are “in favour” of such laws must always carry similar weight. I think this is a mistake, the weight that it carries depends upon the social and institutional situations of the time.

If an administrator must simply change one of his discretionary policies then it is quite easy for a powerful person to make that so. However, if a law must be put before a parliament, debated and passed that creates a higher barrier. If that state is governed by a limiting constitution it is more complex still. Similarly, if there are many states which people may move between and to enact the change a law must be put before many parliaments and agreed then this creates a still higher barrier.

Isn’t this a strawman though? As one of the left libertarians Bryan Caplan is talking about I have NEVER claimed people are aware the government creates monopolies or read such a statement in any left libertarian work. Could he perhaps provide us with a link?

“Well, if most of public isn’t even aware of the government-monopoly connection, it’s hard to see how “cronyism” could explain public hostility to markets.”

Really? it doesn’t take much imagination to draw a link between public hostility to markets and cronyism:

cronyism causes economic problems
economic problems cause suffering
people are unaware of cronyism so blame their suffering on the free market

It’s odd that the author of “the myth of the rational voter” appears to be claiming that the government-monopoly connection doesn’t explain people’s hostility to markets as if people don’t blame the wrong thing for their suffering sometimes.

Tom Hickey wrote:

“As a member of the hard left, I can say with some authority that not all hard leftists are down on free markets — if they are actually free, i.e., competition on a level playing field among approximately equal players, rather than leaving the influential (privileged) free to do as they please, the social consequences be damned.”

Therein lies the problem I see with this article’s assertions about the public’s opinion of the free market, i.e., “free-market” isn’t really defined. It is not unreasonable to assert that the United States has not had a truly free market economy since 1913. So, in that context, any presumptions about how the hard-left views the free-market is moot.

Having read the author’s discussion on why he is not a believer in Austrian School economics is quite explanatory as to the opinions expressed in this article. His “hard-left” is Hickey’s mainstream, thus the inability for either to realize that crony capitalism, as discussed here, was the natural and inevitable outcome of a centrally managed economy and, as such, is the cause of the subconscious behavior of a herding populace to hunker down against the increasing ineffectualness of its benevolently dictatorial government… but dictatorial non-the-less.

Caged animals are the most dangerous, they say. We don’t normally think about the savagery that can accompany economic revolution. However, history is repleat with cake-eating examples. So far, what passes for free-market capitalism in the US hasn’t demanded more than the hunkered masses can cough up. But it will. And when that happens, the definitions of left, right, free-market, mainstream, socialist, communist and capitalist will take on a whole new set of meanings, meanings not well-understood for nearly a century.

MernaMoose,

I think that with some better institutions the problem can be largely solved.

“Normal people think that government is the solution, not the cause, of monopoly problems.”

Polling data contradicts this assertion.

Per Rasmussen: “70% of U.S. voters believe that big business and big government generally work together against the interests of investors and consumers”

http://www.rasmussenreports.com/public_content/business/general_business/april_2009/70_say_big_government_and_big_business_on_the_same_team

Per Gallup: By a margin of 55% to 32%, voters see big government as a bigger threat than big business (among non-affiliated voters, the margin is 59% to 30%)

http://www.gallup.com/poll/117739/Big-Gov-Viewed-Greater-Threat-Big-Business.aspx

Thus, the “normal” voter both recognises the concept of cronyism and appears to see government intervention as an aggravating rather than a mitigating factor in the equation.