About two weeks ago, this site had the beginnings of a discussion about whether a form of laissez-faire capitalism, with regulation only to prevent trust formation and to ensure transparency, could avoid delving into crony capitalism.
Regulation of commerce can be represented as a continuum. On the least restrictive end is economic anarchy, a world of pure caveat emptor. On the other end is monarchic economic control, even more centralized than Soviet communism, where all commerce is controlled by a single person.
Let’s start by looking at the economic anarchy end. Since there is nobody to dispassionately arbitrate or mediate disputes, the only recourse a person has is revenge or to refuse to engage in further commerce with the other party. As a result of the high degree of risk, this model absolutely requires a correspondingly high degree of personal trust between the two parties engaging in commerce. It’s sluggish and horribly inefficient, severely limiting opportunities for economic activity to forms of barter within villages, reminiscent of economies of well over ten thousand years ago.
An ancient Babylonian contract sealed with seven seals
The next level adds a form of contract law and adjudication. Both parties agree to a set of terms prior to the transaction, and if either one violates the terms there is a neutral third party to enforce the terms. This model permits a form of arm’s-length commerce, but still is limited to bartering. At least in this case, the economic activity isn’t limited to people who already know each other. In fact, it allows for long supply chains, where the items are sourced many parties away from any particular transaction, which is part of what allowed middle east bazaars to form. These additions increase the scope of possible partners, but still limit them to parties where each has something the other wants.
At the next stage, we add money. I addressed this back in November, in The Magician’s Assistant, so I won’t rehash it here. Suffice it to say that money provides a unified storage of value, which increases the scope of possible partners far beyond simply the realm of contract law; only one party needs a specific good that the other desires.
It is at this point that the least restrictive form of laissez-faire economics enters the picture. Government enforces contract law, and provides a unified mechanism for storage of value. All else is left alone (hence the term “laissez-faire,” from the French, meaning essentially “let it be”). From here, government can take many nonexclusive paths, but for the purposes of this discussion I will focus on just one of them.
The Darwinistic nature of commerce in this environment encourages sellers to create insurmountable barriers to entry, and this is easiest when a necessary resource is limited relative to market demand. It also encourages sellers to hide unsavory facts from potential buyers if those facts would drive those potential buyers away; the arm’s-length nature of commerce encouraged by the governmental involvement mentioned above makes such obfuscation possible. It is from these issues that antitrust and transparency government regulations spring. And it is from the regulations meant to address these that crony capitalism begins to form.
When establishing government regulations to address business trusts, subjectivity necessarily enters into the equation. How much control of a resource is too much? Ninety percent? If so, why is 89% acceptable? Or 88%? The answer to “how much is too much” requires fuzzy set logic, but the very nature of government regulation requires clear, binary decisions. This conflict is ultimately resolved through the use of ad-hoc decisions made by people charged with making them, and those people are necessarily influenced by others. The decisions made will, without exception, determine winners and losers in the market, so that influence is crucial. And it is that influence, therefore, that produces crony capitalism.
For example, AT&T announced last week that they intend to acquire T-Mobile USA. In doing so, they will remove one of only four players from the market. In a truly free market, this wouldn’t matter; another mobile provider would be able to pop up to fill T-Mobile’s place. But the mobile phone market is limited by available bandwidth in the electromagnetic spectrum. If AT&T acquires T-Mobile USA, part of that acquisition is T-Mobile’s portion of the spectrum. This bandwidth limitation is an insurmountable barrier to entry, as other mobile providers cannot simply create their own spectrum allocations. So is the deal significant enough to be blocked due to excessive market control? What percentage of bandwidth must be controlled before innovation and competition are excessively stifled? The answer isn’t simple by any means. Whatever the ultimate decision, government will be determining winners and losers, and that will be influenced by those who stand to win or lose. And that is the very essence of crony capitalism.
The same applies to transparency regulations. What information must be disclosed, and how? This requires development and implementation of regulations. But why can’t such regulations be applied fairly to all? For the same reason that taxes cannot be applied fairly to all, all regulations are fair from, at best, only a handful of perspectives. They cannot be fair from all perspectives, so they will inherently be “unfair” to some, for various reasons. This, again, is why that personal influence is so important to companies when regulations are being created, which is one reason lobbying is such a lucrative industry. And it is, again, why one cannot have such regulations without dipping one’s toe into the crony waters.
So we’re left with a choice between no market influence from government (the purest form of laissez-faire), or regulations that are necessarily going to have crony influence. They cannot be fully separated. But it’s okay to add the government influence, for the same reasons that it was okay to add it in the earlier stages: this influence improves the economy by encouraging competition among suppliers and trust between buyers and sellers. It’s not perfect, but it is an overall improvement over the earlier stage. Transparency of process and a decentralized approach to managing the regulations can help to reduce the degree of cronyism, though they will never eliminate it altogether.
In a future article, I plan to delve into some other steps along the continuum of government involvement in commerce, including such aspects as taxation, tariffs, and environmental regulation.
Related Articles
- Charles Koch: Why We’re Against ‘Crony Capitalism’ (newser.com)
538 Refugees 
Terrific post, MW! And I agree with the relatively ‘moderate/centrist’ conclusion, basically that you can’t have either an idealized perfect laissez-faire economy, nor do you have to end up with a totalitarian/fascist/supercrony economy. It’s always about degrees within those two theoretical, impossible extremes. The pendulum swings back and forth around the ‘best solution’ and never really stops.
I agree with msgkings. It’s a great article, and does a masterful job of explaining why we need balance and why the exact balance point will be a moving target.
Well, after reading the article, I have to be contrarian.
I just can’t agree that it’s a great article, cause it didn’t say anything at all about momma, or trucks, or trains, or prison, or getting drunk!
@Max,
Or my dog Shep.
Monotreme, I knew I forgot to mention something…
Mule Rider, I’d really like to get your opinion on this article.
@Michael:
Steve Goodman, You Never Even Call Me By My Name.
Steve Goodman died too young. I had the honor of seeing him perform in person in San Francisco.
Had to play that song every night, five nights a week for two years. It was always a favourite sing-a-long.
Steve Goodman also wrote City of New Orleans(made famous by Arlo Guthrie’s cover) and Lincoln Park Pirates (which is probably only funny if you lived in Chicago in those years — then it’s killer). A truly remarkable performer and songwriter.
The last time he gave a concert in the Chicago area, it was at my suburban junior college out in Elgin. Afterwards, we talked him into doing a latenight set for free at the coffeehouse where the local high school students hung out on Friday and Saturday nights.
I think the parable within this article is that ‘Too much of a good thing isn’t necessarily a good thing’. We ‘re surrounded by examples of the market being cornered; Facebook and social networking, Apple and music downloads, and is there anyone on the planet that doesn’t Google? Nobody seems to mind those monopolies. Innovation doesn’t appear to have suffered. I think the only problem is you can’t get a better deal and this has been a problem with the cell phone industry in general. We have less choice, prices are fixed (or at least agreed to by an oligarchy).
One of the myriad reasons I didn’t care for Microsoft is their bullying tactics. They ate or squashed so many start-ups. The bigger a company gets the easier it becomes to do that. There are certainly cases where I think this isn’t a good thing. The financial industry comes to mind. But I’m glad that the government at least is exercising oversight.
BTW, one of your best articles yet.
Y’all letting that redneck show!
That SG video had a comment about the old Armadillo World Headquarters that was up here in Austin in the 70’s. Google on it and take a look at the folks that played there. With a number of them still performing around here in South Texas and A Gruene Hall and you know why I live in New Braunfels.
Sorry, Michael, for the asides.
And now, back to your regularly scheduled thread . . .
I agree, Mr U. This is a great article. Clear, concise, explaining the concepts most effectively. It’s a good summary of the reasons Laissez-Faire capitalism, in its pure form, would be neither practical nor desirable. Its a shame its “opposite” in this formulation, “crony capitalism,” already has a bad name. I don’t think it would be any worse.
But the comparison also is interesting. In a way, they are far from opposites, since the “regulations” that are created in crony capitalism are regulations that the monopolies want. In as far as Laissez-Faire capitalism has a tendency to create monopolies, the end result of these two “opposites” tends to be pretty similar. I’d think the opposite of both is “sane regulation” — the “regulation” part makes it an opposite of Laissez-Faire, whereas the “sane” part opposes croneyism.
I don’ think it’s a continuum, with L-F on one end, and cronies on the other. It’s a U, with cronies and L-F’s on the ends of the arms — quite close together actually, which is why people who people who practice croneyism can convincingly pretend to support L-F — and sane regulation in the middle.
Virtually all of today’s most vocal advocates of Laissez-Faire, from the Teapers to the “captains of industry,” from the Wall Street tycoons to “fiscal conservatives,” all of them, are cronies in Faire clothing.
Mr. U,
Because they’re not monopolies. The barrier to exit for switching from Google to another search engine is near zero. Facebook’s barrier to exit depends, like eBay’s, on the network effect (i.e., the more people that are on it, the better it is), but it’s easy for someone to build a better social network engine, and if Facebook started charging a monthly fee, their service would disappear within weeks. Apple’s iTunes has significant competition from Amazon, and no true audiophile would buy that crappy 128kB rate music anyway (try listening to a 96/24 FLAC sometime if you want to see what I mean).
None of those are monopolies, because they aren’t monopolizing source. If Apple had exclusivity on, say, the entire Sony Music collection, then things would be different. But that’s not what’s happening.
It happened, though less often than most people think (the power of the meme is tremendous). The greatest of Microsoft’s successes came from integration, not buying out the competition.
Thanks. I just wish that these would generate more chatter.
DC,
I know it seems like that at times, but I don’t think it’s true.
There’s a ton of room within the “sane” space for regulations that seem insane to a subconstituency.
There’s a ton of room within the “sane” space for regulations that seem insane to a subconstituency.
True. I’m thinking more about the effect on society as a whole. And yes, there is still room for disagreement.
Exactly. What’s most important? Jobs? The economy? The environment? Orthogonally to those, local or national? And, orthogonally to all of those, short- or long-term?
Those are all good questions, Michael. My general answer is that they have to be balanced. And an important contrast, the regulations that overtly benefit one industry or one company — at the obvious expense of things like the middle class or the long-term health of the economy as a whole — and are presented as if they were L-F — are more dishonest croneyism than anything else. YMMV, of course.
In my opinion, not being an economist, true laissez-faire capitalism (meaning without any government oversight/regulation) would be terrible. It rests on the assumption that corporations will police/regulate themselves, based on market forces. In other words, if consumers don’t like a corporation’s practices, they will not buy the corporation’s product. However, given our overall lack of real choices in the marketplace due to cost/convenience/monopolies, that is not going to work. Additionally, a corporation does not have a responsibility to consumers in a capitalistic system. They have a responsibility to their shareholders, to make as much money as possible. That is how capitalism works, and that is why they need government regulations in order to prevent the wholesale screwing of the public.
Indeed, TakingAmes.
True laissez-faire really only works in communities of around 200 or less, where everyone knows everyone and social pressures are strong enough to prevent someone from overstepping the bounds of greed.
Several different “idealized” social/economic models may work in small communities. But, once the community expands and anonymity is possible, then there needs to be some external pressure to encourage good behavior.
I think dcpetterson hit it right, when he talked about a balance. The “ideal” is always somewhat of a shifting target as society grows and changes.
mclever and TakingAmes,
I agree with what you guys said. I don’t think any economic theory in its “pure” form can work in a community greater than, say, a couple of hundred people. Pure socialism, pure communism, pure laissez-faire — none of it is going to work on a national level.
So when conservatives tell us that deregulation has had problems only because “pure” laissez-faire has never been tried — and that, in order to improve things, we need to go farther toward deregulation — they’re just being blindly partisan.
True enough, “pure” laissez-faire has never been tried. Damn good thing, too. But we have, in the past, been closer to it than we are today. Read some of Dickens for the results.
“True” socialism would be no better. So the binary dichotomy that we are often offered — a gubmint-controlled economy where people don’t even own their own socks, vs. the Wild Wild West — is a false comparison, designed to obfuscate the real world.
The question isn’t “Should there be government regulation of the economy?” The question is, “Which regulations make sense?”
@dcpetterson
The question isn’t “Should there be government regulation of the economy?” The question is, “Which regulations make sense?”
Exactly! 🙂
And just how many times do we as a people have to get screwed to the wall by these captains of industry before we understand that as great as the concepts of capitalism are the inevitable result of unregulated capitalism is nothing more than economic anarchy?
The constant bleat of the top dogs are only answerable to the stockholders is a pathetic joke. They do not give a rats ass about the stockholders the only ones they listen to or move with are the board of interlocking directorships that have but one thing in mind and that is their own ability to suck the economic life out of any business to their own gain.
Pingback: Disaster Capitalism, and the Rise of the Machination | 538 Refugees
Pingback: The Ryan Game | 538 Refugees