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.
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.
- Charles Koch: Why We’re Against ‘Crony Capitalism’ (newser.com)