Crony Capitalism Protects Wrongdoers, Harms Consumers, and Disrupts Markets

May 9, 2013 - 5:00 PM

Thanks to a renewed interest in the works of Ayn Rand and high-profile figures like John Stossel, Glenn Beck, and Rand Paul, libertarianism is enjoying a moment in the political sun. And just like America's two major parties, libertarians can often be blind to faulty logic and flaws within their own ideology. Timothy P. Carney recently wrote a piece for The Atlantic discussing this very problem:

"Voters despise government officials who get in bed with corporations. But what about corporations who cozy up to government? Are companies who use cronyism to grow their profit acting unethically?

The question makes some free-marketeers uneasy. After all, we not only tolerate the fierce pursuit of profit, but also we defend it against taxes and heavy-handed regulation. Milton Friedman famously said, 'The social responsibility of business is to increase its profits.'

But in the age of crony capitalism, libertarians must declare that some means of pursuing profit are immoral and call on executives to reject them. This would create a positive case for capitalism – arguing that the pursuit of profit, in the context of fair and open competition, helps the whole society. The new corporate social responsibility, redefined for libertarians, must stand athwart crony corporatism yelling 'stop.'"

Lest his readers underestimate the influence and scope of crony capitalism, Carney provides a thumbnail sketch of the practice in action over the last decade. Seeing our government's extensive network of corporate welfare laid out in black and white is sobering, to say the least:

"The 2005 and 2007 energy bills required drivers to buy ethanol, created a government loan-guarantee program for private sector green-energy projects, and effectively outlawed the traditional incandescent light bulb. . . . Then, 2008 saw an avalanche of corporate bailouts: Bear Stearns, AIG, Fannie Mae and Freddie Mac. Then the TARP bailed out all of Wall Street, and later General Motors and Chrysler.

Obama came to power in 2009 and signed an $800 billion stimulus bill supported by the Chamber of Commerce and loaded with goodies for the likes of Google and Solyndra. Obama pushed cap-and-trade with the support of the U.S. Climate Action Partnership, a corporate coalition led by GE, which had set up a business to create and trade greenhouse-gas credits.

In June 2009, Obama signed the Family Smoking Prevention and Tobacco Control Act, a regulatory measure that Philip Morris supported and reportedly helped write. ... The drug lobby wrote significant parts of Obamacare, and the hospital lobby liked the bill enough to file an amicus curiae brief with the Court defending the law from its challenge by states and the small business lobby.

Boeing and the Chamber of Commerce launched a full-court lobbying push in 2011 to save and expand the Export-Import Bank, the government agency Obama loves using to subsidize U.S. Exports – including lots of Boeing jets. In a lesser-known case of regulatory profiteering, Obama hired H&R Block's CEO to a top position at the IRS, where he crafted new regulations on tax preparers – rules which H&R Block supported and small tax preparers sued to overturn."

Regardless of where your political sympathies lie, it's undeniable that there is an unhealthy and unholy alliance between well-heeled special interests and politicians and policymakers. It's all well and good to embrace Ms. Rand's philosophy of self-seeking individualism in theory, but when this mentality insinuates itself into the markets unchecked by moral and ethical principles, the results are antithetical to freedom and fairness.

Basically, the special interests invest in political campaigns as a cost of doing business, and they expect a handsome return on their investments. As Mr. Carney explains, that usually comes in the form of pet legislation, subsidies, tax breaks, limitations on liability, preferential treatment . . . the list goes on and on. Of course, politicians are only too happy to accommodate these special interests in exchange for political contributions that help cement and perpetuate their power.

As a result, the free market is stymied; it can't do what it's designed by nature to do, which is to sift good companies from bad ones, reward efficiency and innovation, and empower consumers with authentic choice in the marketplace. In effect, crony capitalism is a form of central planning, something that libertarians and conservatives historically eschew.

The lack of accountability of the cronies is particularly damaging.  Defenders of free-market capitalism generally maintain that accountability and responsibility must run hand in hand in order for markets to operate effectively. If wrongdoers are not held accountable, their wrongdoing will multiply and the whole system will be corrupted. Unfortunately, many free-market apologists in the political arena are only too ready to offer a double standard to their corporate benefactors.

Consequently, we wind up with the excesses that characterized firms like AIG, Fannie Mae, and Enron; we end up with lives lost due to malfeasance at the hands of mining companies and peanut companies, from drugs that cause injury and death and products that explode or fail and cause harm.

We have an epidemic of malpractice and abuse and neglect in nursing homes because wrongdoers aren't held fully accountable. All of this is a direct result of corporations taking shortcuts and playing Russian roulette with consumer safety because they know they will be shielded from accountability if something goes wrong.

As Madison said, "If men were angels, government wouldn't be necessary." Well, they aren't, and we do. The world "regulation" is an anathema to free-market apologists, but it shouldn't be. Proper government regulation and consumer protections are essential to ensure an ethical marketplace.

The fewer regulations we have, the more consumer protection mechanisms we need, and vice versa. This is precisely the purpose of America's civil justice system. It is wrong for corporations to lobby for fewer regulations while simultaneously perverting policy so that they are insulated from accountability in the civil justice arena when they err. When this is allowed to happen, corporate America runs amok and consumers are harmed.

Mr. Carney is correct when he says that the case for capitalism must rest on the willingness of free-marketeers to demand ethical conduct from corporations and politicians alike. Our current economic and political problems aren't just the fault of President Obama, or Nancy Pelosi or any other big government bogey.

The sooner libertarians and conservatives alike recognize this, the sooner we can get our economy and our government back on the right track, and given the enormity of the challenges facing us over the next several decades, this can't happen soon enough.