* Crony capitalism has hijacked democracy

Samuel Brittan:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, 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 to render them necessary.”
Adam Smith, Wealth of Nations

As one of the few commentators to have always favoured competitive market capitalism I have had to ask myself a few questions. Apart from scandals such as the Libor rate fixing, we have had the behaviour of banks before the great recession; a trend to much greater concentration of income and wealth, squeezing the living standards of ordinary citizens; and one could go on. Yet if anyone expects me to issue a clarion call for more state ownership and control, they will be disappointed.

Heading the case for competitive markets is that they promote freedom of choice. They have also helped produce the biggest increase in wealth in the history of mankind. At their best they have an equalising tendency. Not literally equality of outcome or even opportunity, but a tendency for extra-large incomes to be eroded by new entrants and a ladder the ambitious can climb. This has sometimes been called “the American dream”, but its attractions are not geographically limited. There have been many blueprints for a non-capitalist market economy but despite some successes for workers’ co-operatives, as economic systems they have remained blueprints.

What then has gone wrong? In general terms it is difficult to go beyond Adam Smith. Few of us like competition; and the tendency to form closely knit groups to keep outsiders at bay is probably as old as the human race. For pre-capitalist examples one has only to think of the medieval guilds, whether of craftsmen or Master Singers. More subtle are the practices of bankers, as they come disguised as services for customers. In summary, success has depended more on whom you know than what you know. Hence the catchphrase “crony capitalism”.

A poignant example is given by Luigi Zingales in his recent book, A Capitalism for the People . He went to the US to escape the crony capitalism of his native Italy, where prospects depended almost entirely on having the right contacts and not upsetting authority. Yet after 24 years in the US he is distressed to find a new version of crony capitalism creeping up on him. Modern business is too complex to permit many Henry Fords or even Bill Gateses to make their way. Then there is the “capture” of regulatory bodies by those whom they are supposed to regulate. But this is all aided and abetted by the corruption of the political system, one of the worst examples being the recent US Supreme Court decision giving almost unlimited rights to corporate intervention in the election process.

I will risk controversy myself by noting similar, if more subtle, processes in the EU. A group of self-selecting politicians and officials has promoted a bureaucratic and intrusive form of integration, on which they have rarely consulted their electorates. What all forms of cronyism share is a passion for secrecy and a hatred of open discussion. I first saw this in the official attempts to stifle discussion of the possibility of UK devaluation before 1967, when it happened. But I came across it more recently when an otherwise intelligent head of one of the many EU banking bodies said to me in the deepest privacy that any break-up of the euro was unthinkable and undiscussable.

The most interesting of Zingales’ suggested reforms is a reduction in complexity. The 2010 US Dodd-Frank financial “reform” was 2,139 pages long and popularly known as the “Lawyers’ and Consultants Full Employment Act”. The complexity serves to hide the loopholes. And no politician can be expected to like Zingales’ proposed abolition of all industrial subsidies. As important are measures to limit lobbying.
The biggest obstacle to reform is that insiders can devote time and energy to maintaining their position. For ordinary citizens, political reform is a sideshow that hardly repays such efforts. The protests in financial centres are a well-meant but ill-focused attempt to offset this bias.

Yet nil desperandum. The UK corn laws were repealed and the US antitrust acts were passed; and in time both the financiers and the Eurocrats will be brought down.