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Crony Capitalism and the Tyranny of Small Decisions


The word “cronyism” is everywhere you turn. Conservatives are rallying around the argument that government power and corporate power are not enemies, but allies. An opaque and sprawling state makes possible the special carve-outs and tailored regulations that benefit those who have power already. Industry leaders and the politicians they bankroll link arms and cash out together. And consumers and entrepreneurs, who need competition and churn, lose out.

This might seem an unlikely tune from the typically business-friendly Republican Party. Yet these notes ring louder and louder in the symphony of the modern right. Libertarian-leaning pundits such as The Federalist’s own Ben Domenech and Tim Carney, my colleague at the American Enterprise Institute, have seen to that. They and others have spent the nineteen months since Mitt Romney’s defeat calling for the GOP to abandon its country club comfort zone and start denouncing what they see as a public-private orgy of mutual backscratching that always hurts the little guy.

Why Republicans Love This Argument

Many Republicans have found this persuasive and commenced singing from the new hymnal. Some of them were practically born to carry this torch. Senator Mike Lee is a Utahn with serious Tea Party bona fides. Lee manages to simultaneously pass the establishment’s smell test for sanity and impress the fire-breathing base with his conviction. This is an impressive feat. And much of Lee’s wide appeal owes to integrating this “cronyism” motif into his political persona.

The crusade also attracts less obvious champions. Marco Rubio has bought in with enthusiasm. And what about Paul Ryan? Since long before his name became synonymous with center-right pragmatism, the Congressman has been a leading spokesman for limiting the scope of government. Ryan helped pioneer the rhetorical war on cronyism well prior to the narrative’s new momentum.

The political benefits of this shift are obvious. Any fan of economic liberty knows that our views are easy to caricature. Sure, if you nerd out on Milton Friedman, the distinction between pro-business and pro-market seems obvious. But few ordinary voters see the difference.

Defend free enterprise? You’re cheering the firms who currently sit atop its leader-boards. Endorse competitive markets? You’re endorsing the present distribution of wealth and social power, a task few politicians wish for. But the crony capitalism narrative lets conservatives invert this David and Goliath trap. It says that we stand for the competitive forces that improve the world for everyone. Flash-freezing the economy in place will only make it unresponsive and fragile.

Why Progressives Aren’t Buying It

Naturally, the left is not down with this. They see crony capitalism case studies, such as Solyndra, as one-off aberrations with little broader significance. Those headlines remind them of the Benghazi furor. There go those conservatives again, pretending that a few hyped-up scandals comprise some overarching story that proves their philosophy right.

To them, blanket opposition to public-private entanglement is an example of doctrine blinding conservatives to facts. Who needs absolutism when we can do case-by-case pragmatism instead? Sometimes government should step back, but only a fanatic would say markets should run entirely on autopilot. Common sense says that economies need to be nudged in the right direction.

On this view, potential interventions should only be assessed on their particular merits. When arguing for solar subsidies, the only relevant details are the ins and outs of environmental economics environmental economics. For bailout connoisseur Steven Rattner, the financial particulars of the General Motors rescue are all the data we need to conclude that it was a prudent move. No big-picture talk about the role of government is required. Specific circumstances offer all the truth we need. If we get each tree right, the forest takes care of itself.

This is just one theater in the war between principle and practicalism. Conservatives value economic systems and cultural traditions that are abstract, diffuse, and organic. We believe they prove their merits over the long run. But this runs afoul of the concrete, immediate cost-benefit assessments that self-styled rationalists demand.

No single step away from free enterprise and towards coordinated control will crash the whole system. So how can we ever justify holding the line at any particular spot? The other guys have charts and calculations extolling the immediate benefits they say each intervention will bring. All we have is our dog-eared copies of Hayek and Thomas Sowell. In the age of Big Data, this is not going to fly.

The High Cost of Corporatism

Enter Mass Flourishing, a recent book by the Columbia University economist Edmund Phelps. In this wide-ranging volume, the 2006 Nobel Laureaute embarks on a Herculean quest to trace modern economies back to their origins. Phelps asks nothing less than what makes a society dynamic. Just, you know, small and insignificant questions.

In one chapter, Phelps explores an economic approach he calls “corporatism.” It comes advertised as an alleged “third way” between capitalism and collectivism. It stems from the notion that free markets seem directionless. Chaotic and disorganized, they bring us less progress than we could achieve through thoughtful coordination and planning. And besides, unfettered capitalism engenders atomistic, every-man-for-himself striving that undercuts community and virtue. Homo economicus, the corporatists say, is neither ethical nor efficient.

Corporatism doesn’t seek a radical crackdown on private enterprise. It simply wants all “stakeholders”—government, organized labor, industry leaders—to join in purposeful collaboration. It empowers higher authorities to make sure the right things get produced and put thumbs on scales where necessary.

Sound familiar? Phelps’s “corporatism” mirrors what conservatives are calling “crony capitalism.” But now it looks less like an indefinite boogeyman and more like a testable proposition. The case Phelps paraphrases appeals to many progressives and some traditionalists. To those of us with more faith in freedom, it sounds Orwellian. Fortunately, both sides can verify their instincts. Phelps digs deep into the data on corporatism and renders an empirical verdict.

He starts with several different ways to measure corporatism. One is the degree of coordination between employers and labor unions. Are decisions left up to markets or are prices hammered out cartel-to-cartel, à la the New Deal? Another metric is the degree of employment protection legislation. How much does the law elevate job security above liberty of contract? Phelps even develops a proprietary way to measure government’s footprint. He sums government purchases, transfer payments, and subsidies and divides it all by GDP.

All this yields a clear picture of how corporatist a given economy is. Phelps can quantify the extent to which a government tries to manually steer markets. And then he compares these measures against a country’s economic dynamism.

In every instance, he finds that corporatism per se is a major drag on dynamism, growth, and prosperity. It pulls down countries’ market capitalization ratios. It pulls down patent filings. It pulls down employment, job satisfaction, and pay.

Want to pave the road to an unproductive economy? Eager for fewer jobs and less human fulfillment? The formula is simple. Install a subsidy here. Pick a national champion there. And whatever you do, keep pretending that a conference room packed with experts beats millions of individuals navigating their small piece of the economy.

The Tyranny of Small Decisions

Phelps’s work is fascinating on its face, but its significance goes beyond the task at hand. Conservatives instinctively recoil from scientism, from the modern presumption that regressions and footnotes are truth’s ultimate arbiters. But why do we resent tunnel-vision practicalism in the first place? Because we feel certain it proves destructive for the human condition. If we are right, that destruction itself will be measurable. And we are obliged to measure it.

So many in our society are obsessed with empirics and “explainers.” If conservatives are to persuade them, we must exit our philosophical fortress and ride out and meet them where they are. Telling people to go read Burke and Scruton is as necessary as ever, but it has never been less sufficient. We gain nothing by scoffing at statistics when they, too, are on our side.

Phelps’s research shows that the toxicity of governing by ad hoc analysis can itself be unmasked through analysis. Even if convincing PowerPoints can be constructed for each isolated instance of picking favorites, it is clear from 10,000 feet that societies that generally reject such distortions outperform societies that generally welcome them. We need to think about our economy in this overarching way and develop general principles. We need to actively choose the kind of forest we want and let that inform which trees we plant.

“The tyranny of small decisions,” a phrase coined by Alfred E. Kahn, is frequently used by critics of capitalism to bludgeon the system. They apply it to environmental degradation, suburban sprawl, and other alleged market failures in which a multitude of small, individually rational choices add up to something disastrous.

But while progressives are eager to deploy this phrase, it ricochets back onto their worldview with brutal force. What pundits call “cronyism” and economists call “corporatism” is the costly, destructive outgrowth of a thousand small choices that each looked centrist and reasonable enough in its own, dedicated op-ed.

Citizens and policymakers are right to ask if proposals seem sensible on their face. But this cannot be the end of our questioning. We must also ask whether they are the kind of steps that, in general, lead to a more or less dynamic society. Take Kant’s categorical imperative and apply it to policy. What if the premise behind this proposal were not the exception, but the norm? Would I want to live in that country?

We have no other choice. As the data plainly show, we simply cannot afford to pretend that individual policies are not interrelated. Practicalism is just too damn impractical.

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