Crony Capitalism vs. Competitive Capitalism

In certain circles, the word “capitalism” is a synonym for the worst in mankind.

In other circles, the word represents the highest aspirations of the human spirit.

Both are correct.

How can this be?

As in so many things, it all depends on the shadows of meaning attached to the word. At its core, the word “capitalism” means an economic system based on capital–that is, based on money. The first shadow of meaning, agreed on by almost everybody, is that one of the unique traits of capitalism is that capital (let’s broaden the term “capital” to include both money and property in general–land, buildings, machines, intellectual property, etc. in the broad category of capital) is owned by private entities–as opposed to being owned by the government.

Note something important here. What important element of an economy is NOT capital?


At least, in societies where slavery is not tolerated, human beings are not considered to be capital. They fall into another category: “labor.”

But anyway, the first shadow, the first bit of “spin” put on the word “capitalism” is that capitalism is an economic system where capital is owned by private entities, not by the government. This is the shadow that differentiates capitalism from all systems of authoritarianism–the “authority” in the word authoritarianism meaning that the government has total ownership of everything–regardless of what you call the government: the Crown, the Chief, the Boss, or the Central Committee. With me so far?

The second piece of spin is that not only is the capital owned by private entities, it is also controlled by those same private entities–for the most part, anyway. This is the bit of spin that differentiates the economic system of capitalism from the economic system of fascism.

Here’s where we start encountering the conundrum with which I started this article. Now, few people seriously argue that the appropriate level of government for a society of human beings is zero–mankind is simply not wired to behave very well in a system of anarchy. History shows that anarchies rapidly degenerate into systems of authoritarian strongmen vying for power and resources and generally trampling on anyone who gets in their way, or even is unfortunate enough to get noticed. So let’s dispose once and for all with the idea that some level of government is not required by human beings. It is. A lot of us are nice people, but some of us are not. The bad apples spoil the fun for all of us.

Now, having decided that some government is appropriate, the question is how much? Here’s where it gets tricky.

Remember again the basic definition of capitalism, with only a smidge of spin: private ownership and control of capital. Let’s call this competitive capitalism:, because the only constraint on the behavior of actors within this kind of capitalist society is to maximize their own profit-making ability. They can use the traditional ways to do that: improve efficiency, provide better products, superior advertising, better customer service, that kind of thing. Remember, at this point, we have not introduced any government involvement in the system, so “well-connected” people don’t necessarily have an overwhelming barrier to entry, even in the most daunting of markets. Think of Bill Gates and Microsoft vs. the behemoth that was IBM in the 1970’s.

Let’s now add the government into the equation. At its most fundamental, a government is simply an entity which is dedicated to the application of force and power within a society–indeed, it is often said that the government has a “monopoly on the use of force.” The minimum effective human government, sometimes called the “night watchman state” simply attempts to safeguard its citizens lives and property. As the government acquires more power, it expands its use of power and force beyond the “night watchman” role into other roles, such as the regulation of various economic activities–usually starting with things like prostitution, alcohol control, and control of other intoxicating substances, but rapidly expanding into other areas for reasons of “safety” or for other well-intentioned purposes.

As this government power expands over economic activity, it becomes easier for certain persons and groups to use that regulation power for their own cynical, selfish financial advantage. Those who seek to use government power to do this will either use that power to hinder their competitors, or to enhance their own efforts. Generally, they do this under cover of some rationale which makes the intervention “good for society.”

This is crony capitalism.

Notice who benefits from crony capitalism: those persons and groups who are able to manipulate the political process in order to direct government power towards a result that is beneficial to them.

Who doesn’t benefit? Everybody else. The persons and groups using governmental power rather than competition to succeed in the capitalist market are NOT producing goods and services at the most optimal possible price, are they? The need to operate a strictly competitive operation is removed by their use of government power to advance themselves and/or to hinder their opponents. So the customers of the crony capitalists pay in two ways: first, they pay more for the good/service offered by the crony capitalist, and second they pay more for the government which enforces the laws which benefit the crony capitalist.

Now, let’s contrast: Who benefits from competitive capitalism? Competitive persons and groups–and their customers, who receive their goods and services at the most optimal price possible.

Who does not benefit from competitive capitalism? It’s easy to say “those that can’t compete” but it’s not completely accurate. It’s not accurate because of the simple concept of opportunity cost.

(Opportunity cost is basically all of the other things you could have done with your money or time other than what you actually did with your money or time. If you make $10 per hour, but decide to take four hours off and go watch your daughter play soccer, the opportunity cost of that decision is $40. But if instead, your three neighbors all offer you $20 each to come home early that afternoon to mow their lawn, then the opportunity cost to staying at your $10/hour job vs. mowing those three lawns turns out to be $20 (3 lawns X $20 minus 4 hours X $10). People generally do the thing that, at the time, seems like the best use of their time. The cost of doing this is anything else they could have done. That’s opportunity cost.)

So, how does opportunity cost enter into the discussion of who doesn’t benefit from competitive capitalism? Well, let’s say that you and someone else (let’s call him Bob) are stranded on a desert island. You’re stuck eating a diet of fish and coconuts.

Now, Bob can catch eight fish per day. You can only catch four per day. On the other hand, Bob can harvest and open three coconuts a day, and you can only harvest two a day. So, by every measure, Bob’s just better than you are. You can’t compete, right?

Well, no.

See, Bob can’t both fish and open coconuts at the same time. If he tries to do that, the fish will take his fishing pole out to sea and he’ll have to make a new one. It’s the same with you–you can either fish, or collect and prepare coconuts.

So, each day, if Bob fishes and you’re on coconut duty, each day you’ll have between you:
Eight fish, and two coconuts.

On the other hand, if you fish, and Bob’s the coconut guy, each day you’ll have:
Four fish and three coconuts.

What do you do? Well, if you both like fish better than coconuts, then Bob will fish and you’ll collect coconuts. Maybe occasionally you’ll switch up and have a coconut day, but the point is even if Bob does both jobs better than you do, you both have jobs because Bob can’t do both jobs–he can only do one. His opportunity cost is your opportunity.

And the fringe benefit is that you get more fish to eat than you would otherwise have had. That’s why “those that can’t compete” don’t necessarily lose out in a competitive capitalist society. Indeed, because the goods and services in such an economy are optimally priced, they benefit that way, too.

So, if competitive capitalism is so good, why does crony capitalism even exist? For the very same reason why human beings require government: most people are good folks, but some people aren’t. Most people will play by the rules most of the time, but there are those who want to bend the rules or change them entirely so that they have the advantage–and that you don’t.

Most of these people give lots of money to politicians, for much the same reason that Willie Sutton robbed banks: “Because that’s where the money is.”

The problem is not capitalism.

The problem is crony capitalism.