Acton Commentary

Crony Capitalism’s Favorite Trick: More Regulation


Many who reject capitalism in favor of some “third way” do so because they often mistake it for government-corporate cronyism, which is a perversion of a free market. Yes, Washington and big banks are in cahoots. And yes, many developing countries have traded Communism for pseudo-capitalist oligarchies. But in countries that have begun extending true economic freedom to the masses, capitalist activity has already lifted hundreds of millions of people out of extreme poverty.

Happily, a new piece in The Economist magazine offers some helpful medicine for the confusion, insisting on the distinction between cronyism and capitalism while also pointing to some hopeful signs that a rising middle class around the globe is gaining the clout to fight the power structures that still wall millions out of the wealth creation game. My reservation about the article is that it misreads America’s Progressive era, and in the process, leaves cronyism’s favorite trick unexposed.

According to the piece, crony capitalism in America “reached its apogee in the late 19th century, and a long and partially successful struggle against robber barons ensued. Antitrust rules broke monopolies such as John D. Rockefeller’s Standard Oil. The flow of bribes to senators shrank.” Later, it tells readers that while developing countries are making progress against cronyism, “governments need to be more assiduous in regulating monopolies.”

Certainly monopolies shouldn’t be allowed to run wild. If The Acme Global Meat Trust tries to use threats and bribes in Washington to operate above the law, if it uses your Uncle Julio as a key ingredient in its next batch of frozen happy meals a la Upton Sinclair’s The Jungle, they should be prosecuted, and not just the corporation as a legal entity but the particular corporate players who did the deeds.

But if Upton Sinclair’s unsettling turn-of-the-century expose on an under-regulated meatpacking industry is all that comes to mind when we think of business and regulation, we’re missing something important. Both during and after the Progressive era, big business—including the meatpacking industry—actually encouraged and embraced a regime of complex federal regulations. Why? In part, to disadvantage their smaller competitors.

The giant monopolies of the era, as well as the oligopolies that arose in the wake of the trust-busting era, benefited from the regulatory rage because they were better situated than their upstart mom-and-pop competitors to master the growing set of state and federal regulations. The politicians and bureaucrats benefited, meanwhile, by gaining fresh opportunities to seek bribes and campaign contributions in a never-ending process of tweaking, re-tweaking, and selectively enforcing the ever more complex body of government regulations.

Subsequent generations of Progressives in Europe and the United States have been pursuing the strategy ever since, selling it to themselves and to the public as a fight for the little guy. It works nicely as populist rhetoric, but it hasn’t always worked out so well for the actual little guy trying to build a new business and create jobs. The regulations make it harder and harder for the up-and-coming entrepreneur to compete against big, entrenched companies, because he can’t afford the army of lawyers, lobbyists and retrofitting specialists needed to deal with all of the regulations and regulators.

The regulation game is a clever trick for walling out smaller competitors, but it’s also immoral and culturally degrading, since it encourages parasitic rent-seeking rather than economic success through hard work, innovation and other-directed customer service.

For a couple of contemporary examples, think banks and barns.

Banks first. Recent books such as Jay Richards’ Infiltrated, Peter Schiff’s The Real Crash, and Peter Wallison’s Bad History, Worse Policy explore how a host of fussy government interventions in the marketplace privileged big financial institutions, precipitating the financial crisis, and how the Dodd-Frank “reforms” that followed have actually made matters worse, evidenced by the fact that the process of banking mergers has continued apace since the reforms took effect.

As for barns, Joel Salatin’s Everything I Want to Do is Illegal is a good first stop to learn about how big government and big agribusiness have worked hand in glove to disadvantage innovative smaller farms. Salatin shows in painful detail the way well-meaning but often clueless government bureaucrats serve as the long arm of a rigged system, making it difficult to impossible for family farms to process and market directly to customers using methods that are often healthier than the technologically fussier, more expensive government-sanctioned methods favored by large factory farms.

The Economist magazine article clears away some of the confusion about the nature of economic freedom, and sows the seeds of hope when it announces that “a revolution to save capitalism from the capitalists is under way.” But that revolution will prove abortive if crony capitalism’s favorite trick isn’t widely exposed and put to rout.

Jonathan Witt is a research fellow with the Acton Institute, a lead writer for the PovertyCure initiative, and author, with Jay Richards, of The Hobbit Party: The Vision of Freedom that Tolkien Got, and the West Forgot (Ignatius 2014).