What’s in a Name? Capitalism, Crony Capitalism, and Corporatism: Why Terminology Matters

A number of classical liberals to whom I sent my paper on capitalism and civil society replied there is much with which they agree, but think I should use the term “crony capitalism” rather than “capitalism.”  They point out my arguments would be better received in “free market” circles if I avoided a battle over terminology.

At one level I agree. Much of what is most distasteful about capitalism is captured in the term “crony capitalism.”  Used in a political campaign it would be easily understood and at that level, not misleading. If we got rid of “cronyism” we would be doing far better than we are today.

But at a deeper level I think the term is misleading and social science is not politics. Yet after I developed my initial reply  I concluded there were also some significant problems with my framing of the issue.  (So this essay now replaces the earlier one which can still be accessed above.)

I argued modern market economies could exist in civil society, where they served freedom and well-being, or fail to do so by becoming independent of civil society. I believe this is importantly true. But cronyism is also important and intimately linked. It deserves more attention than I gave it, but not enough to describe the problem.

Systems not cronies

The word “crony” suggests bad people, cronies, are the problem with capitalism. Capitalism by itself is just fine.  This view fits comfortably into our cultural bias for thinking in purely individualistic terms. But Hayek, Polanyi, and my own work building on their insights, emphasize the role of systems, not individuals. Systems generate the larger patterns within a society to which we respond. Hayek did not always think this way, having started out a strong methodological individualist. But as he developed his insights about spontaneous orders he saw that view was inadequate to comprehend the market.  Hayek began to think in terms of systems.

A system is a network of relationships that mutually influence one another rather than a linear chain of causes leading to effects which are causes to still more effects. Individual actions can have powerful impacts within systems (think of Steve Jobs) but they are also shaped and made possible by the systems within which they act, and in acting, modify.

Think of an ecosystem. Here is a complex network of relationships between plants, animals, and other life forms each influencing others in a web of incredible complexity. For example, salmon spawning in West Coast streams die soon afterwards.  Their decayed bodies provide nutrients to their young when they hatch, but dead and dying salmon also provide food for bears, gulls, and other carnivores.  The bears, as bears will, shit in the woods. As they do they fertilize the growth of trees, so much so that trees in watersheds sustaining healthy salmon grow significantly faster than trees in watersheds where they are extinct. This process is a major means by which nutrients eroded from the land to the ocean return to the land. At the same time, if the forests get too thick, not enough light will reach the streams to support the brown algae that young salmon eat.  Occasional fires or other disasters clear out the trees in places, opening up stream banks to sun and to alders, whose fallen leaves also enrich their waters, aiding the development of young fish.

Looking at any of these examples in isolation from the networks and webs within which they occur guarantees our not understanding what is happening, and increases the likelihood of our acting in ways that backfire. Salmon fertilize trees that keep stream water cool enough to nurture young salmon.  Take out the salmon and forest growth slows significantly. Take out the trees and streams become too warm to support salmon.

In addition, each of these ‘nodes’ in the ecosystem, from salmon to bears to alders to algae, connect with other organisms and processes, forming a web of life.   Some nodes are more important than others, and ecologists label them “keystone species,” but all are interconnected.

Markets are systems of this sort, and this is why so many linear policies aiming to address economic problems backfire.  Within markets there are equivalents of “keystone species,” forms of organization that have a disproportionate impact on how the market will develop.  I argue that joint stock corporations are a keystone species for capitalism, not markets. In their absence or relative scarcity markets will continue, but remain subject to the larger framework of civil society.

Cronies and markets

Let’s look at how cronyism plays out in this context.

Because markets are dynamic and transformative, the details of how their basic rules apply sometimes need modification. Today the connections between pollution and property rights are the pre-eminent example, but are hardly alone.  When rules need modification those affected will want to influence the outcome, and most will want to do it in ways that serve their own purposes and values. Sometimes these values include the well being of others, and sometimes they are more narrowly focused.  This situation is unavoidable in any viable market system.

Institutions able to make these modifications are obviously necessary.  I argued in the previous paper that in civil society democratic procedures were the only ones that maintained their defining principle of equal legal status for all.

As classical liberals use the term, cronyism arises when these institutions are used to strengthen the position of current market elites against competition and uncertainty.  Law is made to assist certain economic interests, based on self-interest rather than concern for society as a whole.

Cronyism is therefore a pathological expression of an unavoidable tension existing in all market orders. We see it at the micro level on Main Street, just as we see it on the macro level in Washington, or even worldwide, as with NAFTA and now TPP. Cronyism takes advantage of the need for institutions able to make occasional changes in the rules, especially the definition of what bundles of rights exist in “private property.” They use these institutions to rewrite the rules in their favor.  For example, American capitalism no longer guarantees the property rights of small owners when they conflict with private interests such as corporations building pipelines.  Their need for corporate profits overrides what once were private property rights.

It is not always obvious where needed adjustments shift over into cronyism.  For example, take grandfathering in existing practices that have contributed to the need for legal adjustments.  From one perspective this is only fair and cushions the economic impact of needed regulations since future improvements have to meet the standards.  On the other, it preserves a poor technology and the harm it causes in order to meet the economic interests of those who invested in it.  I am very sympathetic to grandfathering in pre-existing exceptions in most cases, but the point should be clear. Much depends on how those terms are defined as to whether they primarily exist to assist a needed change or preserve an existing interest. At its margins cronyism is in the eye of the beholder.

Market systems all threaten the continued existence of those who are currently successful if they fail to adapt to changes they do not control. This tension is essential to markets serving human well-being better than other economic systems. But at the same time it means that organizations within them have interests at cross-purposes to the system itself. This is true for all spontaneous orders: markets, science, and democracies.

Looking at ecosystems again helps clarify this point.   Just as animals in evolutionary and ecosystems have personal interests at cross purposes with the systems that generate and sustain them, so scientific schools of thought have interests at cross purposes with the indefinite extension of scientific knowledge and political parties have interests at cross purposes with democratic procedures. Markets aren’t alone. This conflict of interests is a feature, not a flaw.

Markets in civil society

Markets are systems, but they exist in complex relations with other systems, such as nature and, for this paper, civil society. Like all businesses, individually and family owned concerns must make profits if they are to persist. But once that threshold is met, those controlling them are free to use their income in pursuit of other values.  This means a business need not be run to maximize monetary income.  It can serve other values as well, and frequently does.  This ability to address a complex context of values is what makes the market-in-civil-society a source for individual freedom.

Pat Buchanan, a man whom I usually disagree with, offers an excellent example of what I am describing.  In his praise of the recently deceased Roger Milliken, Buchanan wrote in 2011:

When his carpet plant in La Grange, Ga., burned down on Jan. 31, 1995, Roger could have collected the insurance money, taken advantage of NAFTA, built a new plant in Mexico, employing the same low-wage labor some of his rivals were using, and pocketed the difference as profits for his company.

Instead, he arrived in La Grange the morning after the fire, gathered the stunned workers, told them he would find temporary jobs for them, then pledged to have the most modern carpet factory in the world built on that same site in six months.

He moved his La Grange workers to plants across the South, even to England, and called friendly rivals to ask them to hire his people. He moved to La Grange, oversaw the design of the new plant, brought in 3,000 construction workers and craftsmen, and directed the round-the-clock triple shifts to rebuild his burned-out factory.

A reporter called it with amazement “a company taking care of its company town.” As promised, on Aug. 1, 1995, the new plant opened.

Milliken & Company is privately held.  No traditional publicly held corporation would do as Roger Milliken did because his actions clearly sacrificed maximizing share value to other values. A traditional CEO who acted as Milliken did would have been ousted.

As I explained in the first essay, corporations dramatically narrow this freedom for decision-makers. They must serve share value and to the degree CEOs do not, they open themselves to unfriendly take-overs because they do not own their company. Due to their very nature corporations operate in a far thinner value sphere than other business institutions.  To the degree a market becomes dominated by corporations the environment within which people act shifts from the freedom of civil society to one where the power and value of capital dominates everything else.

Capital rules decision-making.  This is why I distinguish capitalism from the market in civil society.

Let me provide one more example from another paper of mine, to make my point.

Starbucks provides far better medical coverage than do most businesses hiring people with similar skills.  Founder Howard Schultz believes in this policy because of his own life experiences. He made a moral decision, not an economic one.  When the company entered a tough stretch, share prices fell, and executives urged him to cut back on health coverage. When some executives argued Schultz could say he had no choice because of the company’s financial difficulties, Schulz replied there was always a choice. He continued to maintain generous health benefits. For Schultz, Starbucks remained in the realm of freedom. (Schultz, 213-4.).

Had Starbucks been a typical corporation, whose original founder was long gone, the employees’ health benefits would have rapidly been cut down to the “industry standard.”  Doing otherwise would have been to sacrifice shareholder value to other considerations. Schulz’s presence, and prestige as the company’s founder, gave him the standing to act as he did.

When Schultz goes, Starbucks’ unusual attention to its employee’s health will likely go as well because the logic of capitalism runs at cross purposes to Milliken and Schulz’s view that “there is always a choice.”  For human beings, there is.

Capitalism promotes cronyism

Cronyism and capitalism are different.  It is possible to imagine a capitalist system where cronyism does not exist, and every corporation seeks to play and win by the fair rules of the market. We can easily envision a crony system that is not capitalist as I use the term. Main street businesses controlling small town zoning and business regulations for their own benefit would be an example.

But cronyism under capitalism is worse than cronyism in civil society.  The reason is that capitalism’s very logic pushes powerful companies to use their resources to lock in their domination.  The market is not what matters. Nor does any other value but profit.  Further, because of the much larger scale involved: states, nations, and the world rather than cities and towns – the impact on those not as powerful is far greater.  To my mind the US has the worst of both capitalism and cronyism.

Perhaps this unholy combination could be called “corporatism.” In many ways this fits.  But the term suffers from the problem that Italian fascism combined corporatism with a dictatorial government while corporatism is also used to describe a system subject to democratic government in countries like in Scandinavia.  The term is vague. The American variant is closer to Italy than to Sweden, but we remain to some degree a country where democratic procedures, weakened as they are, still matter.

Corporatism

“Corporatism” as I use the term in the American context is not an end state.  I am describing a dynamic process that so far has run roughly as follows.

As an economy becomes dominated by joint stock corporations other values cutting at cross purposes to maximizing share value are minimized in decision making. Because CEOs are human beings this process is never complete.  Good and bad motives can also influence CEO decisions, but do so only at the margins because if they adversely effect stock prices a hostile take over will be triggered.  The mix of values reflected in a corporatized economy narrows to values that serve and increase capital.  This is why I think the term “capitalism” applies whereas it does not apply when the market is subordinated to civil society. In civil society capital serves, it does not rule.

But in capitalism the interests of organizations as organizations remains hostile to the interests of the market process. Consequently powerful organizations will use the political system to influence the rules in their favor.  At this point the term “corporatism” or “crony capitalism” becomes useful.  We increasingly have such a society today.

Our present point is not the end of the process.  So long as the market remains effective at any level threatening those on top, this conflict of interests will continue. In the absence of viable alternatives, I suggest over time, we will develop a increasingly monopolistic financial oligarchy largely free from market forces but relying on them and the smaller economic enterprises they make possible, to support themselves. It will be an industrial version of the exploitive hierarchies that plagued human societies for thousands of years.

How far this process will extend likely depends on at what point its parasitic relationship with civil society and nature leads to the collapse of one or both of its hosts. Aristotle observed long ago that social violence was never triggered by those at the bottom, but rather by the endless excesses of those at the top.  The declining American middle class and the concern of most climate scientists about the outlook for the world’s climate indicate the pattern Aristotle described is not an imaginary possibility. But when and if it happens it will take place on a far larger scale than Athenian civil war.

Combining the criticisms with my argument

I have not so much rebutted my critics as incorporated them, preserving their insights as well as my own.  Their insights can be addresses within my framework but my insights cannot be addressed within theirs.  Individuals do not disappear in this kind of analysis, as they did in most Marxist theory. But unlike a pure crony-focused analysis, I emphasize they, we, exist within a context we did not create, but which helps shape us as the beings we are.  Of course we also help maintain and create that system. We and the systems within which we exist are co-creators.

Emphasizing only the crony aspect of the problem lets the systemic dimension off the hook.  And it is this dimension that pushes corporations to act they way they do, and pushes out CEOs motivated by deeper sets of values. Emphasizing only the system aspect lets the cronies off the hook. Values matter. Individual responsibility matters.  Good people are better for any society than are bad people.

Insofar as classical liberals want to keep capitalism as a term of praise, they confuse their understanding of this dynamic and ignore a far better term within their own tradition: civil society.

Getting clear about civil society

In most market-friendly analysis the term “civil society” has been largely pushed aside by the term “capitalism.” Some writers even equate the two.   Yet it is capitalism’s subordination of civil society to the power of capital, that causes the problems I am describing, just as it is the market’s subordination to civil society that makes a free society possible.  In terms of human values, capitalism is a toxic expression of the market, where its feedback, money, comes to override all other values. The cronyism that always accompanies market organizations to some degree can then acquire even greater power to subordinate markets themselves to the interests of powerful organizations.

Civil society subordinates markets to values that cannot be derived from economics alone. I believe our growing inability to grasp this is one of the most worrisome intellectual and moral failings of today.  This failure renders us unable to really understand or push back against capitalism’s bad effects, which includes but is not limited to magnifying the power of cronies to conspire against the rest of us.

While my analysis takes Hayek’s thinking in directions he did not, I think he saw the same general point I am trying to make.  Hayek favored government measures such as a guaranteed income floor because he acknowledged a growing market economy would dissolve the local ties that supported people in times of misfortune.  He also worried about the growing power of organizations in a society where most people were employees rather than independent producers. He frequently observed the interests of organizations were rarely harmonious with the interests of society.  Significantly, Hayek described the good society as the “Great” or “Open” society, not the free market and not capitalism.  In fact when describing the Great Society Hayek used scare quotes around ‘capitalism’ and preferred the term “market.” (Hayek. 136)

Richard Cornuelle made a complementary point in describing a third sector that was neither government nor market as being essential for a good and free society.  Civil society included this third sector along with the market.  As Milliken and Schulz’s examples demonstrate, they cannot be separated.  Both were profit-oriented businessmen running viable enterprises and philanthropists at the same time. This was because in the human world we do not need to separate how we make a living from the values animating our lives.  To completely separate philanthropy from economics is to adopt a model of the market as pure capitalism.

Civil society is the pattern of cooperation that arises when people of equal status are free to cooperate in whatever ways they want so long as they aggress against no one.  It is, as David Hardwick succinctly puts it, the “Interdependence of independent equals.”  Prices emerge from this civil cooperation, but so also does science, democracy, friendship, peace, and well-being.

In my book Faultlines  I argue with the rise of the mass market, mass democracy, and powerful science, the broad liberalism that inspired our Founders later tended to narrow and split. Liberals tended to emphasize one of those three spontaneous orders as a way to solve the new problems arising around them, problems Locke, Jefferson, and others of that time could never have imagined. Classical liberals gravitated to the market.  Egalitarian liberals gravitated to democracy.  Managerial liberals gravitated to science and administration.  All three exemplify an impoverished liberalism that fails to address today’s issues adequately compared to one balancing all three within a more complete conception of a good society. Failure to appreciate the centrality of civil society weakens liberalism in the face of the many challenges now threatening the existence of a free world, not threats primarily from without but primarily from within.