Is Crony Capitalism Inevitable?

BHL – Here’s a conversation you may have had once or twice:

Socialist: A socialist society would be more fair, and more just than capitalism.

Capitalist: Really? What about Venezuela? Or Cuba? Or North Korea?

Socialist: No, no, those aren’t real socialist societies. The kind of socialism I have in mind hasn’t really been tried yet. But believe me. It’s gonna be awesome.Capitalist: (rolls eyes)

In conversations like this, “socialism” seems to function as a kind of ideal type, the desirability of which is unfalsified (and likely unfalsifiable) by empirical evidence. It’s the “No True Scotsman” fallacy applied to models of political economy.But here’s another conversation you may have had.

Capitalist: Capitalism destroys unearned privileges and gives everyone a fair shot at economic success.

Socialist: Really? What about Solyndra? What about TARP? What about occupational licensing, agricultural subsidies, import tariffs, and the hundreds of other legal mechanisms that prop up powerful producers against their smaller rivals?

Capitalism: No, no, those kinds of policies are incompatible with capitalism. The fact that every actually existing capitalist society has them just goes to show that what we have isn’t truly capitalism. Real capitalism is the Unknown Ideal.

Is this kind of argument any more legitimate than the first? If we’re going to argue against socialism as a political ideal by pointing to the failures of its real-world manifestations, isn’t our defense of capitalism as an ideal subject to the same response?Of course, a lot of libertarians believe that the failures of real-world socialism are something like a necessary outcome of socialist institutions. Crony capitalism, on the other hand, is an avoidable perversion of capitalist principles.But what if it’s not? What if crony capitalism isn’t an accident, but something more like the natural tendency of capitalist systems? That’s the question that Mike Munger and Mario Villarreal-Diaz ask, and answer in the affirmative, in a new paper at The Independent Review. You can also hear Mike discuss the paper with Russ Roberts on this episode of EconTalk.I think the basic thesis of Munger and Villarreal-Diaz’s paper is correct, and I’d be very interested in hearing what some of my fellow bloggers and commentators here think about it. My own quick reactions are that

1. We have to compare real-world systems vs. real-world systems, not real-world systems vs. unattainable ideals. The important comparison is between real-world capitalism and real-world socialism, and on that measure real-world capitalism comes out pretty well, even if it almost always involves some level of cronyism. But maybe the recognition that any actually attainable capitalist system will involve cronyism ought to soften libertarians’ resistance to any deviation from strict laissez-faire? After all, if we know there are pressures within any actually existing capitalist system that tend to tilt the playing field on behalf of the wealthy and politically well-connected, is it really defensible to oppose any form of social safety net on the grounds that they are incompatible with a purely capitalist system?
2. Character matters. Part of the reason why no real-world instantiation of a system is stable is that the rules that constitute that system must always be interpreted and applied by human beings. If the people who administer the institutions are corrupt, then so too will be the institutions. But we don’t even have to assume corruption to make this argument work. It’s enough if people are ignorant of the long-term consequences of their actions, or sincerely try to produce a fairer result in a particular case by putting the best possible spin on a rule, and so on. The bottom line is that even if cronyism is against the “rules,” we’re not going to end it until the people of the society are such as to develop and enforce strong social norms against the kinds of behaviors that lead to it. That’s a difficult task, requiring a long process of education and social change. But it’s not, I think, a utopian one. And it’s much more feasible than the kind of radical transformation of human nature that Marx envisioned as being necessary for the realization of full communism.