Crony Capitalism and Government Jobs Programs

Steven Horwitz

I have a few thoughts on the topic, with special reference to Solyndra, over at Liberty Fund's Library of Law and Liberty.

A preview:

Unfortunately, as the recent example of Solyndra demonstrates, these sorts of subsidy programs, and related public-private partnerships, have shown themselves to be failures at both job creation and economic growth.  As I shall discuss below, the failure of Solyndra, after being given a $527 million government loan and being touted by the President as the exemplar of the “new economy,”  “green jobs,” and the future of public-private partnerships, is a point-by-point example of what’s wrong with this approach. At best, such programs are a particularly insidious form of crony capitalism that enriches a small group of people with access to those in political power distributing the economic goodies while wasting valuable economic resources in the process.  Continuing to funnel resources into such wasteful programs deprives the market of much needed capital, which entrepreneurs who are calculating on the basis of genuine market prices and profits and losses will use far more efficiently. In other words, the perhaps well-intentioned policies meant to produce a sustainable economy inevitably turn into a form of crony capitalism that is itself not sustainable.

Comments

[Barkley Rosser]

Hmmm. Solyndra had Obama connections, but most other failed green energy companies did not, and a careful study claims (perhaps falsely) that the political connections did not influence the grant that Solyndra got. As it was, when China's subsidizing of its green sector led to a fall in prices and undercut Solyndra and its fellows, the funding was not continued, and these companies were allowed to fail. Pretty unimpressive piece of "crony capitalism" this one.

[Jerry O'Driscoll]

Gary Becker has an interesting post on why highly regulated industries have the most corruption. It's an interesting and thought-provoking post.

http://www.becker-posner-blog.com/2012/07/is-banking-unusually-corrupt-becker.html

[FC]

These sorts of government interventions seem likely to be either "shock therapy" that leads to a boom-bust (e.g. Solyndra, the Mississippi Bubble) or life support for favored companies and unions when targeted investments might have sparked a revival (e.g. the post-war British auto and aerospace industries).

[Jerry O'Driscoll]

Charles Murray has written the essay for the Review scetion of the Weekend Journal. It is on topic. http://online.wsj.com/article/SB10000872396390443931404577549223178294822.html?mod=WSJ_hps_MIDDLENexttoWhatsNewsTop

Among other things, he notes that for many Americans "Capitalism" is crony capitalism, and they reject it. This shows up in polling by Rasmussen and others. Happily, "free markets" engender a much more positive reaction.

[McKinney]

Murray's article in the WSJ is interesting, but I think he remembers a time that never existed. Americans have merely tolerated moderate success in business, but have always hated great success. Recall the attitude toward the "robber barons" of the late 19th century.

Americans don't mind the success of artists, like musicians and actors, or professional athletes because 1) they think such people are not engaged in business and 2) they see the direct link between the value of their talent and the money they make.

But most Americans have always held to the ancient idea that all business is evil in its nature and, as Murray points out, that one business person cannot get wealthy except at the expense of another.

What the US is experiencing today is a loss of bourgeois values among the bourgeois. Bourgeois values came from traditional Christianity and as the West has abandoned tradition Christianity it has abandoned the values it created.

[McKinney]

PS, most people will look at the corruption characterized by Solyndra and conclude that politicians involved had pure motives and only wanted to rescue the nation but were thwarted by evil business people who are evil by nature and can never be anything else.

[loterie]

Great post! Thanks you! Very intersting!

[Josh S]

McKinney, slight correction: Bourgeois values came from Protestant Christianity, which at the time was hardly "traditional." Medieval spiritual writers very much denigrated a life of commerce and trade. See Luther and Calvin on vocation, the idea that one's profession, duty, and/or trade is as much a divine calling as that of the clergy and therefore equally noble.

On the original post, there's a pretty simple observation to be made: Venture capitalists will throw money at some pretty crazy adventures. If a company can't raise the money it needs from VC, and the only money it can get is from politicians, then the business plan must be pretty bad.

[McKinney]

Josh, actually, that attitude began to change in Venice as church scholars began to look more into what business does. The peak of Church respect for business came with the scholars of Salamanca, Spain in the 16th century.

Being good scholars, I would imagine that Luther and Calvin got most of what they believed about commerce from those great scholars at Salamanca. That's why Hayek and many others consider Austrian econ to be the descendent of the Salamancan school.

[McKinney]

PS, I think the change in attitudes towards commerce began with the de-throning of Aristotle in many areas, including physics during the Rennaissance. Until then, the church has elevated Aristotle's ideas on commerce to Biblical status. There is even evidence that Aquinas changed attitudes toward business to some degree.

[Barkley Rosser]

If this had been a serious case of crony capitalism, we would have seen government funds continue to be sent to Solyndra (at least, due to its links with Obama) and probably other companies of its sort. As it was, money ceased being sent when the companies started to perform poorly, and they were allowed to fail. This is "crony capitalism"?

It may have been a stupid idea to subsidize these sorts of green energy companies, but let us be clear about what happened. They did not fail because they were corrupt or inefficient. They failed because the Chinese government was more vigorous and sustained about its crony capitalism for companies in this sector, undercutting the US ones in what was essentially an international industrial policy war. If people say that we should not fight such wars, then they should applaud the Obama administration's willingness to cut the subsidy recipients and withdraw from the game, even if it might have been superior not to have engaged in it in the first place (a matter many not on this site would dispute).

[J Oxman]

McKinney and Josh S,

The birth of the positive attitude toward the merchant class is traced by D. McCloskey to 16th century Netherlands. I can't remember how important the Calvinists were for this, but I rather doubt merchant life and Calvinism are very compatible. Catholics to the rescue?

[maillots de foot]

glad to be here and thank u for your sharing!

[McKinney]

JOxman, Yes, I have read her books and they're excellent. But as yet she doesn't explain how the Dutch came to have an attitude so much at odds with the rest of Europe and with their own past.

In fact, not all Dutch subscribed to the bourgeois values. Heated debate on those values existed for the entire history of the Dutch Republic. Calvinists most of the time opposed the bourgeois values.

Fortunately for the Dutch, the ruling class of wealthy merchants tended to be Erasmian Christians and Calvinist only in name. They held to the bourgeois values.

Those values didn't spring from the Dutch revolt against Spain, but were generations in the making. The theological justification for them came from the scholars at Salamanca, Spain.

The Dutch were the first to implement the ideas the scholars had preached for decades. But those values stuck only with the wealthy merchants who made up the ruling class.