January 26, 2015
In this television debate, I argue that current concentrations of wealth are largely the result of pervasive state intervention, including bailouts, quantitative easing and monetary inflation more generally (explained in more detail here). Oxfam’s proposals to address inequality by further expanding the role of government are likely to be counterproductive. High taxes and heavy regulation trap the poor in poverty.
January 23, 2015
January 19, 2015
The recent Oxfam report on inequality and the ‘top 1 per cent’ is riddled with statistical errors. Worse still, its proposed solutions risk harming the poor through ill-conceived government interventions.
Nevertheless, current patterns of wealth distribution raise important questions about ‘crony capitalism’ and the extent to which concentrated special interests have succeeded in rigging markets to benefit themselves at the expense of the wider population.
As might be expected in ‘state-capitalist’ economies characterised by high public spending and pervasive regulation, it would appear that a significant proportion of the ‘top 1 percent’ do indeed owe a large part of their fortunes to special privileges granted by governments.
Several powerful ‘crony capitalist’/protected interest groups can be identified, including:
Some of the individuals and firms benefiting from special privileges could of course also thrive in an unhampered market economy based on voluntary exchange – but it seems likely that a high proportion of the above groups would either be eliminated entirely or see a major fall in their relative wealth in the absence of state protection.
The precise impact on overall inequality would depend on the social structures that evolved under a system based on free exchange. However, it is clear that both patterns of wealth distribution and absolute levels of wealth would be very different if markets were freed. Crony capitalism, special-interest influence and rent-seeking behaviour tend to undermine genuine wealth creation. Accordingly, the emergence of ‘distributional coalitions’ is a serious problem for contemporary ‘state capitalism’.
Tackling the cronies will not be easy, but identifying some of the most egregious special interests provides a useful starting point. A combination of honest, free-market money and deregulation would destroy the privileges of the financial sector. Dramatically shrinking public spending would undermine the government contractors. Scrapping patents would subvert that insidious form of protectionism. Planning liberalisation would reduce the advantages of crony-capitalist property developers. And land restitution (which raises many difficult issues) might start to address the widespread government-corporate theft of individual and communal property. Finally, abolishing occupational licensing would bring much-needed competition to state-protected professions.
Unless otherwise stated, all articles on this website are written in a personal capacity.
February 23, 2013
Mancur Olson is best known for his 1965 book, The Logic of Collective Action, in which he explained why small, concentrated interest groups are more likely to influence policy than large, dispersed groups. Olson’s work, together with that of other public choice theorists, exposed the mechanisms by which interest groups obtain special privileges from government, enabling them to extract ‘rent’ from the wider population. For example, a domestic industry might lobby politicians to introduce import tariffs or environmental regulations to shut out foreign competition. In The Rise and Decline of Nations (1982), Olson contended that over time, concentrated interest groups – facing little public resistance – would come to dominate more and more sectors of the economy, stifling competition and innovation, misallocating resources, crowding out entrepreneurial activity and thereby bringing economic stagnation.
In the recent debate over Britain’s poor economic performance, there has been relatively little discussion of the underlying causes. Olson’s analysis provides a compelling explanation for many of the long-term structural problems now afflicting the UK economy. Much economic activity is now artificial in the sense that it is not the result of voluntary exchange but rather the consequence of state-granted privileges resulting in part from ‘rent-seeking’ behaviour by special interests.
Whole swathes of the nominally private sector are sustained by government regulation rather than consumer choice. Across the professions, occupational licensing restricts entry and raises fees, while at the same time, regulations create artificial markets for professional expertise. Complex tax rules create work for accountants and tax lawyers, for example. Vast industries such as renewable energy and waste recycling have been brought into being by combinations of regulation and subsidies. And major sectors of the economy are now heavily dependent on special privileges granted by the state at the expense of the wider population. Agriculture, energy and public transport are three obvious examples, but a strong case could also be made for numerous sectors including banking (bailouts, QE, etc.), pharmaceuticals (licensing etc.) and vehicle manufacturing (non-tariff barriers etc.). In this context, the success or failure of businesses is frequently dependent on political favours rather than satisfying customers’ preferences. Given such incentives, devoting resources to rent-seeking behaviour is entirely rational, even if it is at the expense of consumers and taxpayers and the health of the wider economy.
Clearly cutting public spending is an important part of reducing the pernicious influence of special interests. It will tend to reduce the share of the ‘private’ sector reliant on government subsidies. But there is little sign that the coalition understands the economic importance of dismantling the web of regulatory privileges enjoyed by concentrated interest groups. Indeed, several government policies have actually increased opportunities for rent-seeking.
Olson was generally pessimistic about the prospects for fundamental reform in stable Western societies. Only extreme events such as wars and revolutions were likely to break the hold of powerful interest groups over policy and restore economic dynamism (arguably West Germany after World War 2 is an example of this). Yet the success of Margaret Thatcher in tackling the unions suggests that it can be done. A similar strategy against ‘middle-class’ professions would be a good starting point.
For an illustrative case study of special-interest influence over policy, and its harmful economic effects, see The High-Speed Gravy Train: Special Interests, Transport Policy and Government Spending.
26 April 2012, IEA Blog
February 23, 2013
Capitalism has a problem. Increasingly it is viewed as a deeply unfair system favouring a small, privileged elite at the expense of everyone else.
Our politicians have been quick to join the criticism. Last week David Cameron mooted granting extra powers to shareholders to restrain executive pay. Today he will give a speech on how to make capitalism more “inclusive”. Ed Miliband, meanwhile, has attacked “rip-off Britain” and backs forcing firms to consult workers on bosses’ pay levels.
There is a whiff of hypocrisy in some of these statements. Recent government initiatives include a plan to give top executives special access to ministers and a scheme to subsidise mortgages which will be run by the housebuilding industry.
Nevertheless, both leaders are correct in acknowledging the UK has a serious problem with “crony capitalism”. They are wrong, however, about the causes and solutions.
In fact, cronyism is quickly rooted out in a genuinely free economy. Companies that fail to incentivise success fall behind the competition. Cosy and complacent corporate cliques are outflanked by vigorous and innovative market entrants.
That is how markets are supposed to work. But Western economies have moved a very long way from free-market capitalism. It is not just that government spending now accounts for close to half of GDP; most sectors are also very heavily regulated.
For many firms, profits are more dependent on political favours than serving individual customers. Energy companies rely on rigged electricity markets for their reveunues from renewables; rail firms require operating subsidies; the defence industry needs government contracts, and so on. The banking sector is, of course, one of the most telling examples. Without the bailouts, many of the banks now being heavily criticised on pay would not exist.
This level of state involvement brings immense political risks to business. A new regulation, tax hike or subsidy cut can destroy profits or ruin investment plans. George Osborne’s raid on North Sea oil revenues is one recent example; the subsidy cut for the solar-power industry is another.
The incentives for business leaders to develop close relationships with politicians and regulators are therefore very strong. The returns from lobbying are often far higher than the returns from conventional business activity. Indeed, large corporate interests often successfully capture the policy process and use it to shut out competition or obtain favourable treatment. The losers are generally dispersed groups such as consumers and taxpayers, who are powerless to resist.
The answer is not, as politicians propose, to add more layers of regulation to control corporate behaviour. This will strengthen incentives for business leaders to get closer to government – an entirely counterproductive result.
Crony capitalism is inevitable given an intrusive regulatory state. It can only be stopped by removing the payoffs from special-interest lobbying – by a substantial reduction in political influence over business activity.
19 January 2012, City AM
Richard Wellings 