Crony Capitalism in America - Hunter Lewis

Russia, China, Argentina, and Zimbabwe are all extreme examples of crony capitalism, and therefore useful in defining what we mean by the term. At the same time, they are by no means isolated cases. Most of the world today is crony capitalist to one degree or another.

 The kind of political and economic system exemplified by these four countries has clear roots in the “national socialism” developed by Mussolini in Italy and copied by Hitler in Germany. But it was by no means a 20th century invention. The earlier monarchies of Europe and Asia worked in a not dissimilar way. Indeed it may be argued that cronyism is as old as recorded human history and has always been the dominant system.

This is precisely why the human race has made so little progress in overcoming poverty. For most of human history, there has been no economic growth at all. People born poor  died  poor. Whenever economic capital began to be accumulated, it was generally stolen by rulers or their friends or allies.

The British economist John Maynard Keynes observed in the 1930s that only one treasure trove, taken by the English privateer Sir Francis Drake in the 16th century from a Spanish galleon, the Golden Hind,  invested at 3%, would have equaled the entire English economy by the time he wrote. Such is the power of compound interest from a successful business or financial investment. But for most of human history, large-scale investments have been unthinkable. It has not been safe to make them. Treasure was to be spent or hidden.

By the beginning of the 18th century, the world was just as impoverished as it had always been. But very gradually, in some countries, especially in Britain and the newly formed United States, governments learned to be less greedy, to avoid killing the goose of enterprise that laid the golden eggs. Reforms, especially reforms that freed some prices from government control, were achieved, the so-called industrial revolution began, and poverty began to decline, especially by the 19th century.

Even then, reform was limited, cronyism remained strong, and millions remained in poverty despite advances. Outside the more reformed and thus more advanced countries, people remained uncertain about their next meal. How could it be otherwise when their economy was run on crony capitalist lines—principally for the benefit of rulers and powerful allied special interests?

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Resurrecting Marx ( A Little) - Hunter Lewis

Of Marx the man, the less said the better. He cheated in his scholarly work, borrowing without credit and distorting others's work, and cheated at home with the domestic help when his wife's back was turned. He was always in debt and trying to borrow more.

Of his work, Keynes was right to call his system " complicated hocus pocus," a characterization which fits Keynes's work too. But in fairness to Marx, he was wasn't entirely a charlatan. Some things he got right. He acknowledged for example that a market system produces the lowest prices, something that President Obama has denied repeatedly. He was not right that capitalism exploits the weak, but if we substitute the term crony capitalism for capitalism then he was right. He was also right in criticizing the kind of print, borrow, and spend policies that Keynes brought us and that are so popular today among world governments. Here is what Marx presciently said in Capital about those policies:

"The only part of the so-called national wealth that actu­ally enters into the collective possessions of modern people is—their national debt. Hence, as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes thecredo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of blasphemy against the Holy Ghost, which may not be forgiven.

As with the stroke of an enchanter’s wand ... [the public debt] endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on function­ing in their hands just as so much hard cash would. . . .

As the national debt finds its support in the public revenue, which must cover the yearly payment for interest, &c., the modern system of taxation was the necessary complement of the system of national loans. The loans enable the govern­ment to meet extraordinary expenses, without the taxpayers feeling it immediately, but they necessitate, as a consequence, increased taxes. On the other hand, the raising of taxation caused by the accumulation of debts contracted one after another, compels the government always to have recourse to new loans for extraordinary expense. Modern fiscality ... thus contains within itself the germ of automatic progres­sion. Overtaxation is not an incident, but rather a principle."

Hunter Lewis is the author of two new books, Free Prices Now! and Crony Capitalism in America 2008-12. He is also the co-founder of global investment firm Cambridge Associates LLC.

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The Principle of Violence

As will be developed later, the principle of violence finds widespread application all over the world, in America as elsewhere. But to illustrate what is meant by violence, I shall choose a modern instance, one among hundreds of familiar instances, one that most people, not having reflected on the matter, fail to evaluate in terms of violence.

  The familiar instance is public housing. A citizen is compelled to give of the fruits of his labor to meet the housing “needs” of others. Freedom of choice as to what he does with his own capital and income (property) is denied him. Freedom of choice gives way to the dictation of an authority, a dictate backed by brute force—violence! Actually, in a strict sense, the only choice a citizen has in this instance is between obedience or death. This may sound extreme, but nonetheless it is true. Suppose, for example, that a person decides to exercise, absolutely, his freedom of choice concerning payment for a government housing project. Suppose that he decides not to pay his share of the cost because he believes that the building of houses is not a proper function of government. Suppose that he deducts this from his tax payments. What would happen?

  Policemen with Guns

  Since the government’s claim becomes the first lien on everything a citizen owns, a judgment for incomplete payment of taxes would finally be rendered against his property—his home, for instance. If the citizen still refused to pay his share of the government housing project—and if he refused to vacate his property that had been attached by government—policemen with guns would eventually appear to enforce the government order. Suppose that he still refused to acquiesce. Suppose that he met the use of physical force by using physical force in return, which would be his only remaining method of exercising freedom of choice and carrying out his initial intention. He would be shot! The justification for shooting him would be “for resisting an officer,” but the issue would remain the same. The citizen would have done nothing more than hold fast to his resolve not to support socialized housing, using the least violent means, step by step, to hold firmly by his convictions.

  The reason that most of us do not think of government coercion as meaning obedience under penalty of death is because we almost always pay our part of the cost of government housing, electricity, and other similar projects before the shooting begins. Usually we acquiesce before the ultimate meaning of compulsion is realized. Thus we are unacquainted with its true implications.

  Early American Experiment

  The principle of violence found acceptance early in American history. The Pilgrim Fathers, after landing at Plymouth Rock, were in dire economic straits. Not unlike their progeny of our own times they thought they could not, during a period of stress and difficulty, rely on the actions of free men in production, distribution, or charity. Their interdependence, very plain and real to these forebears of ours, must, they reasoned, be attended to by some intervening authority. Men acting freely, the identical men who so clearly recognized their interdependence, could not, they thought, be trusted to act in their own interests! The answer: violence!

  True, the Pilgrim Fathers did not call what they did by the ugly name of violence. But, as has been demonstrated, this is what aggressive force is. The Pilgrim Fathers applied aggressive, as distinguished from defensive force. They attempted to effect communalization by force. Every Pilgrim, regardless of how little or how much he produced, was required to deliver the fruits of his labor to a communal or community storehouse. He was permitted to withdraw the stores in accordance with “need,” not the individual Pilgrim’s idea of need but the law’s decree of his need. These Pilgrims put into effect, not by charity or the goodness of their hearts, a principle later stated by St. Simon, and still later held up as an ideal by Karl Marx: “. . . from each according to ability; to each according to need.”[1] They socialized the fruits of their labor. There was a common ownership of the means of production—communalization by force. They were communists in the term’s purest form. They had chosen to live in accordance with the principle of violence.

  Communism Rejected

  There was a most persuasive reason why the Pilgrims finally gave up communism. They began to starve. Many died. Violence, as a method to effect social conduct, was forsworn. Each according to merit became the rule—that is, to each the fruits of his labor. And they prospered. These practitioners began the pattern for the American way: individual freedom, and personal responsibility for one’s own actions.

  This turned out to be superior to other ways. According to the record, this way was so good that Twentieth Century Americans applied violence (unwisely, I believe) to keep others out of our country, while many foreign governments resorted to violence to keep their people at home. This American way had several distinctive tendencies, among them:

  1. The doctrine of individual immunity against governmental power over peaceful actions. This immunity extended to the individual in respect to his property, in respect to his physical person, and in respect to his mind, or thought and expression

  2. A government of laws and not of men.

  3. The doctrine of local self-government.

  4. The principle that governmental mandate and office are a public trust, to be exercised in strictest independence of all personal interests, prejudices, or passions, for the maintenance of individual liberty and the preservation of the public order, all to be done as related to the welfare of all individuals.

  5. Avoidance of entanglements in the politics of European or other countries, and the corollary of this doctrine which advises resistance to the interference of Europe or Asia in the politics of the American continent.

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Instead Of Violence

“I want less talk and more action.”

  That sentiment of a business leader typifies the initial reaction of many persons when they suddenly awaken to the increasing dangers which beset their liberty. They demand action.

  To most people, in spite of this “let’s do something” attitude, the problem is all rather nebulous. Things are not quite right, it is readily agreed. There are strikes with their paralyzing effects; idle workers standing in front of work to be done; a growing national debt which, despite political assurances to the contrary, forebodes an evil day, perhaps not too far ahead; numerous individuals who, by the mere exercise of their capricious wills, can throw millions of American families into chaos; prices going higher; government getting bigger, and demands for vast extension of the same as a cure for the ills it creates; a growing number of people in the world believing themselves the proper objects of our charity; class hatreds developing along occupational and other lines; world-wide police actions accompanying cries for a security that the mad mess denies; more wars in the offing. No, things aren’t quite right. And the record, over a period of years, seems to indicate a whole string of costly, dismal failures in our attempt to set them right.

  Is there some common fault which serves as the root of all these ills, a fault that can be defined and for which treatment can be prescribed?

  Man Is Interdependent

  The population in America would soon be zero if every individual elected to live as a hermit. Perhaps as much as 99% of our present population would perish in even a primitive, foraging society. For instance, there were only several hundred thousand Indians here before us; their number was limited not by their inability to breed, but by the inability of a foraging society to feed. There are now well over 200,000,000 Americans with a higher standard of living than any people have ever known. Why? Because our economy is more efficient than that of a hermit or of foraging natives. The further advanced the economy, the more people it will support at a high level of living. This is by way of saying that the size of the population and the standard of living it enjoys is ultimately determined by the perfection of specialization, division of labor, and exchange. For man is interdependent! And his existence on this earth beyond a primitive state requires a recognition of this fact and a knowledge of how to deal with it skillfully.

  It is true that this fact of interdependence is widely recognized. But how to deal with it skillfully is where divergence of opinion in social affairs originates. This divergence takes the shape of two diametrically opposed recommendations. One commends life in accordance with the principle of violence. The other commends life in accordance with the principle of love. It is important, at the outset, to call these two opposed principles for social conduct by their correct names.

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