Wednesday, May 12, 2010

Crony Capitalism

So many people believe that Free markets are cruel and that capitalism and competition lead to corruption and selfishness. But which is more moral, free markets or government? Which benefits society more, government planning and control or free markets? Who takes care of the poor, the downtrodden, the unfortunate better, government or free markets?
Just two hundred years ago, there weren't rich countries in the world. Everyone lived in virtual subsistence poverty. There are rich countries now because of the development of free markets. China and India’s moves toward freer markets have raised more people out of dismal, grinding poverty than any event in history.
Nevertheless, the complaints against capitalism and free markets continue unabated. It is capitalism’s fault that HIV/Aids is affecting Africa; it is capitalism’s fault that global warming is occurring; it is capitalism’s fault that America meddles in the business of other countries and it is capitalism’s fault that …… any problem and it has been attributed to the feet of capitalism. The invisible hand is not understood at all. Free people left to their own devices, behaving so as to enhance private property rights, tend to do well for all of society. Resources are allocated to where they have the highest value, people are able to get what they want and are willing to pay for, products and services are provided at the lowest possible prices.
So why, if capitalism is so good, do we see big pharma supporting government takeover of health care? If capitalism is so good, why do we see large banks needing bailouts and why does the government have to take over the auto companies to avoid catastrophic collapse? The confusion here is two fold. First, the link between big business and government is not capitalism. It is crony capitalism. It is an inefficient intersection of business and government. Second, it is not capitalism that led to the problems, but the government. Government intervention led to the 2008 financial crisis just as it did every crisis before that time.
Crony capitalism assumes a far larger role for government in the economy than capitalism. With crony capitalism, government employs regulations, taxes, and subsidies to encourage or discourage specific economic activity that the political system considers desirable. In crony capitalism, farm prices and outputs are regulated; selected companies could get TARP money for commercial research projects; states regulate liability and health insurance companies; and Freddy Mac and Fannie Mae both exist to subsidize the real estate market. In crony capitalism private firms that are considered “too big to fail” are bailed out by government. In crony capitalism, the central bank exists to support federal government spending.
Yet the political class, the left, and the media would have you believe that capitalist greed caused the recession and that political regulators need more power. Health care, autos, financial sector, internet, big oil, big pharma, all need to be controlled by government. No way! What we actually require are constraints on monetary growth, more competitive markets, balanced budgets and less output-restricting regulation.

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