Crony Capitalism 101

by Don Boudreaux on September 13, 2011

in Crony Capitalism, History, Other People's Money, Subsidies

Here’s a letter to the Washington Post:

Michael Gerson misses the most germane problem with Pres. Obama’s praise of the transcontinental railroad as a shining example of the wonders of “mobilized government” (“Obama fails the Lincoln test,” Sept. 13).

Save for the one transcontinental line that received virtually no subsidies (J.J. Hill’s Great Northern), the building and operation of the other three lines were contaminated with graft, fraud, and corruption – of which the Credit Mobilier scandal is only the most famous instance.  And on top of these shenanigans that predictably happen when government doles out subsidies were other, equally predictable results: shoddy construction, bloated costs, and inefficient and unsafe operation of the lines.*

On further reflection, Mr. Obama is spot-on to cite the transcontinental railroad as an example of his hope for America: it is a great monument to crony capitalism, under which government officials – constantly cackling about their ‘grand visions’ and ‘commitment’ to America’s future – launch boondoggles that succeed only in transferring massive amounts of wealth from the general population to the politically connected.

Sincerely,
Donald J. Boudreaux

* The literature on this subject is vast.  This good, brief summary is written by my former Clemson University student Timothy Terrell (now on the econ faculty at Wofford College).

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{ 68 comments }

Bob September 13, 2011 at 9:16 am

“It is impossible to introduce into society a greater change and a greater evil than this: the conversion of the law into an instrument of plunder” Frederic Bastiat

Ken September 13, 2011 at 1:06 pm

M. Bastiat posthumously wins the Internets.

Jake S. September 13, 2011 at 9:33 am

And the story of those ‘evil capitalist rail barons’? LOL.

indianajim September 13, 2011 at 10:05 am

Perfectly put!

Hasdrubal September 13, 2011 at 10:10 am

A recently posted TED talk hits this tangentally: He shoots down the myth that authoritarian government leads to prosperity more consistently than democratic government.

http://www.ted.com/talks/yasheng_huang.html

Gil September 13, 2011 at 11:13 am

Many here would argue Democracies are worse because the public have the capacity to vote themselves money from the public treasury.

Cahal September 13, 2011 at 11:43 am

And many here would then reveal themselves not to be interested in true liberty but corporate freedom and ideological dogma.

Fred September 13, 2011 at 11:56 am

I would define “true liberty” as being free to do what you please without asking permission or taking orders as long as you don’t do anything to harm the life, liberty or property of another individual.

How would you define it?

Surfisto September 13, 2011 at 12:15 pm

That could be the question Gil is asking, does voting cause a third party cost? I am not sure about this either. If for example we had a flat tax then would people be less likely to vote for more welfare type benefits? So is it the tax system in this case or the voting causing the third party cost or another factor or not at all?

Cahal September 13, 2011 at 1:33 pm

‘I would define “true liberty” as being free to do what you please without asking permission or taking orders as long as you don’t do anything to harm the life, liberty or property of another individual.’

That’s a pretty wavy definition. Property rights are defined by the state and open to many different interpretations. And the ease with which one person’s liberty conflicts with another’s is underestimated.

Also you have not included positive rights.

If you think that it is better that YOUR definition of these is imposed on others in a non democratic regime then you are undermining individual freedom, not supporting it. Many would question the idea of property at all.

Fred September 13, 2011 at 1:58 pm

“Also you have not included positive rights.”

I did not include positive rights because they conflict with liberty and justice.

“If you think that it is better that YOUR definition of these is imposed on others”

How can negative rights be imposed? By definition they require no action by another party.

“Many would question the idea of property at all.”

True. Many people find it preferable to live off the labor of others. They are called thieves. Whether or not they carry out the theft themselves or institutionalize it through government plunder, they are still thieves.

Mark September 13, 2011 at 2:46 pm

Cahal,

In response to your statement that, “Many would question the idea of property at all”, I would respond that private property is much better cared for than property that isn’t owned by anybody (or is owned by the State).

http://en.wikipedia.org/wiki/Tragedy_of_the_commons

I would also like to point out that there are many people throughout history who didn’t believe in the concept of private property: Marx, Lenin, Stalin, Mao, Castro, Pol Pot and a whole host of other mass-murderers. When you don’t respect peoples’ property, you usually don’t respect their life and liberty either.

Emil September 13, 2011 at 3:06 pm

Cahal,

“Also you have not included positive rights.”

That’s because they have nothing to do with freedom. You can try to argue that they have something to do with well-being (although I won’t agree with you) but trying to make a case for positive rights being necessary for freedom is about as intelligent as saying that Keynes was a micro-economist

Cahal September 13, 2011 at 3:39 pm

Positive rights (‘freedom to’) obviously have something to do with liberty. A person alone in the middle of the Sahara desert is free from force fraud and theft and whatever else you go on about but has no positive freedom.

‘How can negative rights be imposed? By definition they require no action by another party.’

You seem to be presupposing a police state and factoring it out of the equation as a ‘party’. Of course property requires enforcement via coercion, as do other laws that you seem to take as a given.

‘True. Many people find it preferable to live off the labor of others. They are called thieves. Whether or not they carry out the theft themselves or institutionalize it through government plunder, they are still thieves.’

Bizarre non sequitur. Have you ever had a conversation with an anarchist? It has nothing to do with taxes etc.

You are *all* ignoring how complex property rights are and how many different types there are. You simply take your weird governments vs markets view and apply it what you call ‘philosophy’ which leads to your bizarre responses about Stalin and government theft. I’m not even sure if what you all say constituted a response.

Basically you guys have yourselves so deep in a libertarian hole that I don’t even think we can engage each other properly.

Fred September 13, 2011 at 3:52 pm

“Of course property requires enforcement via coercion, as do other laws that you seem to take as a given.”

My property, the fruit of my labor, require only that you don’t steal it.
That’s it. Enforcement is reactive, not proactive.
It’s a negative right. Unlike your positive rights it requires nothing from someone else.
If you want my property you can produce something of your own and then maybe we can trade.

Methinks1776 September 13, 2011 at 11:57 am

Government of any kind doesn’t lead to prosperity, full stop.

morganovich September 13, 2011 at 12:16 pm

methinks-

that’s not entirely true. some government does create the preconditions needed for prosperity.

you need national defense to keep from being invaded.

you need basic police services to uphold basic laws that protect the sanctity of your person and property (essentially your rights)

you need a predictable court system to enforce and adjudicate contracts.

without those things, prosperity is pretty tough to come by.

once government gets beyond those basic roles, it tends to do more harm than good, but absent them, the engine of prosperity really cannot function at all.

muirgeo September 13, 2011 at 12:35 pm

Yeah… and that National Academy of Sciences was also as devastating as that damned railroad. Oh how I long for the pre-transcontinental railroad days.

Yeah…what we have here is a full blown cult.

SaulOhio September 13, 2011 at 1:52 pm

This is an argument I have been hearing a lot from government worshipping statists lately. Because free market advocates argue for a political system closer to what we had in the 19th century, the statists conclude that we want the material conditions of the 19th century.

This ranks high among the arguments which prove that its the government worshipping statists that are the dogmatic cultists.

Clearly, to anyone with any brain at all, free market economists want to return to the economic freedom of the 19th century because we want the RATE of progress seen in that century, not the STATE of progress of those times.

Josh S September 13, 2011 at 3:23 pm

Clearly, no one would have built a transcontinental railroad without a government subsidy…oh wait, yes they did.

jjoxman September 13, 2011 at 12:39 pm

But you are assuming those things must be provided by the government. Those things are certainly desirable, but why assume the government must provide?

Methinks1776 September 13, 2011 at 12:45 pm

Morganovich,

None of that creates prosperity. What you describe is protection of liberty and private property which supports an environment in which individuals can, if they wish, become prosperous. Creating prosperity and maintaining rule of law are two different things.

Prosperity is created by us, not by government.

without those things, prosperity is pretty tough to come by.

I’m not entirely sure that a government is necessary to provide those things, though.

Jim September 13, 2011 at 1:02 pm

Whether private or public, the practical issue is that it tends to produce a mafia type entity either way.

History shows us that even the best governments can only survive about 100-150 years before corruption forces their collapse. Private mafias do not last as long, which may be a feature rather than a bug. At least they can not commit mass genocide.

Sorry, but tired of reading American gibberish, I’m reading the European rhetoric. It is even more depressing. Tainter and Olson will become popular again. Would that they were brackets to our arrogant, progressive nonsense.

Gil September 13, 2011 at 10:30 pm

Really? Has the Mafia all but dissipated? The Yakuza, on the other hand, have a very long history.

Methinks1776 September 13, 2011 at 12:49 pm

By the way, Morganovich, having considered your list a little more, it occurs to me that the institutions you list have started to become aggressors against the citizenry rather than the protectors of it.

muirgeo September 13, 2011 at 12:37 pm

“Government of any kind doesn’t lead to prosperity, full stop.” methunks

LOL! YRAFI. Full dope.

James N September 13, 2011 at 2:31 pm

Why do you bother? Your comments contain little more than straw man arguments, disingenuous, reptitive missives or ad hominem attacks. Is it difficult to find a site that will fawn over your nonesense or are you simply a masochist?

Fred September 13, 2011 at 2:37 pm

This is the only site that hasn’t banned him.

Michael September 13, 2011 at 4:07 pm

He responds here because people pay attention to him.

John Galt September 13, 2011 at 4:32 pm

O RLY? IJSMP I’m such a brilliant commentor. DTMS? Keynes in the hizzy. Full Employment. Yo!
http://www.theonion.com/articles/report-you-know-you-are-a-fucking-idiot-right,20907/

Methinks1776 September 14, 2011 at 8:47 pm

LOL!!

indianajim September 13, 2011 at 10:19 am

This is a great letter Don!

As you know (there is only so much that can be put in a letter), another aspect of the three subsidized lines that failed is that they were constrained and/or dis-incentivized from building networks of spurs off into the hinterlands to facilitate pick-ups of freight. Hill’s decision as an unsubsidized entrepreneur was to facilitate freight with numerous spurs off the truck line. Hill had full incentive to apply his knowledge of particular circumstances all across America whereas the incentives of others were dulled by subsidies, bureaucratically imposed requirements, etc.

Jim September 13, 2011 at 7:30 pm

The whole story of the railways is a horrific story of failed bureaucracy and subsidy.

It is a gift that will not stop giving.

Invisible Backhand September 13, 2011 at 10:58 am

The portion of the speech:

“But there’s always been another thread running throughout our history — a belief that we’re all connected, and that there are some things we can only do together, as a nation.

We all remember Abraham Lincoln as the leader who saved our Union. Founder of the Republican Party. But in the middle of a civil war, he was also a leader who looked to the future — a Republican President who mobilized government to build the Transcontinental Railroad — (applause) — launch the National Academy of Sciences, set up the first land grant colleges. (Applause.) And leaders of both parties have followed the example he set.

Ask yourselves — where would we be right now if the people who sat here before us decided not to build our highways, not to build our bridges, our dams, our airports? What would this country be like if we had chosen not to spend money on public high schools, or research universities, or community colleges?”

http://www.whitehouse.gov/the-press-office/2011/09/08/address-president-joint-session-congress

kyle8 September 13, 2011 at 11:08 am

The short answer to all of those things is, that someone else would have built them if there was a profit in it.

Now in a more narrow sense, it may have been in the interest of the United States to force a quick construction of a transcontinental Railroad for security and other purposes. But the way that they went about it was especially ripe with corruption.

Cahal September 13, 2011 at 11:44 am

‘The short answer to all of those things is, that someone else would have built them if there was a profit in it.’

And of course, no economist has ever found £20 on the floor because somebody would have picked it up. There are these things called public goods and externalities.

kyle8 September 13, 2011 at 12:09 pm

Yes there are public goods, and I should have restated my answer, not only the profit motive, but some people would have done all of the things that he wrote about, for other reasons.

Some of the greatest foundations, for both science and art were founded by private individuals. The Smithsonian Institution is run by the government, but was founded by an individual.

The Washington monument was built with donated funds.

So the real answer to IBH’s question is someone will do it, we don’t necessarily need government.

Methinks1776 September 13, 2011 at 12:14 pm

What’s your point?

Slappy McFee September 13, 2011 at 12:55 pm

I have always enjoyed the logic used by defenders of ‘public goods’.

The story as they see it as follows:

Neither producers nor consumers find value in the ‘public good’ in order to supply/consume it theirselves. For it is only the benevelent hand of government that takes from the many and gives to the few for the benefit of none. After the ‘public good’ is created, the benevelent hand must stand forth and proclaim, “you ignorant masses are lucky that I was here to save you from yourselves and provide you with this glorious ‘public good’ that you didn’t know you wanted and wern’t willing to pay for yourselves”.

I beat you because I love you…

Methinks1776 September 13, 2011 at 1:00 pm

I don’t know if “theirselves” appeared purposely or if it is an editing accident, but either way, it adds a nice touch.

I find people often define “public good” as a good provided by government or a good that must be a public good because it is provided by government.

Chucklehead September 13, 2011 at 1:36 pm

Hey Slap
Does not the fact that people continue to elect progressives and statists not prove that the majority of people will do irreparable harm to themselves if left to their own devices? I am unable to resolve this paradox.

Cahal September 13, 2011 at 1:36 pm

‘Neither producers nor consumers find value in the ‘public good’ in order to supply/consume it theirselves. For it is only the benevelent hand of government that takes from the many and gives to the few for the benefit of none. After the ‘public good’ is created, the benevelent hand must stand forth and proclaim, “you ignorant masses are lucky that I was here to save you from yourselves and provide you with this glorious ‘public good’ that you didn’t know you wanted and wern’t willing to pay for yourselves”.’

Erm, no, the basic definition of a public good is that it is non excludable and non rivalrous, so individuals will not have the incentive to produce it for a profit. In this case public provision is superior.

Your definition is just a standard libertarian rant.

cmprostreet September 13, 2011 at 2:09 pm

Unless railroads are non-rivalrous and non-excludable, your retort to Kyle8 above is irrelevant by your own definition.

Your defense of government meddling is just a standard statist rant. Try again.

Slappy McFee September 13, 2011 at 2:13 pm

Because goods/services are scarce, be they ‘public’ or private, they can never be non-excludable or non-rivalrous.

Because the road outside my home is held by the public, doesn’t mean no one profits from it.

Next time you trade your labor for less than what it cost you to provide it, then you can rant against profit. Until then, crawl back in your little Marxist hole.

Josh S September 13, 2011 at 3:24 pm

Roads and airports aren’t public goods or externalities.

Speedmaster September 13, 2011 at 12:41 pm

Lincoln founded the GOP?!

Chris O'Leary September 13, 2011 at 12:59 pm

“Ask yourselves — where would we be right now if the people who sat here before us decided not to build our highways, not to build our bridges, our dams, our airports? What would this country be like if we had chosen not to spend money on public high schools, or research universities, or community colleges?”

The idea that nothing will get done if the government doesn’t do it, or lead the way, is self-serving nonsense.

I’m in the middle of rehabbing the baseball and softball fields our grade school athletic association uses. I’m not doing it because the government is helping me or because they came up with the vision. I’m doing it because it needs to be done and I have the knowledge, time, and motivation to do it.

Now that I’ve gotten the ball rolling, more and more people are signing up to take on parts of the project and expand its scope.

As I tell people, what they see when they see me on the tractor is the power of self-interest. I’m doing it because my kids play baseball and softball.

Everyone else just gets to benefit.

Yes, there’s some/a lot of free riding but I don’t care because my kids have better fields to play on.

Chris O'Leary September 13, 2011 at 1:00 pm

You could also make the case that excessive government “leadership” kills the spirit of volunteerism.

Craig S September 13, 2011 at 1:24 pm

But in the middle of a civil war, he was also a leader who looked to the future — a Republican President who mobilized government to build the Transcontinental Railroad — (applause) — launch the National Academy of Sciences, set up the first land grant colleges. (Applause.) And leaders of both parties have followed the example he set

don’t foreget he was also the leader that started a war that cost over half a million people their lives, forced people against their will to take up arms by conscripting them into the army, suspended habeas corpus, violated the first amendment. All just means to the end of creating a powerful state.

Chucklehead September 13, 2011 at 1:49 pm

A Gettysburg tour guide told me “if Lincoln had not done these things, then the United States would not of been able to defeat Hitler.” How is that for a convoluted justification.

Crawdad September 14, 2011 at 1:25 pm

A guy tried this same argument with me. I replied that if he wanted to go into hypotheticals then I had a pretty good argument that there wouldn’t have been a Hitler without Woodrow Wilson’s having taken us into WW I.

Economic Freedom September 13, 2011 at 3:22 pm

“Founder of the Republican Party.”

Zerobama’s an ignoramus. Lincoln was NOT the founder of the Republican Party.

I love the fact that the New York Slimes — in its usual whitewashing of the president’s gaffes — simply excised that line in its reprint of the speech.

Methinks1776 September 13, 2011 at 4:09 pm

Give Il Duce a break. He’s just finished flying his bus to all 57 states.

Ken September 13, 2011 at 4:55 pm

IB,

The first thing I’d do is ask how well does Obama know and understand history? If he’s unwilling to take 30 seconds to do a google search to find out Lincoln was NOT the founder of the republican party, but merely assuming it, what else is he assuming out of ignorance?

Secondly, I’d reply that we’d have highways, bridges, dams and airports. The reply is very simple people like Obama assume that if the government doesn’t do it, no one will, which is clearly stupid. Also, I’d reply that we’d be freer, more educated, and more prosperous if the government not taken citizens’ wealth to set up indoctrination centers they call “public schools”, “universities”, and “community colleges”. These have been and remain some of the most corrupt institutions ever erected by the US government.

Regards,
Ken

Stone Glasgow September 14, 2011 at 12:34 am

Oh c’mon, Ken, everyone knows that good things are never produced by private robber-barron businessmen, who only aim to monopolize and terrorize us with their greedy ways. The only way to make roads and airports and public parks is through benevolent and all-knowing government.

If everything were run by a powerful centralized government our world would be filled with joy and joyness and love and rainbows and no one would ever have to work ever again.

Ken September 14, 2011 at 5:37 pm

I know. I remember a time when there existed a joyous and lovable Soviet Union, and wish I could have seen the wonderful rainbows caused by the Great Leap Forward and the Cultural Revolution. It’s a shame such a paradises were lost to history. Such love and joy existed in those times.

Regards,
Ken

Jim September 13, 2011 at 7:36 pm

Ask yourselves — where would we be right now if the people who sat here before us decided not to build our highways, not to build our bridges, our dams, our airports? What would this country be like if we had chosen not to spend money on public high schools, or research universities, or community colleges?”

Wow. That answer is simple. We would all be a great deal richer. Even the ‘poor.’ In fact, I believe governments have so hampered growth that without the welfare state, some of us might have already built communities in the stars.

Further, I have a financial model that proves it.

Speedmaster September 13, 2011 at 11:27 am

To wit, this is a GREAT piece on the RR story: http://mises.org/daily/2522

Chris O'Leary September 13, 2011 at 1:03 pm

“The grades did not meet but ran parallel to each other and had continued that way for 250 miles — almost a year’s work.”

But think about all of the additional jobs that were created or saved.

Speedmaster September 13, 2011 at 1:12 pm

>> “But think about all of the additional jobs that were created or saved.”

You, Sir, are a pot-stirrer. :-)

Terry Noel September 13, 2011 at 12:40 pm

Don,

You are probably aware of The Myth of the Robber Barons as well. Good read.

Terry

Speedmaster September 13, 2011 at 12:43 pm

Indeed, that’s a FANTASTIC book! I left a review here: http://bit.ly/qbE9e9

ettubloge September 13, 2011 at 12:45 pm

Didn’t Hill’s Great Northern actually run more safely such that consumers chose his line when given the opportunity? Oh, yeah. Sorry to mention those consumers. They are always an afterthought. And Hill’s workers suffered fewer injuries during construction that the government RRs..

Speedmaster September 13, 2011 at 12:46 pm

Pesky consumers, always getting in the way. ;-)

Chucklehead September 13, 2011 at 1:20 pm

What the heck is “Whig economics.”

Richard Stands September 13, 2011 at 5:17 pm

I think that’s when creditors of failed firms which were “too big to fail” become “too politically connected to take a haircut”. So they cover up the scalping with growth taken from others.

J. M. Keynes September 13, 2011 at 8:11 pm

Professor Boudreaux, this is a well written letter that points out the obvious — the statist’s worship of crony capitalism. It is no surprise that statists like muirgeo and Invisible Blockhead worship the state so much that they will sacrifice any credibility they may have had to support continued state- sponsored crony capitalism. Tomorrow , they will undoubtedly criticize those who support free markets by falsely claiming that they support crony capitalists like Goldman Sachs and GE.

LAD September 13, 2011 at 8:19 pm

I stand in defense of 19th century crony capitalism. For all its flaws, 19th century crony capitalism built railroads.

By contrast, 21st century crony capitalism will not build California’s high speed bullet train. The billions we spend will only fund the environmental lawsuits.

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