The Myth of Crony Capitalism

I think your post brings up some good points. Firstly, I would agree with your assessment of serial instability of the US economy, and to add to your observations, I think you will find this extends well past the mid 1800's, back into the late 1700's, starting with the Panic of 1785.

In fact, you can almost set your watch by the crashes instigated by laissez faire Capitalism, from the signing of the Constitution to the Great Depression of 1929.

http://www.answers.com/topic/financial-panics

This is one of the first clues that things are not adding up with respect to the contemporary narrative- but not the only clue.

Underpinning the historical observations of consistent, cyclic economic collapse are the predictive theories of the mid 19th century (Das Capital, et.al) that do a pretty good job explaining why these events are intrinsic to laissez faire Capitalism, and why they will continue to recur with ever increasingly severity. So we have a case where the observable events match with theory- to a point. To be thorough, it must be said that the contemporary narrative seeks to explain these events by blaming government intervention, but these claims fall apart when we extend the historical timeline to the era before the 1913 Federal Reserve Act and the initiation of federal income tax. Many historians will tell you that the government was simply too small to impart any influence on commerce in the pre-Civil War years, yet this was a particularly active time for economic crises.

And most economists will add the final nails to the coffin of the interventionists, which is that government intervention was specifically needed to try and stabilize a vastly unstable system, and was required, (and demonstrably still is) time and time again, to prevent a complete and total collapse at many intervals over the last 200 or so years.

But to your larger point highlighting periods during this timeline that showed improvement in social relations, yes, there definitely are, but I will make the case that these occurrences underscore my point, not contradict it.

At the risk of introducing more boring and obtuse explanations regarding class theory, I want to loop back to the comments regarding overdetermination, which is an essential concept to making sense of all this.

Some attributes of overdetermination:

1.) In complex systems such as a Capitalist economy, any attempt at singular definition of cause and effect is almost certainly wrong.

2.) The function of Capitalism is inherently overdetermined. Here are a few examples: a. Availability and access to natural resources. b. Availability and access to finance capital. c. Social attitudes towards labor and Capitalists. d. Availability and access to labor resources. e. Technology.

Overdetermination means these attributes interact dynamically, in real time, in the context of a Capitalist class structure to result in a Capitalist economy. But most importantly it means that if there is a change in one attribute, for example, a change in technology, the other factors also change, and adapt to consider the new technology. You can make the same observation using any of the listed attributes, and see the same effect. Another key consideration is that these adaptations intrinsically and irreversibly change the individual processes.

As a concrete example, we can use the technology attribute and illustrate how a smart phone, (or ATM machine, etc) changes not only the social relations (changing how we interact personally) but irreversibly changes how we interact with finance and banking as well. And as these attributes continue to evolve and interact, the boundaries between them become harder and harder to differentiate.

The technology example is pretty easy to follow, and self evident. Less easy to illustrate is the attribute of social relations, and it's interaction with the other factors. Nevertheless, let's use this framework and move directly to your question of the era of 1890-1910.

Of course, this coincides nearly perfectly with the Progressive Era, which was largely a period of socially inspired change. On the heels of the Depression of 1893, people were disenfranchised with the damaging effects of laissez-faire Capitalism and their robber baron overlords. There was widespread agreement that the government must intervene to correct social inequities of the day, not only by the general populace, but by the farming community as well as small businesses, which were a much more powerful force in those days.

The upshot of all this was a marked change in social relations, which worked against the dominant Capitalists and acted as a powerful countervailing force to the intrinsic tendencies towards exploitation- which had wreaked havoc among the populace.

Perhaps it is useful to look at the previous list of contributing attributes and overlay these with some of the accomplishments during the Progressive Era:

a. Availability and access to natural resources. i. Railroads enhanced access to natural resources, distributing these resources efficiently to far flung production centers.

b. Availability and access to finance capital.

i. Establishment of the Federal Reserve Act in 1913 adding a "lender of last resort" capability to the remarkably unstable American banking system.

c. Social attitudes towards labor and Capitalists. i. Widespread disapproval of the robber barons. ii. Implementation of women's voting rights. iii. Focus on the family as a means of combating Capitalist exploitation. iv. Introduction of legislation (Interstate Commerce Act, Sherman Anti-trust Act) to bring Capitalist forces in check. v. Introduction of federal agencies to focus specifically on keeping Capitalist forces in check (Interstate Commerce Commission, Federal Trade Commission, Food and Drug Agency)

d. Availability and access to labor resources. i. Introduction of the moving assembly line (Ford, 1912) commodifies and discretizes labor-grossly simplifying production tasks and opening up the labor pool.

e. Technology. i. Railroads. ii. Gas powered automobiles iii. Farm automation. iv. Factory automation and assembly lines.

All of these attributes and accomplishments occurred during Progressive Era, and the overdetermination of these factors greatly impacted the Capitalism of the day- and most would argue for the better.

So this overdetermination of the Progressive Era resulted in a strain of Capitalism that was more socially acceptable than what was previously realized at the end of the Guilded Age.

But it must be said that in a odd and somewhat perverse symmetry, the achievements of that day are now being challenged once more, and by the very same forces. The Interstate Commerce Act, the FDA, the FTC, the Federal Reserve system, and moving to a slightly later era (Post Depression) Social Security, etc, are all now being vigorously disputed once again after nearly a century of extremely tough lessons learned.

Anything smell funny yet?

As a interesting aside, which current political ("free market") candidate is the most vocal at excising these exact entities?

All of this good will and positive social change was to come to an end with the arrival of the First World War, the end of which coincided with another era of rampant and runaway Capitalism, that despite the social advances made by the Progressives would finally culminate in the Great Depression of 1929.

Because you see we have in this tale a very similar version of the Crony Capitalist story of our current day, this time though, the conclusion can be seen through the spectacles of history, and despite the momentous advances of the Progressive Era, (they did in fact de-legitimize the "Cronies") after all that, they were still left with Capitalism.

All of this which would come into sharp relief in the Crash of 1929.

So again I would add that once you remove the "Crony" from Crony Capitalism, you're still left with Capitalism.

Jim H- thanks for your reply. I read Jesse's blog everyday, I think he has some of the most insightful commentary of virtually anyone I read- but he is a trader. And I have noticed a general blindness of those that are involved in the equities trading business to have any type of robust understanding of class structure, and as such, they are overly defensive, and dare I say blind, to the key principles of Capitalism.

I find that most of the traders, at least those that author the "doomer" type of web sites are almost universally gold bugs, and are usually staunch believers in the "free market" economy for what I hope are obvious reasons. The markets, at least as far as the traders are exposed to them are simply a means of exchange, and efficient ones at that. It is somewhat natural then to conflate the free market as defined by a means of exchange, to map to the current vernacular with laissez faire Capitalism, the interruption of which might be considered an impediment to what the trader sees and experiences every day.

Capitalism is a very different subject than the means of exchange as embodied by a market.

Capitalism most certainly is an abstract concept, the Wikipedia definition is little more than a place holder. It's not about money lending, it's not about monetary systems, and above all, it most certainly is not about equal justice. Capitalism is a system of social relations, and it is characterized by several key attributes, I'll mention two, Exploitation, and Accumulation. At it's very essence, if there is no exploitation, there is no capitalism, but you won't find the traders making those claims. You can valorize this foundational aspect all you want, (and to be sure there are many good aspects to capitalism) but the intractable bottom line is that the worker is paid less than the Capitalist gets.

Not at all sure how you get equal justice from that calculus.

It's disingenuous to suggest that parties in the form of worker and employer always enter into voluntary agreements, sometimes they do, sometimes the agreements are not at all voluntary, as there is another key foundational concept, and that is the compulsion for all wage earners to sell their labor power to exist. All of them. And when opportunities abound, it works out pretty well, but when necessary natural resources decline, when the job opportunities disappear, jobs are therefore taken- contracts are entered- which are survival based and voluntary at only a superficial level.

There is no equal justice when you have such a relationship, there is clearly a dominant and favored party in such a contract.

You have presented a very good point here, (regarding corporate law breaking )and I make the case that such bias and disadvantage need not be illegal to have the same destabilizing effect. You have described the coercive laws of competition, which dictate at a benign level, that any corporation that invents or evolves a technology which lowers his cost of goods, enjoys a (temporary) competitive advantage (as he should). This lasts until the competitors also adopt the same or equivalent technology, which they must do to remain viable. So far so good. But what about when the same corporation offshores their labor force to China, their competitors must do the same, or risk going out of business

I think you can see that this extends to many elements of modern business, from employee benefits, to working conditions to wages and sets up a declining spiral or race to the bottom. And nothing about this is illegal, nor should it be. Corporations consolidate to gain size advantage, displacing smaller firms in the process and trend toward monopoly and monosopy. They accumulate vast amounts of wealth, and convert this wealth to social power, allowing them to capture legislators, regulators, and the seats of power defining their own laws, tax structures and rule systems to substantially benefit their own interests at the expense of the rest of us. Not "Cronies", but systemic, inevitable, accumulation of wealth and power, remove the offenders and new ones appear, changing, adapting, revising laws and power structure until finally the capture is so complete they don't bother with prosecutions anymore.

They do this until their wealth extraction exceeds the capacity of the system, and the system crashes. With greater frequency and magnitude each time, with every crash.

And then the State steps in with a new wrinkle, the even more destructive wrinkle of State Capitalism. So damaged and in need of bailouts that large scale industries,(such as the auto industry- embodied by GM, once the most powerful corporation in the world) are reduced to a shambles and can be "saved" only by the State. And laughably, using the same aforementioned class blindness, now this is called Socialism with seemingly no clue that the exploitation and accumulation are still present in full force, with just a different paymaster. The penultimate destination is grim, either collapse via revolution to another class structure, or, gradual evolution into the final realization of uninterrupted State Capitalism- which is Fascism.

If anything can be said of the lessons of the 20th century, it was the profound and destructive oscillations between private and State Capitalism, world wars were fought, empires sank and revolutions failed as superpowers vacillated between private Capitalism and State Capitalism - and back again.

Which way will it go this time, ladies and gentleman, place your bets.

If we are at the point of conceding the entire State is compromised by “cronyism” than the term is inappropriate and has outlived its usefulness. More blood has spilled and more poor decisions made by misinterpreting labels than perhaps any other cause.

The road signs evident to even the casual observer point towards the obsolescence of the word “crony”, as the inevitable segue into the next phase of descent has already superceded the archaic and wholly inaccurate explanation suggested by the term. An argument could be made that last relevant sighting of “cronyism” was the Savings and Loan crisis of the early ‘80’s, where a relatively small cohort of miscreants cooked the books on a massive scale, got caught, was prosecuted and imprisoned amid much jawboning and saber rattling that this ”would never happen again”. But it did, at a much larger scale, because that’s what things with systemic baked in failure modes do, over and over again.

This time however, we are well past a small cohort, we are looking at wholesale extraction of wealth from the economy by actors that have no intention, nor any contributory skill sets in support of adding any value. It’s all about extraction and accumulation.

At this scale, we have moved into the next phase, which is State Capitalism. The boom and bust cycles are now so large, the ramifications so devastating, that collateral damage from unintended collapses of Capitalist schemes gone bust now damage non participants, observers who find large sums of money or benefits or assets plundered, pillaged and otherwise extracted from their purview- and done at a scale that requires State intervention to try and mitigate the contagion.

This phenomena is difficult to reconcile given the political lexicon of our time.

The right is preoccupied with reducing government and introducing austerity at precisely the time that massive restructuring at the societal level is required, and the left is caught flat footed, unable to explain the intrusive expansion of government in areas of personal liberty (Patriot Act, large scale data mining and surveillance) by the only entity large enough to counteract the destructive forces of unchecked Capitalism.

Both sides miss the point, and neither will not be able to effect any meaningful change, as neither ideology passes muster with an omnibus explanation of what we can observe, and part of this stems from misunderstanding labels. Both (right and left) explanations have areas of lucidity, but both fail badly when asked to reconcile and integrate the larger picture.

The explanation that integrates both aforementioned factions is the explanation of State Capitalism, which allows for the encouragement of privately owned entities to be managed by an overarching, totalitarian State. We can cite a current and prominent example today of such a system in the People’s Republic of China. We can tie this to our own country by looking at the “bailout” events of 2007-2009, namely the financial bailouts and notably, the bailout of General Motors and Chrysler, but particularly GM. Taken in the context of the encroachment of State Capitalism these events make perfect sense, while at the same time are poorly explained by the left vs. right paradigm.

The early and mid 20^th century contained fertile ground for misapplying labels, with respect to ideological terms. And in this period we can find perhaps the most famous example in Russia- with the Bolshevik Revolution.

Perhaps best chronicled in John Reed’s famous book “Ten Days that Shook the World” this tectonic event is to this day not mentioned in polite company. To focus on March of 1917, when 500,000 workers showed up at their jobs on a Friday afternoon and informed their managers and factory owners that come Monday morning their services would no longer be required, and they (factory owners) would be well advised to leave the keys on their desks and vacate the premises post haste.

Which they did.

Unfortunately, as attractive a story line as this is, this tale had a most unpleasant ending. If not in days, then certainly in weeks, the nearly 500 year reign of the Tsarist Empire, one of the largest in the history of the world, imploded and kicked off the bloody Russian Civil War which was to last more than 4 years and kill hundreds of thousands of Russians.

Entire careers have been spent documenting a passable post mortem of these events and the Stalinist regime that would follow, so one must consider it folly to attempt in offering a reductionist explanation of an extremely complex sequence of events. But one concept rises head and shoulders above the many contributory factors, and that is the concept of surplus value, who got it and what did they do with it.

It could be argued that misunderstanding and misappropriation of surplus value is responsible for more armed conflict in the history of the world than any other singular topic, and it rears its ugly head even in (and especially in) modern times. The Bolshevik Revolution was certainly no exception. Despite the well meaning attempt of recompense by exploited workers striking and taking over the means of production, in the final analysis control and distribution of the surplus value simply shifted away from the Capitalist factory owners (yes, capitalism was rampant in Tsarist Russia-and not very popular) and was redirected to the party Commissars with little structural change in the status quo, and a whole lot of dead peasants in the process.

The process was to repeat yet again in the late 20^th century collapse of the Soviet Union, with yet another reversal of the failed political and economic policies active in Russia at the time- this time in the opposite direction- toward private Capitalism once again, this time the surplus value going to Oligarchs. 

Deciphering causality in the demise of this regime as earmarked by the symbolic fall of the Berlin Wall in 1989 is not so easy. Much of the historical record and any accurate sequencing of events was compromised by decades of Soviet propaganda which was largely in place until the Glasnost era of 1990 allowed scholars access to files and history of this time. Much of the explanation of the day defines this period ideologically as Communism, although some conceded that is was more Socialist than Communist.

In any event, the analytical focus was on the Soviets’ capture of private property by force, and additionally, on the well known central planning component of Soviet governance in this time. In short, the focus was on the machinations of power, and it turns out this misses a crucial element- the surplus value- who gets it and who appropriates it.

If you consider this critical element, you are left with the conclusion that what happened in 1917 was not Communism (or Socialism) at all, but rather, the onset of State Capitalism, with the rather unwise addendum to confiscate private property.

Consider this excerpt from a definitive book of this period “ Class Theory and History – Capitalism and Communism in the USSR”

………This socialism was and is a form of State capitalism. The last century’s intense struggles articulated as epic battles between capitalism and socialism, were conflicts between private and state forms of capitalism. For the enemies of state capitalism (quo socialism), capitalism’s violent birth out of feudalism, articulated out of the liberatory surge of individual freedom against absolute state power, has been endlessly replayed. The hallowed contest of individual and state had been made familiar and anchored deeply in the (people’s) consciousness. It provided them with ready made words, phrases, moralities and certainties to wield for private and against state forms of capitalism- renamed as capitalism versus socialism/communism. Thus, “freedom”, “liberty” “democracy”, and “individualism” have opposed “dictatorship”, “totalitarianism”, and “collectivism”. The old concepts and battle cries of capitalism’s birth resurfaced to understand and fight the battles between private and state capitalism (quo socialism).

I think this explanation makes much more sense than trivializing these events as mere “cronyism”, an inaccurate and obsolete term if there ever was one. The important point here, and is it ever important, is that all the focus on power distribution and property ownership is all well and good, but to those can see through the smoke and haze the vantage point of class theory, the image of surplus labor and surplus value distribution looms large.

Yes, I agree with this, as you have chronicled in your many excellent posts on this topic. The coarse schematic is something like this; Private Capitalism Þ State Capitalism Þ Fascism. I view these as somewhat of a continuum, or as the various transformational changes along a pre-ordained route.

What I think is a little different, and perhaps interesting about the example of the Bolsheviks as compared to our current predicament is that the Bolshevik Revolution set out with the express purpose to make a deliberate change- and ended up with State Capitalism anyway. In our case, I think to some extent we find ourselves (currently) embroiled in State Capitalism inadvertently, as no specific social change agenda is apparent. Now to be sure, the corporate self-serving influence on legislature and regulatory capture is in effect full force, and this may be considered a de-facto agenda of the profit seekers, and many in (government) positions of power are certainly just taking the payoffs. But some are not, and are placed in the position of trying to dig out of an irreconcilable economic mess caused by the excesses of Capitalism.

And to these folks, it would seem they have no other option but to commit the State to massive interventions to stave off wholesale failures of Capitalist excess- as a response not as a cause. And the sum between these two is truly bad news for the rest of us.

Well I think you’ve effectively illustrated the very essence of this thread, the misguided notion that once the “cronies” are out of the way we can get back to the bidness of growing, expanding, consuming resources and pointing incredulously at the maldistribution of income.

But increasingly, the vernacular of the day is now mentioning the crisis in terms of structural change to the economy, and not cyclical. The housing market is forever changed, those jobs are not coming back. And as I point out, we may be at a place where there are simply too many people selling too many things to too few people to support any further economic expansion-at all.

I won’t be apologizing for the definition of exploitation, it is a legitimate use of the word and has been so for nearly 200 years. The reason why it is charged and offensive is simply because it is not intended as a pejorative, it is a clinical description of a situation wherein your surplus labor is appropriated and consumed by someone else, for their benefit and not yours.

This is a numerical quantity, not an emotive quantity. Irrespective if your salary is $7.25/hr or $250,000/yr, in a Capitalist society someone is taking out more than you are putting in, and in this context, you are being exploited. How you “feel” about this is simply a reflection of class consciousness (or lack thereof). And when in the aggregate this exploitation rolls up to differential accumulation, and this accumulation is then converted to social power, we have circumstances as we have now.

This cycle will repeat ad nauseum

While it may be true at the “bottom” that there is a more visceral sensation of exploitation, the notion of class consciousness demands that at the very least, no matter how uncomfortable the realization is, one must have at the very least an awareness of the plain physics that says if you are making a salary someone else is benefiting –from your surplus labor- as well.

And while it is all well and good to mention that we have options, let’s move out of the world of theory into the practicum, and that is one has to exist, which is to say pay bills and raise a family. So all these options at the end of the day must provide substinence, whether you are a passive investor, a small businessman, a Kettle Corn salesman or a panhandler.

As a side note in the theme of class consciousness, none of the options you propose are considered part of the Capitalist class structure.

This quip aside, the statistics for small business success are alarming. Something like 85% of small businesses fail within the first 5 years. According to the IRS tax records, 75% of all corporations in America have zero employees, and account for about .0004% of the total receipts (revenue) in the US. Inversely, about 75% of the total (corporate) receipts in the US come from corporations with 500 or more employees. And rest assured, this cohort is most certainly part of the capitalist class structure.

So while you may be perfectly content with a salary and benefits package, as you point out, you are unlikely to achieve the financial and logistical goals of starting your own semiconductor factory. The level of salary and combined benefits seeks to assuage the loss of the workmanship ideal, to some extent, but much class theory these days focuses on alienation, manifesting as deep dissatisfaction, and a general diffuse malaise. We see workplace shootings, mass murder really, which barely makes front page news anymore, does anybody really think there is no connection?

Not a playground Jim H, but it is a thread that is by design intended to explore different thoughts and theories that may better explain our predicament. It is not my goal to try and convince you or anyone else to take the “sleigh ride to Sweden” and turn socialist, (certainly as a business owner I’m not) but rather to present provocative ideas that have some reasonable basis for discussion and exploration.

Your comments and editorial are welcome here.

That said, I do not find hair splitting definitions and pivoting to monetary explanations (gold standard et. al) to be a convincing rebuttal to the extremely serious charges being leveled against Capitalism. Nor do I find that stating truculently (paraphrasing) “ for all it’s flaws it’s the best system we have- so unless you’ve got some thing better, shut up” to be particularly compelling or useful.

In the past, this <look the other way> philosophy has served Americans well, as for hundreds of years with a rising standard of living for most, intersecting with dramatic technology advances (most subsidized by cheap energy) the rising tide has floated most every boat. That is over now, and somewhat obliquely , has been over for around 30 years. Now we are faced with end stage Capitalism, fortified with Neoliberalist policies and globalized trade. Heady words, but what this means is that the 200+ year labor shortage allowing the middle class to achieve some semblance of parity with the Capitalist class has been burst by a chronic oversupply of globalized labor at below market prices.

Offshoring manufacturing and other technology jobs has destroyed the mechanism of social mobility which is critical to maintaining a standard of living for the middle class, this allows oneself to elevate his or her earning power via exposure to increasingly higher value occupational tasks. Not acknowledging or misunderstanding this notion is one of the most serious structural problems in our country today, and this was predicted to occur many, many years ago……

Couple these (and other) phenomena with diminishing availability of natural resources such as oil, and the we have a clear directive to stop thinking that uses old paradigms and start using new ones, post haste.

As such I do not find this at all in opposition to the tenets of the Crash Course, in fact I find it totally consistent. I have posted before I think this type of analysis simply extends the work of the Crash Course, and addresses areas that are not examined by this material.

These comments are typical of the de facto defense mechanism for Capitalism as already mentioned, as in whatya got that’s better- a defense that I don’t take very seriously. Intrinsic to this defense is the conflation of authoritarian and totalitarian power grabs with the type of political economy which is in my view, faulty logic.

So of course we are left with powerful imagery of Stalinist Red Purges, peasants sent to the limits of Siberia, chronic supply shortages caused by a centrally planned economy gone wild. Best stay with the devil we know than the devil we don’t know eh?

Taken to it’s full extent, this conflation you propose has us cowering under our 2^nd grade desks on the first Friday of every month as the air raid sirens wail and when asked, the teachers tell us “The Commies are coming”. Remember those days? I do.

Is it reasonable to conflate the American system of a Constitutional Republic with the death and horrendous social costs of the Civil War? How about the uncountable deaths caused by religious persecution through the millennia, is this reasonable to say “I wouldn’t want to part of any system like that” by ascribing these untold tragedies to the message and culture of organized religion? No it is not, and reasonable people do not make these types of word game associations and neither should we.

I think it’s time to put this trope to rest, mindful of our history, yet cognizant that continued thinking and apologizing for systems that demonstrably rely on exploitation to function need to be revisited.

As for moral degradation being a significant contributor to the current situation- I must disagree- at least in the context of how you present it. I don’t discount the idea that there are indeed moral lapses, this is obvious, but as to the cause of this being somehow related to a spiritual deficiency that can be corrected by just attending the right church or abiding by the right moralistic laws, no. This moral malaise extends from the alienation born of subliminal knowledge that you don’t own what you earn and that someone else is exploiting you to accumulate at your expense, and then using this accumulation to enact laws and construct a society to put you and your children at permanent, perpetual and increasing disadvantage.

It’s not second grade anymore and it’s time to get out from under the desks.