Cronyism and Monopolies in Politics and Economics Explained
We explain two types of special interests: cronyism (politicians working with corporate interests) and monopolies (the consolidating of corporate power in a given industry to a single entity).
Cronyism and Oligopolies
More specifically and technically, we’ll be looking at monopolistic practices that happen in types of oligopolies (where a monopoly is a single person controlling a market, a monopsony is a single entity controlling a market [what most people mean when they say monopoly], a duopoly is two entities, and oligopoly generally describes “a few” entities dominating a market).
We will not only look at this in terms of economics alone, but in terms of their relation to politics where “cronyism” describes government involvement in the creation of, and maintaining of, oligopolies. We will also look at antitrust and competition laws which is the breaking up of monopolies by government (which can itself be a form of cronyism).
TIP: When discussing the types of government oligarchy means “ruled by the few via wealth,” aristocracy means “rule by the few; generally by merit,” and monarchy means “ruled by one.” Most systems created from cronyism and monopolies are “oligarchical.” To be clear, not just governments can be oligarchical, but any entity with power to rule over other people is. See the history of Barons, Churches, and Kings ruling over people.
FACT: The first modern Union of business and government was the V.O.C., the first publicly traded company. The history of business and government go back to the Atlantic trade, to the Italian Republics, to the roman Republic, to Athens, to Athens before Solon, etc. How far back do you want to go here? There is a reason Plato wrote about Oligarchies in his Republic. The problem isn’t new, not its positives (like the wealth of nations) or its negatives (like the wealth being consolidated in the hands of the few via a corrupt relationship between business and government). See also; the Monroe doctrine.
The Free Market vs. State Intervention
Both free-market capitalism (classic liberal and neoclassical economics) and “social capitalism” (social liberal “mixed-market” “new Keynesian” economics) have drawbacks, namely those related to oligopolies and cronyism respectively.
First let’s define these two basic types of capitalism and their respective economic theories, and then we’ll further define cronyism, monopolies, “cronyist monopolies”, and other types of economic and political oligopolies to see how each can be a corrupting force on socioeconomic systems.
TIP: Need to brush up on terms, check out our page on the types of liberalism and conservatism.
Classical Economics Vs. Social Economics – Free-Market Capitalism Vs. Social Capitalism
- Free-market capitalism (classic liberal economics) – Capitalism with no or limited state intervention, free-market knows best. Roughly a laissez faire neoclassical economic ideology. This breeds types of oligopolies, especially monopolies, and monopolistic practices (like price setting) because there is no regulation or rules to prevent it and “the few” have economic incentive to do so (there is no visible hand to guide the invisible hand).
- Social capitalism (social liberal economics) – Capitalism with moderate or lots of state intervention. A way to describe the economic ideology that says “we need state intervention to ensure a fair market”. Roughly an extension of Keynesian economic ideology. This breeds cronyism, as it creates a political middleman who can have particular or corporate interests. In an ideal state, regulators check and balance big business. In practice, government has historically be known to result in corruption and unnecessary bureaucracy. This is why Mises said, in his typical absolutist fashion, “the issue is always the government or the market“.
TIP: The main economic ideology in the west today is one that attempts to bridge the two types, it is called “New neoclassical synthesis“.
Capitalism and Socialism: Crash Course World History #33. Capitalism and Socialism. Socialism, where all the “social-insert-terms-here” come from when discussing politics and economics. When we say social-, we aren’t saying “we love Marx comrade,” we are saying we want “a system that benefits everyone and we believe in some amount of state intervention to accomplish this.” We know both systems have pros and cons, that is why most real systems are mixed, and why this page is warning you of the ills of each.
Monopolies and Cronyism Explained
Above we gave an overview of the general topic, below we will focus on monopolies (here-forth describing monopolies, monopsonies, and general oligopol practices as “monopolies” unless otherwise noted) and their relation to government (specifically regarding cronyism). The goal will be to understand how the consolidation of power by private or public entities can be dangerous (not to present an essay on the ideal number of entities in a given market, or how this should be ensured by government or not).
With that in mind, here are some more solid definitions of monopoly and cronyism:
- Monopolies: When businesses consolidate power forming powerful special corporate interests who fix prices and wages and manipulate public opinion and politicians. They amass economic capital to ensure their power and to gain more political and economic capital. This can create a sort of reverse Cronyism where politicians with limited power are influenced by Big Business.
Monopolies and Anti-Competitive Markets: Crash Course Economics #25
- Cronyism: When government consolidates power, typically by being “in bed” with private interests or other public interests. They amass political capital to ensure their power and to gain more political and economic capital. This can create an environment where Big Business answers to government, but in the interest of political and corporate interests, not the public interest.
How Cronyism is Hurting the Economy
As you can see, there isn’t a big difference between cronyism and monopolies, but are some key differences (not just in their result, but in the environment in which they come to fruition).
Cronyism is a bit more deadly, as the crony capitalists have the power of the state behind them (they can tax, they can legislate, etc.). However, cronyism is also a bit more manageable, as the people have recourse via the ballot box. The people can oust an elected official in a democratic or republican form of government, even when the system is rigged against that.
Monopolies formed by private industry only have the state behind them when cronyism is involved. Otherwise, they are weaker politically as their power is based on their production of salable goods and services. However, they are also dangerous, as people have no recourse aside from boycotting the company, which becomes nearly impossible to organize once a company is big enough.
Thus, both corruption of the free-market and the social-market pose some of the greatest dangers to society. These risks are addressed by most of the great political and economic thinkers. Below we offer more historical context so you can understand the core issue and the debate better.
Finally, we can put together the two concepts and get cronyist monopolies (or in some cases, cronyist oligopolies). These are entities in which cronyism and monopolies are occurring at once, such was the case with the Medici bank, the first publicly traded company the Dutch East India VOC, and later the South Sea Company.
A type of state-controlled economics called Mercantilism tends to breed this type of entity, and that was exactly what classical liberal economics was pushing back against in the first place.
That said, not every state-backed entity is a bad one, Walmart and the Federal Reserve come to mind as institutions that work pretty darn well for example.
TIP: Hamilton, Jefferson, and Madison all argued for a mixed-Constitution (a mixed form of government). As the Federalist #10 points out, mixed-systems are the key. As Hamilton noted, moderate governments and a balance of credit and debt is key. As Jefferson noted, men are naturally divided into two types. Any power is going to pose danger when its power isn’t balanced and checked against.
TIP: It is worth noting that both monopolies and cronyism can exist at the same time in a social liberal market. So that is a consideration when discussing mixed or balanced systems. In a theoretical Libertarian utopia, where monopolies never acted as governments and markets were always steady, cronyism wouldn’t be an issue. More centered solutions typically involve transparency and a code of ethics (like the Federal Reserve uses), but even a bill of morals and ethics like a Bill of Rights or a Constitution of an agency or other entity doesn’t magically solve all the complex problems any one system poses.
The Perks and Pitfalls of Free-Market Capitalism and Social Capitalism
Adam Smith, the father of modern economics, warned us of the dangers of both politicians and private businesses in his 1776 book the Wealth of Nations (Amazon), but he favored the free-market over a more social market (as did all the early liberals in general, as they were all rebelling against mercantilism and economies run by Kings and state-backed monopolies like the VOC).
Smith predicted a driving factor of the human condition (which he called moral sentiment, AKA self-interested empathy) would steer the economy in a free-market (if as by an invisible hand) toward an equitable sharing of resources, resembling how things would be shared if mother nature distributed goods and services herself.
Smith believed that the free-market was generally the best solution, as opposed to state intervention, despite the drawbacks of each. He believed that the free-market could free the people from Kings and Churches. These entities had largely ruled and divvied up resources before the revolutions of the 1600 – 17000’s. See the birth of liberalism.
Later, in the mid-1800’s, Marx “did an 180” and said that “capitalism is a failed system; nothing more than an extension of feudalism and ultimately a stepping stone on our way to Communism.” He felt that we should need only state intervention. To paraphrase his statement of opinion, “this free-market nonsense has only led to the Barons becoming our new Kings and oppressing the people as if Kings had ruled ruled the people themselves, or worse.”
The philosophy of Smith wasn’t wrong per-say, and neither was Marx (and this is why today we fuse the styles and look to new-Keynesian and new-neoclassical theories).
We haven’t proved on style is that one is better than the other. Instead, we have proved that both bear fruit in the right settings and both have been thorns in the paws of humanity since their inception at the same time.
TIP: People tend toward corruption when regulation doesn’t prevent it. However, regulators are people and they too can be corrupt. Hence, “a system of checks and balances”, “transparency”, and “oversight” can all help moderate things.
Crony Capitalism Revisited (Is Keynesianism What We Think It Is?) | Hunter Lewis.
TIP: Keynes represents this idea of the perfect mix of social markets and free-markets. He bridges Smith and Marx, and his theories are at the basis of modern macroeconomics. Keynes’ work after WWI is more an inspirational starting point than a system in practice today. As such, modern economists will argue about exactly how much state intervention Keynes suggests. The reality is that he didn’t call for much. This video from the Mises Institute notably leans in the libertarian, classical liberal direction.
How Crony Capitalism Corrupts the Free Market | David Stockman. Another libertarian take on free-market vs social market. They talk about this more than other groups as that is sort of their thing. You’ll note we don’t pick and choose sides and warn against the dangers of letting the Barons have free reign. Still, you’ll need to make up your own mind.
Barons, Churches, and Kings… and Everybody Else
To understand why cronyism and monopolies (or other types of oligopolies) are a problem, and why their respective free-market and social-market socio-political-economies both pose dangers, we have to know history.
For all of Anglo-European history, from post-Republic Rome to the Glorious Revolution, people were ruled by Barons (power through money; often land owners), Kings (power through Divine right and birth), and Churches (power by divine right and Religion). Other entities that rule are Military and mobs, but these are essentially Kings and Barons respectively (also, in a perfect world there may be a technocracy, but we are discussing history and real systems here, so we can ignore that; see forms of government). TIP: Intellectuals “have power”, so do common tradespeople and merchants, and so do “the people”, but they always exist as a sub-group of one of the overarching groups. See our related element theory (politics) and see the caste system (for an example of how classes relate to rulers).
The two groups who suffered due to the constant power structure were the common people and the common merchants. The merchants would sometimes rise in power using their wealth and would become Barons. This would lead to the Magna Carta and the Barons’ wars for instance. The Barons NEVER, in recorded history to my knowledge, treated people better than the Kings or Churches. In fact, they had a habit of turning free people into indentured servants ensalved by debt. Even in 600 BC Athens Solon decided to free people from their debt as they had all sold themselves to the Barons of the time.
History has commonly left one group with the short end of the stick. Those left out include everybody who isn’t aristocracy, in the church, or a baron. The group has roughly 7.19 billion members; there are 7.2 billion people in the world (or a relative figure for a given time period and region).
Both Marx and Smith tried to extend an olive branch to the average citizen, constructing opposite ways for them to rise up and rule themselves. Both classic and social liberalism do this at their core too.
America was founded on many of the liberal principles at the core of Smith’s books and has tried aspects of both social philosophies in practice (Keynesian economics for example). It worked rather well, except, in most instances, those who have risen up have responded by becoming themselves Barons, Churches, and Kings themselves. Thus arises monopolies and cronyism, and an internal and infernal loop appears. We have not yet found a way to stop this cycle, but many are making ernest attempts to do so (as evidenced by things like the financial regulation under President Obama which has been addressing the post-2007 financial world).
Smith, Marx, and most modern intellectuals can point out the dangers of politicians and Barons, but we haven’t exactly figured out a perfect solution. Current attempts at solutions include both expanding government, dismantling government, and “a third way” mixing the two styles. See the positions of both major political parties in the US).
Now you know the discussions, and the pitfalls, maybe you’ll be the one who figures it out. More likely, though, you’ll be oppressed by a monopoly or crony capitalist with little to no recourse and a dash of righteous anger. Luckily, America is a representative democracy, and the American dream is alive and well, so you can step up and make changes via the public or private sector, or simply via the ballot box. That is, if you can ward off the common corruption associated with your new position of power.
Megacorporation Or Monopoly: What’s The Difference?
TIP: Sometimes monopolies create wealth, jobs, and innovate, sometimes they eat subsidies, price fix, and union bust. Sometimes politicians regulate, trust-bust, and create great social policies; sometimes they crawl into bed with monopolies and help crush Unions. This can go bad quickly, but we can’t ignore the perks of big business. This, like most issues, is complex. The answer is probably less “Occupy Wall Street” and more of “Regulate Wall Street” while working toward a culture that promotes positive social values.
TIP: A famously moderate Baron, Andrew Carnegie, expressed the idea that both Unions and Monopolies had a right to form, as sure as the freedom to speak and assemble were ensured by the Bill of Rights in his philosophical works.
Examples of Barons, Churches, and Kings
Below are two supplemental examples that I wrote. They didn’t fit in the final article, but provide a useful addendum.
- The Barons of Industry: When businesses were allowed to thrive in the mid-to-late 1800’s, we saw the rise of the Captains of Industry and the corresponding industrialization. This was probably the most prosperous time in American history, largely for the country and big business, but also for the workers as they moved from farmer to full-time factory workers. We can verify this with the influx of immigration, people happy to gain personal freedom and some coin by coming to work in the American factories. This semi-happy story unfortunately also came at the expense of growing monopolies and workers rights abuses, which in turn led to forms of oppression by the Barons, which in turn (along with the rampant corrupt cronyism of the time, see the Glided Age) led the progressive era of Trust-busting (and union busting). When the Titans of the private market are allowed to play without a rule-set, or under a corrupt crony capitalist rule-set, they create government-like entities that rival the divine right of kings. They become an unelected government whose ethos is one of personal morals, or lack thereof, and the acquisition of power, assets, and capital.
- The Kings: When kings rule by bloodline and believe it to be their divine right, it tends to be oppressive to anyone who doesn’t share their last name. We know intelligence and worth aren’t transferable traits through sexual reproduction, and the last thing anyone needs is another Nero or Stalin – Kings by physical or political bloodline. For every enlightened monarch, there is a tyrant, and it only takes one tyrant to ruin life for millions.
- The Churches: The Churches sometimes rule as Barons and Kings, but often they are more like the Spanish Inquisition (when we note that much of its cruelty was a myth). This is to say, they act as moral leaders. Where Kings want power and Barons want wealth, Churches want both, but to ensure their brand of morality. The puritanical push for political correctness, or temperance, or prohibition, or the outlawing of abortion at an extreme is a modern day “rule by churches”.
Barons, Kings, and Churches can “share self interest” and work together to create cronyist monopolies, not as a coordinated attack on the rest of us, but as a natural advent of their shared self interest via the invisible hand. The rest of us have to constantly be on guard about this long known advent of human nature. This is why a mixed-system of checks and balances is always needed.
How We Fight Against Monopolies
TIP: What is the difference between the divine right of kings and the divine right of money? Probably bloodline. The one benefit of an individualist stance is that anyone, no matter how poor their initial lot, can technically pull themselves up by their bootstraps over time and generations. This is better than kings and caste systems in that it provides at least the hope of change. It doesn’t make it OK. It only makes it a little bit better . . . comparatively.
Bankrupt – How Cronyism and Corruption Brought Down Detroit