Backgrounder: Capitalism or Cronyism?

December 20, 2016

by John Pickerill

As I’m writing this, the stock market is breaking above 19,900. That’s a 1,000-point increase since Donald Trump was elected. So this must be proof that people believe Trump will generate a healthy economy, right? After all, if people are willing to buy stock in American companies it must mean they’re confident those companies will see improving profits in the next four years.

Not so fast, says economist Steven Horowitz. Although it’s true higher stock prices signal a growing belief that U.S. companies are more profitable, it’s not true that profitable companies always mean a better economy, as he explains in a recent article entitled, “A Rising Stock Market Does Not Signal Economic Health.” Saying things like “a healthy economy” doesn’t mean a whole lot. Things are not good or bad for the economy; they are good or bad for individuals who are part of the market, especially when those individuals are consumers.

“All the economy amounts to is people engaging in trade, exchanging their labor and goods in order to better satisfy their wants. What we should care about is whether or not people are able to better satisfy those wants,” says Horowitz. And by “better satisfy” he means more and better goods and services available at cheap prices.

In a true free market, when companies are profitable it’s a good bet they’re better able to satisfy the wants of consumers. But in a manipulated market, the companies that are profitable aren’t always creating value. Companies who profit through privileges, protections and subsidies from governments are merely showing they know how to make politicians happy, not that they can deliver value to working-class consumers.

“In a world of this sort of crony capitalism, profits are de-linked from a connection with consumers,” explains Horowitz, “In a world of cronyism, many firms will do very well, especially to the extent that they have connections with those in power . . . that would be reflected in rising stock prices.” We shouldn’t confuse this profitability with improved economic well-being. Policies such as a proposed 35-percent tariff on imports might enrich a lot of companies but they would impoverish the average American.

Republican and Democrat politicians, then, are confusing cronyism with the free market. While defending the $7-million deal with Carrier, Mike Pence stated, “The free market has been sorting it out and America’s been losing,” revealing that he has little concept of the term “free market.” Although there is a legitimate argument that the Carrier deal might keep 1,000 jobs in the U.S. instead of moving them to Mexico, Pence blaming the free market for American jobs being lost is far-fetched.

Brittany Hunter, a writer for the Mises Institute, warns that perpetuating the lie that free-market capitalism and cronyism are one in the same is not only misleading, it’s dangerous. For many Americans, whose economic opinions were shaped during the housing crisis and subsequent bailouts, crony capitalism is all they know. Tragically, this has pushed many of them, especially young Americans, to subscribe to socialism or even communism in reaction to a corporatism that they mistakenly believe is capitalism.

Horowitz reminds us that we are not better off when companies have to meet the conditions set by a president before he will “allow” them to operate in the U.S. That ends up distorting the economy away from pleasing customers toward pleasing the authority. Profits will be sought as the reward for knowing the right people. Profits will no longer be sought for creating real value through innovation and efficiency.

In a truly free market, rising stock prices and profits reflect real value creation and satisfaction of people’s wants. But in a system of economic cronyism, they reflect the satisfaction of politicians’ desires for political power. Corporations and politicians might win more power and influence but average Americans could be the losers.

John Pickerill, former chairman of the Montgomery County Republican Party, wrote this for the Indiana Policy Review Foundation. A graduate of Purdue University and the Navy Nuclear Propulsion Program, Pickerill retired from the U.S. Navy with the rank of Commander.


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