Intro. [Recording date: February 13, 2019.]
Russ Roberts: My guest today is political economist and author Michael Munger.... This is his 36th--count 'em--36th appearance on EconTalk, at least I think that's right. We last heard from him in October of 2018 discussing his book, Tomorrow 3.0.... Mike, welcome back to EconTalk.
Michael Munger: It's a pleasure to talk, Russ.
Russ Roberts: I think you meant that. I appreciate that. There was a certain radio sound to that. But, I'm going to take it as legitimate.
Michael Munger: It could be both.
Russ Roberts: Our topic for today is a recent article you wrote in the Independent Review with Mario Villarreal-Diaz, "The Road to Crony Capitalism". What is that road?
Michael Munger: We're obviously trying to riff on Hayek's Road to Serfdom. And, Road to Serfdom is often mischaracterized, where people say Hayek says if you take a single step toward centralized planning you end up being Communism. That's not what he said. What he said was there's a tendency towards collectivization, not least because if you start planning it creates distortions that then require additional regulations; and before you know it, most of the economy is planned even if all you did was regulate a few industries to begin with. So, what we became interested in was an analogous problem: Might there be, looking at the way capitalism is working in the West now, might a Hayek but of the Left, say that there's a road to cronyism? Because--the simple summary of the argument is that--as industries mature they invest more and more in new products, in new engineers, in cheaper ways to make things; and that's the essence of competition; and that's great. At some point, the first dollar that they might spend on lobbying becomes more profitable than the last dollar that they spent on pursuit of honest profits. What that means is that I am hiring now people who are trying to lobby the government to protect my product from competition--to obtain tariffs, to obtain subsidies. And, it would be surprising in a mature industry if it were not true--that the first dollar spent on lobbying and getting government help was not more profitable than the last dollar that I spent on investment. And, once that happens, then it means that your industry owes some of it's existence to the state. You become dependent on the state; and, it's likely to see an expansion of that dependence. So what we became worried about was that the criticism that many people on the Left have made for years is--they actually have a point. And, what we noticed--and I've done this myself--I'll say to one of my friends on the Left, 'Look, Socialism doesn't work. Look at Venezuela.' And they'll say, 'Well, that's not Socialism.' Well, I actually think that's where Socialism leads. Socialism is a recipe for, economic at least, totalitarianism. But likewise, if one of my friends on the Left says, 'Well, look at Solyndra,' or 'Look at the way that many industries have basically gotten in bed with the government, with regulatory agencies that they depend on,' then I'll say, 'Oh, well that's not Capitalism.' Well, wait--I'm making the same
Russ Roberts: 'That's crony capitalism. That's not the real thing.'
Michael Munger: Yeah. 'That's not real capitalism. But, what if it's true that, as industries mature, they find that crony capitalism is more profitable in an accounting sense than playing it straight? Then I do this thing that I would criticize in other people. What I will say is, 'Oh, we need better people. All we need is better politicians that don't engage, don't allow this rent seeking.' Or, 'We need better CEOs [Chief Executive Officers].' That's the one thing, Russ, that you know that I cannot say--
Russ Roberts: it's against the rules--
Michael Munger: because the premise is: You cannot say, 'Good people.'
Russ Roberts: Right. 'We need'--our premise, our team, is that incentives matter, institutions matter. And with bad incentives, the best people become corrupted. And with good incentives, not-so-great people do the right thing. So, that's the--right. So you can't say that. Keep going.
Michael Munger: Well, what that means is, once you recognize that it would depend either on capitalists, corporate CEOs, leaving money on the table--that is, they would have to choose not to take legal but economically immoral actions that would get them protection from competition, then I go--imagine that the yearly stockholder's meeting. I'm the CEO and I tap on the microphone and say, 'Good morning. Thank you all for coming. And I want to say that our profits are significantly lower. Our accounting profits are significantly lower this year than they might be, but you'll be glad to know that the reason is that we decided not to engage in rent seeking. We have not used lobbyists to obtain protection from competitors. We have not obtained government subsidies that we might have obtained.' And I wait for the applause and there's silence. Stockholders say, 'What the heck. We need a new manager.' So, even if we did have a good manager, it's not sustainable, in the sense that either we're likely to see stockholders who are in pursuit of legal profits--and I mean accounting profits. There is nothing illegal about using lobbying to obtain the benefits that I can get from the government. And actually, I have to say, we first started thinking about this seriously after I heard Luigi Zingales basically summarize this argument a couple of times. It's not very original. What we tried to do is close the circle and point out that if you think that the only solution to this problem is better people, you actually need to rethink that, because that's the one thing that we cannot say. Now, our point is, the short point is: Capitalism in a democracy is not sustainable.
Russ Roberts: So that's deeply disturbing. It might be true. And, like you, I also have this issue where I'll point out some flaws of Socialism; and they'll say, 'That's not real Socialism.' Or they'll say, 'That's not the kind of socialism I want.' So, similarly, I find myself doing this with capitalism; and I'm sure I've said it have conceded this point on EconTalk in the past: That we do kind of do the same thing. We say, 'Well, that's not the kind of capitalism I want. I want the real kind.' The fundamental question that you raise in this article which I think is a deep and important one, is: Is there something inevitable about cronyism that's built into Capitalism? Is it somehow an illusion--excuse me, a delusion. Am I deluded into thinking there's such a thing as capitalism without cronyism, without government handing out favors. Now, my usual answer to this, by the way--and I'm going to critique it--but, my usual answer is, 'Well, there is such a thing as capitalism without cronyism if you have a Constitution, and you have a legal system and a legislative system that limits the power of government to hand out goodies.' The problem with that argument is that maybe built into the system is that powerful capitalists then change the political system so that it can hand out goodies. And that's really, I think, the Left's critique right now. It's very clever; and it might be true. Which is: it's inevitable. Like you say. It's part and parcel of the system and to pretend otherwise is to delude yourself. Before we go on, I want to read the Milton Friedman quote that came to mind a minute ago, that I think deep and important. He says,
It's nice to elect the right people, but that isn't the way you solve things. The way you solve things is by making it politically profitable for the wrong people to do the right things.
So, the point there is that--the counterpoint to that is that, eventually, the political system is going to be structured by capitalist influence to give out those goodies, so that even good people do the wrong thing.
Russ Roberts: So, that's the thesis on the table. I'm going to challenge you. I'm sympathetic to it. I worry about it like you do. I'm thinking, 'Am I just doing the same thing that my political opponents are doing? Am I living in a utopian world where I'm imagining an ideal that is not credible, not realistic, can't exist?' So my first question for you in thinking about this is: Why do you think this is an issue now? You and I are old enough to remember--I have a decent memory of the last 40 years of political economy in the United States. And, there are a lot of things that haven't changed. One of them is: We subsidize agriculture. And that is a vague statement that masks what really goes on, which that a very small group of people capture a fairly large amount of money. I learned from Gary Becker, who was the first person probably who pointed out that in societies where there are only a few farmers, farmers can do really well. In societies that are mostly agricultural, they don't get a lot of favors. But, say, in Japan. Right? Rice is highly protected in Japan. There are very few rice farmers. That small number of people produces a large amount of the rice, just like in America a very small number of agricultural corporations produce an enormous proportion of the food. And they use the government to exploit the rest of us. Sugar quotas are an obvious example--you talked about subsidies, but quotas are another example that you alluded to: trade policy where we keep out foreign sugar just like Japan keeps out foreign rice. I've probably mentioned it before, but my Japanese students, when I would be teaching MBAs [Masters of Business Administration] and have Japanese students, they were always shocked at how good American rice was, because they'd been told for years that it was awful and that's why we had to keep it out, to keep it from, you know, destroying Japanese cuisine. And of course it's a lie. A lie engendered by the political power of a small number of politically important rice farmers in Japan. And similarly, a small number of sugar beet and sugar cane farmers in the Dakotas and Florida keep out foreign sugar. So, that hasn't changed. That's as old as--a tale as old as time, in America: that certain small groups of people get favors. Why do you think that the system is "corrupt"--or 'cronified', I'd call it. I don't feel that. I think there's a handful of industries that get special favors--and we can talk about which ones they are and why they get those favors. But overall, I'm not sure there's a lot of cronyism in American capitalism. And I'm not sure it's growing. And if it is, the burden is on all of us as scholars and thinkers to figure out: What's changed? So, give some of your reaction to that.
Michael Munger: Well, there were a bunch of issues there. I'll try not to take too long to respond by answering them one-to-one. But, let's go back to 1944, when Hayek published The Road to Serfdom. And you could imagine one of his, someone else in England, saying, 'Now, Fritz, we're not a socialist country. Yes, there's a few sectors that are being planned. But we're not really a socialist country. Don't you think you're exaggerating?' And the point that Hayek would make is, 'Yes, but I'm identifying a tendency. Which, if we not act on it, will result in more and more sectors being planned.' So, my answer to you is, 'Yes. We're not especially cronified yet, although there are a few industries where it's happening. But, I don't know if you remember--in the good Star Wars movie, the one that's Number 4, where Grand Moff Tarkin is on the bridge of the Death Star and a guy comes in and says, 'We've analyzed their attacks, and there is a danger. Should I have your ship standing by?' And Tarkin says, 'Evacuate. In our moment of triumph, I think you overestimate their chances.' Well, the point is: I've analyzed the attack of the Left, and there is a danger. They actually have a point. Now, Marx's claim that the animating force is driven by Capitalism is actually not right. What I'm trying to do is say we should take Public Choice seriously. And what Public Choice says, is that people in government act on their own self-interest. And the self-interest of people in government is trying to increase their power and to increase the things that they can use to raise money. And, selling off rent-seeking opportunities is something that political entrepreneurs are likely to do. So, I'm not claiming that this is entirely being driven by capitalists, so that the Marxist idea that the system will be driven by the narrowest of capitalism, I think is wrong. However, the system is driven by the broad self-interest of people in government to find ways to increase their power. So, what I'm worried about is, if Public Choice is right and we cannot depend on the goodness of people in government, and people in government can change the rules, then it's very likely that there are people in government--legislators, regulators--who are going to approach industries and say, 'Look, we can help you out. And if you don't play ball, we are going to hurt you.' So, in a way it's a kind of protection or extortion racket. But still, as a result, there's going to be a tendency towards cronyism. So, the only criticism that I would make is, 'Wait: we have to add something.' And that is: We have to take Public Choice seriously. The question that you said--a good question--is: Why now? And I want to note the passing of a giant of a person that I have long admired, Anthony de Jasay, who died just, not quite a month ago. And he this very interesting critique of Public Choice, the Buchanan theory of constitutions. And so, you said, the solution would be, 'Let's have a constitution that puts rent-seeking beyond the ability of government to move towards cronyism.' Well, what de Jasay said was that constitutions are either ineffective or unnecessary. They are ineffective when everyone wants to do something the constitution prohibits. So, a paper parchment barrier cannot stand when all of the incentives and the attitudes of people are: Let's go crony. But, constitutions are not necessary when there is a shared commitment to the principles that are written in the constitution. And so I think for a very long time the United States got lucky, because we looked to the Constitution as containing, as expressing a set of values about the way that we should conduct ourselves in our private, in our public lives. And that has started to be stripped away. Once that's true, we can't expect the Constitution to constrain the ability of people in government to rewrite the rules. So, that's--once people in the state realize that they can rewrite the rules to encourage rent-seeking, there's always going to be a relatively small number of people in business that say, 'Why would I leave money on the table?' And if there's not, somebody else can come in. When you consider the market for mergers and acquisitions this becomes a little bit more chilling. So, suppose that you, Russ, are the CEO of a medium-sized corporation, and you say, 'We're not going to invest in rent-seeking. We're not going to get subsidies. We're going to leave money on the table.' And the employees say, 'You know, that's right, because it's the wrong thing to do.' Well, I'm a corporate raider; and I look, and your stock price is lower than it could be, because you could reallocate your capital in a way that would produce quite a bit more accounting profits, if you would just go to the government and seek those subsidies--which are legal. Well, I put out a tender offer for your stock. I can buy up the stock, because I can pay a higher price, because I'm willing to do the things that you will not do. Very quickly you lose control of your corporation because I buy up all of the stock; I hire a "better"--and I'm making quote marks--manager than you, a more rational manager than you. And now we're off to the races. And now, the company that was good is now wise, in the sense that they are now maximizing their return on capital. Do I care if the return on capital is based on rent-seeking rather than on honest profits? Well, maybe I do, but there's someone out there that doesn't. It doesn't take many, at the margin, to drive this system in the direction of crony capitalism.
Russ Roberts: I don't agree with that. I'm going to try to push back against it in a different way in a minute. But I want to start with a more fundamental question that you raise. I mean, I'm sympathetic to it: I think it's a risk. I don't think it's "wrong." But part of the story is missing.
Michael Munger: I hope so.
Russ Roberts: Don't we all--
Michael Munger: I'd really like you to talk me out of this: [?] slash my wrists.
Russ Roberts: I'll do my best. But I want to go back to--I want to go to a more fundamental question, which is: Why is the murder rate so low? There are a lot of people out there people don't like; they'd prefer to see them gone. There are a lot of things we can do as individuals that are deeply wrong and immoral. And, I actually think there are people out there in the world who think that the murder rate is low because it's against the law. And that's not why it's low. It has an impact. I'm not going to suggest it's irrelevant. But it might be a small part of the story. The main reason the murder rate is low is fortunately most people think it's the wrong thing to do, and they don't do it. So, we understand that if you find a wallet in the street, and it's got the person's driver's license and it's got the person's credit cards, an it's got, say, $200 in cash, you've got a few options there. And nobody sees you pick it up. And you take it home and you find out what's in it. And you've got some options. You could take the cash out and return the wallet as a kindness. You could keep the cash in. Or you could just keep the whole thing--keep the cash and the credit cards, throw it in the garbage. I think at different times in human history and in different societies, the modal finder of that wallet would do different things. So, I think deep down, your Jasay point about constitutions is 100% right. He was right that a constitution that people don't believe in is not going to be sustainable. And it's true, I think that the attitudes in the United States about the power of government have changed. I don't think the attitudes toward cronyism have changed much. I think most people are against it. Most people would say it's wrong to favor particular industries over others and at the expense of consumers. And yet we've got more of it perhaps than we used to have. But I think that's part of the attitude that's opened up the Pandora's Box of, 'Let's let government do--let's let politicians do what they think is right,' rather than what's constrained by the Constitution. Once that attitude becomes widespread among lots of people, yeah--there's a lot of things on the table that weren't there before. But the idea that somehow it's okay--'We understand that cronyism is tempting'--you know, so is a lot of dishonest, horrible things. You wouldn't say that a stock is underpriced because the people don't engage in fraud. Right? We don't expect a CEO--'Well, CEOs, of course, fraud is against the law but if they can get away with it, we expect them to because after all, they'll raise their stock price.' I don't say that. Do you say that?
Michael Munger: I don't say that.
Russ Roberts: So, how do you reconcile that with your story that, 'Well, of course, there's a natural temptation to use the government to extract goodies from the rest of us?'
Michael Munger: Surely you are not claiming that it is somehow morally equivalent for me to lobby a Senator from my state for subsidies for my business, which is about to fail, and murder. The first is not only legal: I can find someone who will persuade themselves that it's moral, and in fact it's a great benefit. It doesn't take many people to say, 'Not only is this legal. It's morally okay. This isn't cronyism. This is the way that capitalism works. I see it all around me.' The difference is that it is--scale. I mean, murder happens one at a time. But, if companies grow, using the Misesian logic of profit and loss, then, if a company can increase its profits by seeking subsidies, successfully, then that company is going to grow. Rapidly. And so, the economy will come to be dominated by those companies--the economy, the national economy--is going to quickly become dominated by precisely those companies that, at the margin, are successful. Using profit and loss. And the ones who seek subsidies are going to grow faster. So, I, I think that we have produced--and I worry a bit about the--If you go to be an MBA [Master of Business Administration], you are probably taught that what you should do is accept all legal means to increase the profits of your company. And in fact, Milton Friedman, famously argued something that could almost be--and that's not what he said, but you could almost interpret it that way--the only responsibility of the corporation is to seek profits. Now, he would say, but 'Oh but of course, you shouldn't do rent-seeking'--
Russ Roberts: He says, well he says explicitly: Without fraud. Keeping the laws of the land--
Michael Munger: It is not fraud!
Russ Roberts: I agree with you.
Michael Munger: So, what you are doing Russ, you are actually resorting to the thing that we cannot do. And that is good people--
Russ Roberts: Oh no I'm not--
Michael Munger: All we have to have--Yes, you are saying we have to have no fraud. You are saying 'No fraud.' And what you mean by 'fraud' is the legal pursuit of means that many people accept as legitimate. But you are saying, 'I think people won't do it because it's wrong.' It's just morally wrong. It's not illegal.
Russ Roberts: Here's what I'm saying. Here's what I'm actually saying rather than what you'd like to think I'm saying--
Michael Munger: this characterization--
Russ Roberts: exactly--
Michael Munger: contentious mischaracterization.
Russ Roberts: And cruel, actually.
Russ Roberts: I would try to restate it in a more acceptable way. I understand there's still a flaw in it, but I'll--maybe you won't find it, so I'm going to take a shot. What I'm trying to argue is that culture and norms matter a lot. If you have a world where people don't have a moral compass, I'm not sure any system works well. Right? I also believe that certain systems enhance a moral compass, and some destroy it. I think in a--in the Soviet Union--you were a sucker if you played by the rules, because no one did. You know, one of my, I have a lot of favorite jokes--it's not good English, but one of my favorite jokes of the Soviet Union is, which I heard from someone who grew up there, is, 'We pretended to work, and they pretended to pay us.' That kind of system, where, you know, basically it was describing a factory where, you know, people stole--I think they were making stockings. And he said, theft out of the inventory was common. It was how you made money. It was the way you got paid. The way--the way you put food on the table of your family was to steal some of the stuff. So that's a system that distorts and brings out the worst, I think, in people. Adam Smith argued, as you know, that capitalism does the opposite. It forces you to put yourself in the shoes of other people and figure out what they want. It forces you to imagine being empathetic about their desires and about their needs. And I think it--I'm not going to--I don't want to be naive. I don't want to be Pollyannaish, and I don't want to pretend--I don't want to suggest it's easy to fix this: we just need to change norms and culture. But I don't think you can talk about this descent into cronyism that you are accusing the American system of and suggesting it's going to get worse, and ignore the cultural and educational [?]. I'll give you an example. When I get too much money back from the cashier, I give it back. At least I think I do--
Michael Munger: Because you are rich enough to be able to afford your preferences. You want to think well of yourself. And you are rich. You can give it back. So that it's a luxury good. You are wealthy enough you can afford to be able to think well of yourself. Most people can't do that. They'll happily take the money.
Russ Roberts: I did it when I was making $18,000 a year, by the way, as an Assistant Professor--
Michael Munger: You are a good person.
Russ Roberts: Well, I don't know if I am or not. Maybe I just had--my parents raised me poorly to be honest, when in fact I'm a sucker. Right? Only a sucker gives--right? There's two ways to look at that: What a noble thing to do. Or, what a sucker. And I think when you transition to a world where you are a sucker for being honest and failing to exploit opportunities like that, you--you are on the road to hell. Whether it is socialism or capitalism. And, you know, I think--I am conceding that I think, there is something endogenous about the culture we are in. Right? Obviously; and you make that point implicitly in your paper and you made it earlier, right? Once you start thinking, 'Huh. Everybody else is taking--why shouldn't I?' And in fact, 'If I don't, my firm is not going to survive; and I have to fire them; my workers will all be laid off, so it doesn't matter.' 'It's the right thing to do,' I convince myself. But I do think: The example is--I should get a special deal for my company, my industry, my situation. Because everybody else is at the trough. Of course, that's the ultimate--government is public bad. That's where the Tragedy of the Commons is running amok. And, to bring it full circle, you know, you and I think-believe--and tell me if I'm wrong--that we think the Tragedy of the Commons in private settings can be overcome by norms. And by self-monitoring. If groups are small. And, it's observable that people are sending their cows out at night and grazing when it's not their turn. So, how do you deal with that?
Michael Munger: I actually want to turn now and agree with you. I was obviously trying to make the provocative form of the argument. I just think--I don't know if you know this, Russ: You and I are weird. There are a lot of economists--
Russ Roberts: I know that--
Michael Munger: that would not concede the value, the central importance of norms and culture. They would look instead to institutions. So, let me state--
Russ Roberts: I'm not sure what's the difference between those.
Michael Munger: Well, right. Maybe if you drew a Venn diagram there's very substantial overlaps. Norms I think or individual concept; culture is something that is larger, collective concept from which norms come. But, let me state the technical claim that I'm making. What I'm asking is: Is the honest pursuit of profits, and evolutionarily stable strategy, in the game-theory sense--or, if it's invaded by mutants--it doesn't take many mutants: you are looking at the relative rates of reproduction in a game-theory system--a mutant that is a pursuit of honest profit but instead is willing to pursue any legal profits--won't the invasion of those mutants result in the proliferation of that form of an agent? And I'm worried that the answer is, Yes. That it's easy for them to expand. I think--I was just in Guatemala, at Universidad Francisco Marroquín--and was able to give a number of talks on this subject. And got to talk quite a bit to their rector, Gabriel Calzada. And the thing that--I'm an outsider; I'm in no position to urge anything. But they teach a lot of people economics, Austrian economics. I said, 'I urge you to think of the importance of character.' I think that one thing that the people on our side have failed to do is to emphasize the importance of character, to emphasize the importance of perpetuating the norms of seeing there are right ways and wrong ways to do things; and even if it is technically legal in the sense that you won't get caught or punished, there are still profit opportunities that you should eschew. Now, the question is: Can we do that enough to make the pursuit of honest profits an evolutionarily stable strategy? Because you are always going to be invaded by outsiders to that system. That don't share those, don't share that value that this is the correct way to act. So I don't know if we can make the system immune. But, perhaps--because--you've taught in a business school. The Business Ethics class is, usually, you look at a list of criminals, and then say, 'Now, don't do that.' And, 'Don't do that.' And I don't know--we don't teach the, character, as something that's something that's very central. And frankly, I'm not sure how to do it. So, what I would like to do is turn back towards the idea that there are right and wrong--and this--Adam Smith would be surprised to learn that this is something that I think economics now doesn't do. Because, it was the core of what Adam Smith thought was important. So, I want to come back and agree with you, now that I have made the argument now in its starkest form. But it's still true that if you take the Public Choice argument seriously, that you cannot say 'We have good people in government, and we have good people'--and by 'good' I mean willing to leave money on the table. In a way, irrational. Because there are legal means of acquiring profits that I'm not going to do because I personally think they are morally wrong. Unless we have that resort. Unless that's something that we can invoke. I do think the system has an undeniable tendency towards cronyism.
Russ Roberts: Well, I guess you could argue that--it's too fine a line to argue that, 'I'm not arguing that we need good people. We just need people with good mores, good norms, good values.' You know--I understand there's still something a little bit utopian about believing that. But I don't think it's so long ago that people would have thought it wrong to take advantage of every opportunity. I would suggest, by the way, that one of the challenges in America--maybe in the world--of being a modern human being--you and I have probably talked about this before. But, why would it ever cross your mind that everything that's legal should be done? Or everything that's legal should be allowed? And the flip side of that is: Everything that's bad should be illegal. We want a space for self-monitoring. Self-regulation. Where we don't need the legislative power and coercive power of the state to maintain stuff. You know, a trivial but not uninteresting example of this is tipping in a restaurant that you never expect to come back to. You are on a trip. It's a one-time thing. I still tip. Now, you could argue I'm a fool. Why should--and we've talked about this before, at length, in other episodes; we'll put a link up to it. But, my point is that: It would never--there are a lot of people who would just say, 'But that's the right thing to do.' When you go from a world where the right thing to do is irrelevant, all that matters is that you're going to be caught, or screamed at by the waiter, or beat up by the waiter who chases you down the street, that's a bad world to be in. I don't want to be in that world. If we don't have character--if we don't have norms of decency and some trust in a willingness to leave money on the table--that's not a world you and I want to--I don't want to live in that world. I'd rather live in a different world. And I don't think it's totally naive to think that that world--I know it exists, and I still think it exists to a large extent. Because, when my wife lost her diamond earring in Great Tetons National Park in the lodge we were staying in; and the visiting East European maid gave it back to us because she found it sweeping up--there was no way she was going to get caught keeping that earring. She didn't even know it was my wife's. It could have been left there by somebody--it was on the floor in the kitchen under a counter. It could have been three guests back. And she's giving it back to us? It's hundreds--it's not a big diamond earring; it's worth a few hundred dollars. But, as you say, that's a lot of money to somebody who is a housekeeper. And it's even a lot of money to me--I was--my wife was really upset, for emotional reasons. I was like, 'It's okay.' It's part of life. Things like this happen. But, the housekeeper gave it back. That's virtue. That's the world I think we all want to live in. We all want to live in a world where people return their diamond earrings. And I don't think it's ridiculous to imagine that. I do think it might be ridiculous to think we can get there from here. We can increase it. We know how to do that. And I agree with you that an Ethics class in business isn't going to do it.
Michael Munger: But the difference is: Both of your examples were basically interpersonal relationships. So, murder, which is both immoral and illegal, and the return of something--or tipping--the things that, I'm acting in binary relationships between people--I think that system can be sustained if there is a few people who act badly. Because there are social pressures to act well: We get reward, we get the esteem of other people. We feel--and those of playing the drinking game, I'm going to say it--'We're not going to just be loved, but we're also going to be lovely.' We're going to be deserving of. So, probably, that maid, she would have felt bad if she'd kept the earring. She felt good: you know, 'I'm actually a good person. I'm the sort of person that deserves the respect of other people.' That system is stable with respect to some people who act badly. The problem with capitalism is that its very dynamism means that, if you have only a relatively few people who are willing to act badly, that company could very rapidly expand because it's more profitable. It's more profitable to engage in rent-seeking activities. And that means that it's not restricted just to individual actions. I'm a corporate CEO: 'I don't care that other people think badly of me for charging high prices and receiving subsidies. Because I'm earning money hand over fist.' So, I worry about the dynamism of capitalism being used against it, in the sense that if I approach a politician and can get the help of just a small sector of government, I can rapidly expand at the expense of my opponents, precisely because they are acting morally. So, the--I do worry about the scaling aspect of this. But, I do think that somehow we need to reincorporate this idea of character and the importance of norms. So, you asked me to distinguish, before, the difference between individual norms and culture. Culture probably is the thing that reproduces this. But it also needs to--I think we've talked about this before on the show--Chile and Argentina spend almost exactly the same amount on tax compliance enforcement. But, in Argentina the tax compliance rate is maybe 60%, maybe less. In Chile, it's 99%. Well, if you don't pay your taxes in Chile, other people think, 'Well, you're a terrible person.' And if you do pay your taxes in Argentina, people think, 'Well, you're an idiot. You're a chump. Nobody does that.' So, Argentina tried to hire some people to--some football players, some actresses--to go on TV and do ads about how you should pay your taxes. They had to pull the ads within two weeks, because all of the actors had not paid their taxes. There's two different equilibria. One is, everybody does the right thing, and if you don't do the right thing you are a bad person. The second equilibrium is: Nobody does the right thing, and if you do the right thing, you are an idiot. And, I worry that the second one is the one that we're tending towards. And, while there's still time--and it's not too late--while there's still time, we need to call people's attention to the fact that there is actually a danger. That the complaint of the Left about Capitalism is not entirely ill-founded.
Russ Roberts: Well, I concede that. And I have before. I agree with you. That's why I invite you on, Mike. It's not because it's an interesting article. You've been on 36, 35 times. I just want to put a footnote on that story about the diamond earring. And the tipping episode we did was with Anthony Gill. We'll put a link up to that. But, as fate would have it--and I can't explain this--I left an exceptionally large tip for the housekeeper that morning. By my standards. It was not a large tip in any sense. We've talked about this before: I usually leave a dollar or two a night for my housekeeper when I stay in a hotel. I think it's a nice thing to do. I don't know whether it's--I'm not going to suggest everyone should do it. But I like it; and I think it's a good thing to do. For some reason, I left--we'd been there I think 3 or 4 nights--four nights, I think. I think I left a $20 tip. Which is just, still, not a huge amount of money. But, I don't know if that played a role in the housekeeper's decision to return the earring. It's an interesting question. We've talked about the idea that one reason to tip housekeepers is that you do leave things behind. And it's just--it's a weird--it's not a contract, but it does engender, perhaps, some good will on the part of the housekeeper. And I will also add that I tipped her--I don't know how money I gave her--for returning it. And I think she took it. But I think I gave her another $20 or $40 just as a thank-you for her honesty. And was so overwhelmed--I mean, my wife was deliriously happy at finding it.
Michael Munger: She was probably more happy than the value of hearing, actually, that--
Russ Roberts: Oh, absolutely--
Michael Munger: 'This is great!'
Russ Roberts: You know, it wasn't her fault. Etc., etc.
Russ Roberts: But, the other point I want to make, though, is that you said a CEO gets a subsidy or whatever. I own a Ford Escape. And I would say--I'm an exception; I understand this--but I am not alone. One of the reasons I own a Ford Escape--I also own a Honda Accord--but one of the reasons I own a Ford Escape is that Ford did not take money in the bailouts during the Financial Crisis. That could have been the equilibrium. 'Oh my gosh: GM and Chrysler took bailouts. Oh, we're not going to buy their cars any more.' And I say that, because these predations that we are talking about that lobbyists and CEOs extract from the rest of us: They are not secret. Now, they are not always well-known. They are not waved about all the time, like Ford's. A lot of times you have to read the paper carefully. And I think it's strange that newspapers don't, maybe, have a special section, or a special tally on their website, for local cronyism. Because I think that would help people get--anyway. To me, it's like the hall of shame. It's not the hall of, 'Hey, I got what I could.' It's the hall of shame. You took from me. So, I think that publicness has some leverage, perhaps, in the future. Or could. It's imaginable. But it does make the problem a little bit harder. Because it's not: I took behind your back, I took advantage of you, I kept your wallet or I didn't return the earring. It's that: It's out in the public. It's out in the open, now. It's true. As you were saying earlier. They do tend to figure out ways to make it look like they are doing it in the public interest.
Michael Munger: Well, maybe even to persuade themselves. I think there have been, again, Russ, there's just not many people like you, and the world is a worse place for it. I wish there were more. But, I don't watch that much TV, but I watch some. I have never seen a Ford ad that said, 'Oh: Buy a Ford because we did not take any subsidies.'
Russ Roberts: Yeah. That's a good point.
Michael Munger: So, if that were salient, if that were socially salient, it would be--because you don't have to have the newspaper do it. The company should be able to advertise. And if it worked--if people actually cared about that. But you raise a good point. One of the things that we use to flog things like Fair Trade Coffee, and the actual social impact of Fair Trade Coffee is probably less than many people believe. But they'll advertise and say, 'This is Fair Trade Coffee. You should pay a little extra.' If--
Russ Roberts: 'We left money on the table. We overpaid for this, so you should too.'
Michael Munger: But, that works. And that's an example of the kind of thing that you are talking about. People are willing to pay at least a little bit extra for doing the right thing. Now, what the right thing is maybe can be manipulated a little bit. But all that would be necessary is for consumers to say, 'Nope. We're not going to be complicit in these kinds of rent-seeking activities. We're going differentially to seek those companies that have behaved in a way that's socially responsible.' And what I mean by 'socially responsible' is the pursuit of honest profit. And, so maybe that. That's the word that's going to go out from this time and place. Like ripples on a pond. You have now started a new consumer revolution, Russ.
Russ Roberts: I'm so excited. Uh, I just want to read a line from David Foster Wallace. He has an essay called "Host." It's quite an interesting essay. It was written around 2004, in the heyday of conservative talk radio. Which has morphed into--talk radio has morphed into Twitter and Facebook and--and, David Foster Wallace, of course, is gone, unfortunately, tragically. But I want to say to him as I read his essay: You ain't seen nothing yet. You know, he's talking about the incentives that talk radio faces. And he has a line in there: he says, 'Aren't there parts of ourselves that are just better left unfed?' And that's really hard for us. That's really hard for us. That's end of quote, 'is unfed.' It's really hard for us to say, 'I can have this but I shouldn't.' And, our culture right now is: If you are hungry, feed it. And that includes rent-seeking. It includes subsidies. It includes tariffs. It includes food. It includes everything. It's all on the table. Nothing's--foregoing things has become--it's a fool's game. And I think it would be great if we got back to a different world.
Michael Munger: Well, may I read a quote from José Ortega y Gasset? So, in The Revolt of the Masses, in 1929, he wrote this about liberalism--and it'll take me 20 seconds to read. It's not that long.
Liberalism--it is well to recall this today--is the supreme form of generosity. It is the right which the majority concedes to minorities and hence it is the noblest cry that has ever resounded in this planet. It announces the determination to share existence with the enemy; more than that, with an enemy that is weak. It was incredible that the human species should have arrived at so noble an attitude, so paradoxical, so refined, so acrobatic, so antinatural. Hence, it is not to be wondered at that this same humanity should soon appear anxious to get rid of it. It is a discipline too difficult and complex to take firm root on earth.
So, liberalism means that you have to--
Russ Roberts: That's the end of the quote.
Michael Munger: Yeah; end of quote. Liberalism means that you have not do things which you could legally do because you recognize that you have a larger duty to the system not to exploit it. And that--I mean, we see that in politics, where liberalism means that someone you disagree with--violently--is still allowed to speak. In economics we see it where I could go and get a subsidy or a restriction on the ability of new competitors to enter the industry, and yet I say, 'Nope. We have to do that.' Because that's the system that we're part of. So, that system is really fragile. And that Ortega y Gasset book was written before Schumpeter. So it's interesting that in the 1920s, 1930s, and 1940s there was quite this--exactly the same pessimism that Mario and I are expressing. And, we are--I think that there was more concern then--that you see these concentrated industries that were getting power from government. And, in a way, what we've done is gone back to that. There was a period of pretty robust liberalism and capitalism in the 1960s, 1970s, and 1980s. We see the dramatic expansion of democracy--the sort of triumphalism of liberalism--in the 1990s. And now I think some of that optimism that we saw from Francis Fukuyama and other writers who said, 'History is over. We're done. Liberalism and democracy have won'--that optimism, it's going to require continued work on the part of all of us in order to sustain the values that we think are essential.
Russ Roberts: Well that's a really deep quote. And the idea of not doing what comes naturally is--it's unnatural. It's hard to do. And maybe it's not sustainable. Maybe. But that's like saying civilization is not sustainable. So, I'm not quite ready for that level of depressing reality.
Russ Roberts: I want to go back to a critique of an earlier point you made, because I think this is relevant. Actually, I want to say something first. Which is, we both mention in passing that you could fool yourself into thinking that what's good for you is good for other people. Like, taking that subsidy is important, or keeping out your competitors 'because they are low quality.' 'We need licensing because we don't want to let scam artists come in and exploit people.'
Michael Munger: Your rice example earlier, is great, because if the rice were really bad, you wouldn't have to exclude it. People would say, 'This rice is bad.'
Russ Roberts: It requires a further point and belief in people's gullibility--because 'They might be fooled into thinking it's good rice. We have to keep it them.' But I do want to add--and I think this is extremely important for the economists and would-be economists listening: I know there are a number of graduate students and undergraduate econ majors who listen to EconTalk. It's one thing for Tim Geithner or Ben Bernanke or President Bush or President Obama to argue that we had to bail out all the banks--almost all the banks--100 cents on the dollar--because if we didn't, the world would come to an end. So, I think that was a lie. I don't think the world would have come to an end if they'd gotten, say, 80 cents on the dollar. I don't think the world would have come to an end if instead of bailing out banks we'd be able to help[?] homeowners. I think we've bailed out banks because they are politically powerful. And, politicians take a lot of money from them. And that was the worst cronyism of our lifetime--the Financial Crisis of 2008 and how it was handled. And I think we are going to live with the costs for a long time. And I think we are in the middle of those costs, even though, 'Oh, wow, we saved the world. It's great!' We didn't. We encouraged people to use the system to exploit the rest of us. We destroyed people's faith in democracy. We destroyed people's faith in capitalism. I think it was a terrible, terrible mistake. But, that economists have to applaud that is inexcusable. That economists become the enablers of that by saying, 'Yeah, well the system. Of course. ATM [Automatic Teller Machines] machines might have stopped.' Economists had no moral foot to stand on when they argued, when we argued--and I'm not one of them, so I don't like to say 'we'--when they argue that 'Of course they did the right thing. It was terrible. It was the best choice available, but it was terrible.' We shouldn't say that. We should have been out there suggesting alternatives. And when we look back on it as history, we should say it was a terrible mistake. And, of course, as Zingales's--Luigi Zingales pointed out on EconTalk--we're just like everybody else. We have our own incentives. We like being part of the system, too. So, let's not fool ourselves, folks. Let's call it like it is. And I think that was a really horrible set of policy decisions that remained in 2008 [?]; and I invite all economists to join me in saying so. And I think saying otherwise--to give them the intellectual cover for that kind of exploitation of the taxpayer and the average person is inexcusable.
Michael Munger: You--I hear you. I am with you. But, listen to yourself. What you basically said was: These incentives appear to be irresistible, for two reasons. One, we want to be part of the system; and as Zingales has said, there's monetary incentives. You get paid better, if you are a consultant for this sort of view. But then you said, 'But, I want to live in a different world.' Well, that's the thing that make it--I mean, you literally said that. And so do I. I can imagine a different world. The question is, just in terms of A to B to C, how can we have a combination of a structure of material incentives and intellectual ideas--an explanation that makes people say, 'This is the problem that we have. It involves character and norms.' I worry that economics has abandoned the position of emphasizing character, norms, and morality. And, one of the reasons that I'm a political scientist and philosopher rather than an economist in terms of my academic affiliation, is precisely that I'm worried about the structure of preferences and the sustainability of the willingness of people to try to act in the right way, even if it may be illegal. And let me emphasize: The real problem here is the ability of rational state actors to restructure the legal rules in ways that over time could corrupt moral character that might otherwise prevent a move in this direction. So, the real problem is we have to take the public choice objection seriously. Members--people who work for the state, elected officials and bureaucrats--are rational and they are entrepreneurs. They are looking for ways to increase their power. Now, that doesn't necessarily make them bad people. Maybe, you know, it would be better if we had a system where that weren't true. But I can't imagine what it would be. What we need is voters that will say, 'No. I'm not going to accept that.' So, the character of voters and consumers ultimately will drive the system. I'm just not sure that we're even trying to do that at this point, except for this excellent podcast.
Russ Roberts: You're kind.
Russ Roberts: I want to draw a distinction to bring home your criticism of my little rant there, which is a distinction between George Stigler and Milton Friedman. George Stigler looked at the world and laughed. He observed it; he saw those incentives; and he didn't think he could do anything about it. Milton Friedman was the opposite. Milton Friedman said, 'This is wrong; I'm going to speak out against it.' Now, we can debate about what their relative impacts have been on the world and we can debate about Friedman's academic work versus his polemical work. But I just want to concede your point, that, that little speech I gave a second ago about 'economists should do this'--that's preaching. It's not Social Science. It's not Economics. It's preaching. I'm asking the economists out there listening to this, and in theory the ones who aren't listening, to join me in what is effectively a moral crusade: not a study, not research. It's saying, 'Don't we want to live in this world?' And we understand that it's easy and fun to free-ride on, when people act morally. But it's the wrong thing to do. And, I think it's good to talk about that, even if I understand that the incentives to act otherwise, are otherwise. Just take a more trivial example: I think studying econometrics is somewhat corrupting because it encourages you to believe that you can measure things accurately that you--some of which you can't. And yet, I understand that if you're 27 years old and you've just come out with a field in econometrics, you're going to do a lot of econometric work--some of which is, maybe, not going to be as reliable as you'd like it to be. And the incentives, which we've talked about many times on this program, to publish things that are--not dishonest, not fraud, but just simply you convince yourself that this set of regressions that led to a significant coefficient, those are the ones that are the right ones. And the ones that didn't, those were wrong, for other reasons. And, I tell people on this program: Don't be like that. Now, that's bad career advice. I get it. But, you know, I want to look in the mirror every morning and be relatively pleased with what I see. And I hope other people do, too. And that's--again, it's the world I want to live in; I want to encourage people to live in that world.
Michael Munger: And there's the--what I like about that argument is that it's true that we probably don't have direct material incentives to defend free markets in the context of the right thing to do. But, it's important that we do it nonetheless. And actually, one of the things that started me, after I heard--in several podcasts--there was a paper in 2004 by Rajan and Zingales. And they said,
The behavior of government is determined, in part, by public mood. But to a greater extent, it is also determined by the special interests being regulated. This is why the free market system is fragile. Not economically..., but politically. While everyone benefits from competitive markets, no one, in particular, makes huge profits from keeping the system competitive and the playing field level. Thus, nobody has a strong vested interested in promoting and defending free markets.
Now, one thing to do is what Stigler did, and throw up your hands and say, 'Well, this is amusing.' And Stigler did take--
Russ Roberts: And study it. And measure it.
Michael Munger: Yeah. We can study it. It's interesting to watch. But another would be to, in spite of the fact that we have no direct material incentive, to point out, nonetheless it's still really important. And there's a lot of things which, collectively, we can, as a culture--as a nation--I don't want to get too, sort of vague-patriotic here. But it is important that we say it precisely, because it's not in anyone's direct material interest. And that is an important part of teaching. And I really worry that economists have abdicated their responsibility to at least offer fair-minded commentary, listen to arguments--that, this is not a church. But the preaching part of it is to say, 'This occurs in the larger cultural context; and that context matters. Let's talk about that.'
Russ Roberts: Yeah, I agree.
Russ Roberts: And now that brings me to the other point I want to make. Which is: Don't you think a lot of this concern about cronyism is not about the passing of time or the maturing of industries or the sclerotic nature of democracy, but is the outcome of an economic process in particular industries and those industries alone? And elsewhere it's not a problem? There's huge parts of the American economy that aren't particularly cronyized. Where people have to make good products. If they don't make good products, they go out of business. They are highly competitive. And those sectors do great. And, a large part of our life is blessed by those kinds of products, produced by those kinds of industries. They are highly competitive. There is no option for them to cartelize through the crony-ish system. They can't. It's too hard. It's too difficult. Transaction costs are too high. Maybe it's antitrust laws. But, they don't. For whatever reason. But it's those other industries that are highly concentrated. Here's what I'm arguing: I don't think concentration is the inevitable result of capitalism. And I don't think it's the inevitable result of every industry. I do think that in 2019 there are a handful of areas where very large firms, that are few in number, are able to wield political power in ways that are quite destructive. But that's where the problem is. It's the information world we live in, where Google and Facebook--they have to compete, but I think they make some serious monopoly profit; and some of that profit is through legislation or certain property rights that have been established or that are not established. I think that matters a lot. I think the banking industry--we've talked about it as highly blessed by political goodies. Outside of that, I mention farming. And, there are creeping licensing problems, which we've talked about on the program before; and I know you're aware of those. But, so much of the rest of the economy is just doing great. And it doesn't seem cronyized. Or am I being naive there?
Michael Munger: I think you're right. I'm worried about the tendency. And, the thing that struck me in writing the article was: It's just a calculus problem, in a way. Microsoft, for example, for a long time said, 'We're not going to have any lobbyists. We're just going to sell our product. We're not going to have any lobbyists.' Then they got in antitrust trouble; they had a couple of lobbyists. Now they have a building. So, some of this is a process of maturation. So, it's true that in a new industry you are focused--if you are making something in a new market, at first the profit opportunities just from making better, cheaper products, you are going to keep hiring engineers. But it doesn't take that many years, before, as a matter of just of calculus, at the margin, the next dollar that I'm going to invest can more profitably be put into lobbying than it can into engineering. It may take a while for that to happen. The other thing that I worry about is that many of the smaller companies have either found a way, or the government has offered this as an opportunity: There's been a huge increase in the number of professions that require licensing. And, you've had a couple of people on the program to talk about this. That's sort of operating in the background. And the cases--the more egregious cases are pretty upsetting--but, in North Carolina, you have to have quite a few more hours to be a hairdresser than to be an emergency medical technician. So, the barriers to entry that it's possible to erect that we don't really notice very much--there's an accretion of these. I don't want to use a bat guano metaphor. But, it's piling up all over the economy. And, I worry that if you do a study of it, there is actually, has been, a big increase over time. So, I would worry both about the mature industries problem and the professional licensing proliferation: that, I think we probably are seeing more cronyism slowly creeping up than you might expect if you weren't thinking about it in those terms. Because it is easy to look at the large, dynamic parts of the economy and say, 'Everything's just fine.' Let's try to do something before it's too late. Even if you are right. Even if we are doing okay, let's make sure we don't go any farther in that direction.
Russ Roberts: Now, part of the reason I think that cronyism is, and the state of capitalism, are in the conversation, to the extent that they are, is a belief--which listeners will know, which I think is false--a belief that the rich have somehow captured all the gains for themselves, of economic growth. And, this is an insidious belief. I don't think it's true. But, if you think it's true--if you believe it--if you believe that the rich have rigged the system so that the average person doesn't get any of the benefits from the economy, then you've got to believe that, 'Yeah. Cronyism is rampant. Capitalism is corrupt. And some form of Socialism is desirable.' And I think that is part of what's underlying the current political conversation we're having in America, which is a widely-held view, certainly among mainstream media--pundits, columnists, and many academics--that over the last 40 years there's been no progress for the average person. If you believe that, then the system is corrupt. I don't believe that. I think that greatly exaggerates the--I think it's literally not true. And I think it greatly exaggerates the severity of the problem we face. And instead of thinking, 'Oh, I guess we need to be on guard about this,' it's like, 'Oh, we've got to tear down the system.'
Michael Munger: I feel like you are Grand Moff Tarkin and I've come in and said, 'I've analyzed their attack. There is a danger.' And, in fact, 2008 and 2009, the events in the financial industry shook my own faith. For just the reasons you say. That's--in fact, there was pretty good evidence that very substantial concentrations of wealth were just baldly protected by the state, in a way that has absolutely no justification. And we made up this false narrative about how it actually saved the world: It was good and moral that we repaid 100 cents on the dollar out of taxpayers who were the ones who had been ripped off in the first place. So, I think there is actually a danger. Now, you can say that, 'I think they over-estimate their chances.' I think they have a pretty good chance. And even if the next election results in a move towards the Left, economically, that isn't as far as I'm worried about. It isn't just the elections that are the concern. It's the sense that people have that the Left is winning this debate. And I think unless we bring back the notion that culture and the right thing to do--because the Left constantly talks about morals and the right thing to do. And, many people on the Right will just say, 'No, no. Markets are a better system.' They make a Consequentialist argument. And, we need to say, 'No; it's actually a better moral system, too. Because it rewards virtue and hard work; and here's the evidence for it.' I think, unless we can do that, we're ultimately going to lose the debate, because we're conceding the notions of character to the Left. Whereas, in fact, we actually have a good position.
Feb 25 2019 at 9:42am
One need look no further than the American pharmaceutical industry (or financial) to see that the reliability of norms to constrain unethical behavior is dead and gone. Or fossil fuel companies that have known about sea level rise probabilities and factored that into their oil drilling platform heights. Or Big Tobacco. But sure, the norms will save us!
Feb 25 2019 at 10:17am
I agree with Ben but want to point out that it is not just big businesses that have seen a decline in business ethics. Norms constraining private small business behavior have definitely also eroded. I am retired now but ran my own small business from 1975 to 2007.
During that time I saw accountants evolve from being the people who told you what you could and couldn’t do regarding business law and ethics to being little more than lawyers who worked with numbers and would argue for the legality of anything you wanted.
Likewise the norms surrounding how much respect and consideration employees are owed by employers have declined sharply. I was shocked at how some of my best employees were treated by other employers after I closed up shop.
Feb 25 2019 at 10:51am
Russ and Mike – at the tail end, Mike suggests that Russ is too sanguine about the current openness of large sectors of the economy, but overall you are BOTH too sanguine. Much of the conversation revolves around explicit benefits from government to business, such as price subsidies, import controls, bailouts, with a mention of the proliferation of state level occupational licensing.
While it is true that many sectors do not receive these explicit benefits or barriers to entry, most of the economy in fact faces some form of regulation, whether at the local level (e.g. building, zoning, health codes) or at the state and federal levels (regulatory agencies passing rules through notice and comment procedures of various kinds. Many such regulations do, in fact, protect the public from some harm or other, and many regulators are indeed, hard-working and well-meaning professionals who see themselves as putting the public interest first. Even so, regulatory rules that get enacted have the effect of raising the cost of entry while permitting the industry behaviors that are most beneficial to incumbents, regardless of the benefit to the public. But, even if every actual rule were benign, the established procedure of notice and comment rulemaking, wherein state and federal legislatures delegate the power to write the rules to the agencies, who then publish their deliberations to be paid attention to mostly by the regulated industry, is foreseeable under public choice reasoning. More bluntly, the rentseeking has been allowed to be first disassociated from the elected politicians, so they face no direct consequences, and second disguised by mingling industry protection with protection for the public.
Conclusion: given that agency rules are numerous and pervasive, there is scarcely an industry in which the level of compliance cost for new entrants is truly close to zero. Even you, Mike and Russ, some of the most vocal worriers about these issues, may not be worried enough.
Jon L. Pritchett
Feb 26 2019 at 1:17pm
Right you are. Russ and Mike should be more worried. I observe the expansion of rent-seeking and protectionism schemes on a daily basis. When favor-seeking and moat-building are rewarded, it sends the message to companies to allocate more resources to the public sector. That is a terribly inefficient use of capital and changes the market/customer-based service and innovation equation, which has been the source of wealth creation in the West. What we are facing more and more is the market moving towards wealth protection strategies and defensive postures. Such a movement thwarts creative destruction, venture and early stage equity investing, risk-taking, and thus the growth of small and mid-sized business. That is not a good recipe for a dynamic American economy driven by entrepreneurs. I’m afraid it gives far too much power to the elected and unelected officials of government who are not accountable for the damage from such policies.
Feb 26 2019 at 11:43pm
Amen Steven, you beat me to the punch and said it way more eloquently that I would have. Love when Russ talks Mike (he’s by far my favorite guest) but at the end there I was screaming at the car radio lol. Applied politics is all but legalized cronyism in name as the Supreme Court themself has acknowledged at a various times anytime anybody tries to move beyond blatant open tit-for-tat bribery charges especially when it comes to businesses. And it’s not just Federal regulation, subsidies, or occupational licenses. The local car dealer isn’t donating to the local school board because he likes throwing his money away, he’s greasing the wheels of the community for regulatory capture of some sort. Property developers are attempting to skirt local building codes or zoning or enforce new ones to lock others out. The local plumbing organization isn’t advocating certain types of toilets be banned for safety. Hell I live in Honolulu and we have a annual mandatory “safety check” for all vehicles which basically goes like this “Find any mechanic, hand him $20, and he will hand you a sticker” .. the entire “safety” inspection takes about one minute which involves him writing you receipt and making a record in the city system. Every time the local law comes up to be changed, whodda thunk it but donations flood into local political koffers from the various automotive mechanics at a individual and group level. I would wager local cronyism as a whole, unlike what Russ and Mike seem to believe, vastly outweighs in cost and impact any Federal or even state cronyism.
Feb 25 2019 at 11:57am
Great discussion and another great Munger episode! Would have liked to hear some discussion around Amazon HQ2 in NY. I have heard some people speculate that Amazon never intended to move to NY in the first place and that they basically put on a show to get a better deal from Virginia.
It seems in 2019 like the largest companies in America don’t even want to do business as usual or consider taking risks/making investment without perks from government (ultimately tax payers) to do so.
Feb 26 2019 at 2:14pm
This was a fascinating episode. I was also hoping to hear about the bid wars for Amazon’s HQ. Seems like peak cronyism to me. And there’s also something off putting about how we can just tune in and watch it all happening. Bezos doesn’t need a magic mirror in a dark corner of his palace to find out “Who’s the croniest city of them all?” He just stages a competition like the Olympics where cities publicly try to out crony each other.
On a related note: publicly funded sports stadiums. Or, as I will call them from now on, ‘nanny stadiums’. (Sorry…)
Has there been an episode on either of these topics?
Mar 1 2019 at 5:02pm
Nanny stadiums aren’t cronyism…they are public-private partnerships.
Seriously, if you ask people on the street what they think of cronyism, surely the percentage condemning it would be above 80%, probably much higher, maybe 95%. If you asked the same people if they think public-private partnerships are a good way to invest in our community, I suspect that 65% would say it was a good idea…probably a higher percentage if the public-private partnership is to build a stadium for their favorite sports team.
We slap a different label on unpopular ideas or on popular ideas to try to manipulate a mostly uninformed citizenry whose peak involvement in our democracy is in the voting booth.
Mar 7 2019 at 9:14pm
“Nanny stadiums aren’t cronyism…they are public-private partnerships.”
Public private partnerships tend to be just an euphemism for cronyism.
“Seriously, if you ask people on the street what they think of cronyism, surely the percentage condemning it would be above 80%, probably much higher, maybe 95%. If you asked the same people if they think public-private partnerships are a good way to invest in our community, I suspect that 65% would say it was a good idea…probably a higher percentage if the public-private partnership is to build a stadium for their favorite sports team.”
Yes, and if you ask people if they like taxes, they will say no, but if they like ‘public fundraising’ they will say yes. And people who want to use public money to fund a stadium for their teams are the biggest cronyism enablers out there. If you want a stadium, give your own private money. I don’t care how many people are in favor, I don’t want my taxes used this way.
Feb 25 2019 at 12:32pm
”real capitalism” is just voluntary trade by individuals. There’s nothing to regard as being stable or unstable. Thinking that way is a kind of category error, or some people would call it a “package dealing” (combining multiple separate concepts into one so as to be able to make a spurious argument based on false framing / assumptions).
A better question: are governments “unstable” and inherently biased toward corruption? I’m not going to quote Lord Acton because we all know the answer. Go read the declassified Operation Northwoods memo and then read “Confessions of an Economic Hitman.”
If you don’t want cronyism you have no alternative but a complete wall of separation between economy and the state. Take away the state power to grant subsidies and you won’t have to worry about who gets subsidies anymore. So long as the power exists in the state there is no way to contain corruption. The state is run by mere humans, not angels or Ubermench.
Feb 25 2019 at 1:21pm
Yeah, it seems to me that the fundamental response to their dilemma in this podcast is pretty simple. The problem they describe with capitalism (businesses finding it more profitable to lobby to change the rules in their favor than compete) is actually a problem with democracy, and it’s absolutely still going to be there in any sort of socialist democracy, too.
Feb 25 2019 at 3:50pm
Nope, you’re completely wrong. If we implemented my preferred (very clever) mix of democracy and socialism and whatnot I’m sure it would be completely different from what we see in every country around the world throughout all recorded history. Vote for me!
Or maybe just vote Cthulhu: why choose the lesser of two evils?
Feb 25 2019 at 8:22pm
Cronyism goes far beyond subsidies – government makes many laws that determine how the playing field is set for competitors. The copyright extension act is a prime example of cronyism – hugely beneficial to Disney and other owners of copyrights. Not beneficial to consumers or creative folks that want to build on past work. No direct economic benefit to the government. A rule of “no subsidies” does not fix the problem.
Feb 26 2019 at 12:03pm
Definitely! Laws and regulations often benefit some businesses and harm others. There’s also bailouts, FDIC guarantees, loan guarantees, subsidies to consumers of various business goods (like college grants, houses, etc), wars started or extended on false pretenses to the benefit of the Military Infustrial Complex, special legal privileges for unions, and on and on and on. The myriad ways in which the state privileges some is unavoidable so long as they have the power.
“The state—or, to make the matter more concrete, the government—consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can’t get, and to promise to give it to them. Nine times out of ten that promise is worth nothing. The tenth time it is made good by looting A to satisfy B. In other words, government is a broker in pillage, and every election is a sort of advance auction sale of stolen goods.” -H. L. Mencken
Feb 26 2019 at 2:25pm
What about private property law? Plenty of cronyism can be effected by defining and applying it one way or another. Should the State get out of that too?
Feb 26 2019 at 6:36pm
Mar 1 2019 at 11:32am
I disagree with Bob on this one point. (I totally agree with everything else he wrote.) I think government has a legitimate role in resolving conflicts over property rights. If nothing else, as the final arbiter of property right disputes through the common-law court system. Admittedly, my understanding of property rights is not the strongest area of my models, but as I learn more about economics I am increasingly sensitive to the critical importance of property rights in the eventual outcomes of any civilization.
Well defined property rights are required for capitalism to operate. It almost doesn’t matter how the property rights are defined, only that they are well defined and maintained. The biggest problem of socialism, imho, is that property rights become malleable under various circumstances. In a pure capitalist world, for example, what you earn belongs to you. In a socialist world, some of what you earn belongs to you, but a variable portion of it belong to all the winning participants in the state machine. This is the absence of the ‘Rule of Law’ that Russ Roberts is always lamenting. The Rule of Law is the idea that all laws apply to everyone equally. As in, ‘no one is above the law, not even the king’. But that’s not the case in America today. To take but one example, the Individual Mandate in Obamacare applies or does not apply variably based on annual level of income, working status, welfare certification status, present insurance coverage, and government certifications for said present insurance coverage to name but a few discriminators. In short, it’s not the same for everyone. That one law is radically different for different citizens. The entire tax code follows the same pattern, taking wildly variable amounts from some citizens and giving or not giving variably to others. In other words, ‘Rule of Law’ is really ‘Uniform Rule of Property Rights’. Without stable property rights, capitalism is doomed, independent of the system used to ration the property rights, be that democracy, common law, socialism, communism, or any one of the infinite others.
Mar 2 2019 at 12:32pm
My bigger point is that anything that the government does is prone to cronyism. I do believe that government is important for capitalism to exist at all. A strong, stable government is necessary to define property rules and enforce contracts. I don’t think there is an easy or realistic answer to this of getting government out of capitalism.
Mar 7 2019 at 1:56pm
This is not a solution either. Without some kind of government apparatus to define and enforce laws and rules about who owns what, under what conditions, and what can be exchanged and on what terms, ‘stateless markets’ would still be rife with corruption and coercion. They certainly would not be utopian markets where every exchange was voluntary and everyone benefitted. People would still be governed, just by bodies even less representative than the ones we have now.
If your response is that we simply don’t need such laws and rules, well, that doesn’t work either, precisely because free markets are unstable. They will become unfree and uncompetitive without something like the state to enforce the freedom itself.
In short, genuinely free and competitive markets both rquire the state and are threatened by the state. Which is why it’s such a wicked problem.
Feb 25 2019 at 2:19pm
Very interesting conversation, and I think this is a topic pro-capitalism individuals are too quick to dismiss. Throughout this conversation I was constantly reminded of Plato’s Gorgias, and in fact this conversation even followed a very similar path as the dialogue. To me, the vulnerability of neoclassical economic thought is that it’s too easy to equate being profitable with being good. When we talk about an individual’s wage being equal to their marginal productivity, it’s too easy to make that next step and say that an individual’s wage is directly linked to their benefit to society. When we say that the firm operates to maximize profits, it’s too easy to then declare that any legal action is permissible for the sake of profit maximization, and in fact you are doing a bad job if you’re willingly not maximizing profits. When we talk about the efficiency of markets, it’s too easy to then assume that if something is profitable, it’s because people want it and thus it’s a good thing.
I don’t think the lobbyists and government rent-seekers see themselves as knowingly committing evil for personal profit, I think in their position they genuinely believe the things they lobby for are good for Americans. Like Russ, I think the solution involves creating and propagating cultural norms that remind people that just because you can do something, doesn’t mean you should. Unfortunately, I’m becoming more and more convinced that this type of solution is nothing more than a utopian daydream.
H. Skip Robinson
Feb 25 2019 at 4:12pm
Russ is absolutely correct in that civil society requires an ethical compass and we surely need to make this a significant social ideology in our narritve. However flawed, it appears that “most” of our founders had enough ethical compass to get them through the revolution and legal constituting of our nation. I also believe, as we have become a more socialistic society, we’re developing the inferior ethic, as both Michael and Russ suggests, “if you don’t participate in the unethical activities, you’re a fool, everyone’s doing it”.
I always ask everyone, how do we ethically justify the taking of people’s money and property from them when they justly earn it thus it rightfully belongs to them and take it by politically determined force and/or coercion and redistribute it to those it doesn’t justly or rightfully belong to?
It seems as soon as we the Citizens of the world allow any additional taxes and the redistribution of wealth, inevitably the systems become more and more cronyistic and unrestrained as to both the size and scope of centralized governmental powers and those influencing it; crony capitalism.
Taxation is antithetic to liberty yet we want both. That’s like mixing oil and water and expecting them not to evidentially sperate with the government rising to the top and the middle class/majority falling below.
Feb 25 2019 at 5:35pm
I agree with your first paragraph, but you’ve lost me from the second on. How does one “justly” earn property anyways? How do we ethically justify depriving people of valuable resources because someone has lain a claim to it? It seems to me that it’s very tricky to determine what market activity is just and what is free of coercion, and it’s too simplistic to think the government is the only entity capable of coercion. How do you deal with the fact that some wealth today is inherited wealth from individuals/companies that engaged in activities many of us would consider unjust?
Feb 26 2019 at 2:46pm
I find it interesting how people can have such strong beliefs based on arbitrary premises. Some guy walks a bit farther some day, plops some rocks in an area of land, and 300 years later some other guy who possibly hasn’t even seen it considers it as much part of him as his spleen.
Mar 7 2019 at 1:02am
It’s interesting that you ask how the state can justify taxing people’s wealth and income, but you don’t ask how the state can justify enforcing the existing distribution of property rights that give rise to that wealth and income.
Why is it not okay for the government to say to a billionaire “You can’t spend this money”, but it is okay for the government to say to everyone who doesn’t own a piece of land “You can’t walk on this piece of land?”
You seem to assume that absolute ownership rights are justified. But that assumption is extremely vulnerable to challenge. It is extremely difficult to defend historically derived inequalities of resource holdings. Which is why most people don’t even try. They just assume, as you are doing, that the status quo of ownership is legitimate and then object to taxation on that basis.
But if the status quo of ownership is illegitimate, e.g. because resources were originally appropriated by force or fraud or other coercion (genocide of Native Americans, enslavement of Africans), then taxation can be justified as a compensation to those who were arbitrarily left out of property holdings and therefore are forced to hire their labor out in order to survive.
Feb 25 2019 at 6:11pm
Mike nailed you to the cross on this episode.
I have personal experience from a shareholder and CEO perspective of the incentives and motivations of corporations regarding lobbying.
Relying on norms and good people is a hope, not a strategy.
Feb 26 2019 at 7:42am
I thought I made it pretty clear that it’s a hope that is a bit of a long shot. And surely the current environment of lobbying does not satisfy the kind of norms I’d like to see in place. That’s kind of the whole point of hoping that norms change.
Feb 27 2019 at 8:32pm
That wasn’t quite clear to me, you seemed to suggest a couple of times that this is a limited problem and that norms persist in most industries, it’s just a couple (banking, agriculture) where we have a problem. My mistake if that wasn’t really what you were trying to communicate.
In any case, I think it would be an interesting follow-up to talk about how and why these norms are changing (if they in fact are). I think Mike made an interesting point after the diamond earring/tipping anecdotes that both of those represented interpersonal interactions. My own thinking about this subject is that the erosion of these ever-fragile norms has accelerated recently because increasingly we are interacting with each other in impersonal ways – behind screens, on social media, etc. But who knows if there’s any evidence for that.
Something else that might be worth noting: when talking about the history of business & politics this country (as well as the countries we’re culturally descended from), we might be tempted to look at the past and see decent, ethical actors who knew right from wrong and operated with shared common values. But those actors were almost universally made up of one slice of society, often benefitting greatly from the labor of others, many of whom were not treated with decency, and who in fact were often a resource to be profited from. It’s rather easier and comes naturally, unfortunately, to treat your fellow man well when they’re exactly like you, and you’re both benefitting greatly from the norms that have been established.
Feb 25 2019 at 6:25pm
I liked the comment on “Hall of Shame”. I would put business people that write of expenses that are not legitimate. For example, this most often happens with small business owners in my experience, at the end of a dinner will pick up the check and say some phrase about their business and say to me ‘we did talk about business’. I recognize that I could if I were more courageous, say something like ‘I do not want to be used for a fraudulent write off’ but I have not. This practice that I have seen most of the small business owners I know use has colored my view of the small businesses in our country.
BTW, regarding pointing out that you were given too much change back, I was out to dinner last evening and when I paid my second beer was not on the charge. I pointed that out they did not add it to the bill. But if you have norms or character or whatever it is called, you have it in all circumstances.
Feb 25 2019 at 7:13pm
Great conversation. Got me thinking about economic rents and an area where former Econtalk guest, Paul Collier’s book ‘Future of Capitalism might be topical and worth bringing back on the show. Relevant points in the book for me were identifying not just ‘rights’ but ‘responsibilities’ within liberal democracies and how tax policy should focus on taxing areas of where rent seeking is more endemic perhaps as a dis-incentive.
Also you guys never mentioned anything about the ongoing, re-distributive and extremely powerful impact that monetary policy has on economic incentives. While not as cut and dry, I would be interested to hear your thoughts on the role of government, visa vi monetary policy and how that fits into the discussion of crony capitalism. At what point does bailing out capital through ultra easy monetary policies, not to mention every time the stock market declines become an effective bail out, and what are the long term implications of a ‘fed put’ for capital mis-allocation and reckless risk taking.
Feb 25 2019 at 7:36pm
What if all lobbying is just Coasian bargaining?
Feb 25 2019 at 7:52pm
We speak of crony capitalism because there are forms of capitalism that does not favor cronies. Crony socialism is not spoken of, because, that is just socialism. The very nature of socialism, government control, spawns cronyism, just as the government interventionism in capitalism invites development of favor toward cronies.
If we take the three main forms of socialism, Mises spells out here:
It is easy to see how rent seeking is not only possible, but unlikely to be absent in state controlled enterprises, the compulsory economy of Zwangswirtchaft with bureaucrats and politicians directing owners, and state/guild controlled enterprises. The need to know someone to get in the union is so commonly known it is used as a device in dramas in television and movies.
Consider this observation from ‘The Big Change: America Transforms Itself 1900-1950″ on the control government had/has over business and that control incentivizes crony capitalism.
The “government-guided enterprise” will seek to gain some influence in that guidance. To reduce crony capitalism means that government interventionism must be constrained.
Mar 2 2019 at 11:47am
Ok now that you have pummeled socialism into the dust, what are your thoughts on crony capitalism? Inevitable? Desirable? Despicable? If despicable, how to avoid?
Feb 25 2019 at 8:14pm
It was a good topic and important conversation. It might have been good for you to define cronyism. What rent seeking activities qualify? What is “a lot” or “a little”? Several times in the episode, you said it wasn’t much of an impact. How are you measuring? My gut reaction as I was listening is that there is “a lot”. I most recently came out of the sheet music industry, where the Mickey Mouse Protection Act (copyright extention) has had an enormous impact on the business. Wouldn’t zoning laws that hugely benefit current homeowners also be a form of cronyism? I’d love to see some way to evaluate it a bit more objectively.
Feb 25 2019 at 11:47pm
I’m surprised neither rr nor mm explicitly put forth the basic “classical” conservative premise that smaller government would be preferable because it would result in fewer/smaller distortions.
Limited government would seem to be requisite for a functional capitalism. Otherwise, crony capitalism is inevitable.
Feb 26 2019 at 4:07am
Consider how one taker can destroy an organization. Watch Adam Grant and apply social psychology to Mike’s subject.
Machiavellian ethical standards are common — whatever is acceptable to “success” is ethical to takers and non-thinkers (That is how things work).
Thank you Russ and Mike for doing the work you do. This podcast and subject bother me because it is another context where takers harm us all.
Feb 26 2019 at 4:37am
Wow. An hour and ten minutes of discussion between two economists, plus the comments above, and not one single mention of the economic concept of Consumer Surplus.
The next time some of your socialist friends corner you and demand a defense of Capitalism of you, ask them this:
“How much Consumer Surplus was created by: Karl Marx, Vladimir Lenin, Joseph Stalin, Nikita Khrushchev, et. al. – or even the entirety of the Union of Soviet Socialist Republics – or Adolph Hitler (National Socialist German Workers Party) – or Chairman Mao, or for that matter, any Socialist “government”, up to and including that of the current Venezuela …
… as opposed to, how much Consumer Surplus has been created by the likes of Bill Gates, Steve Jobs, – or even the long past “robber barons” like Cornelius Vanderbilt (shipping), J.D. Rockefeller (oil), Andrew Carnegie (steel), et. al.
If they require more contemporary examples, ask them which is creating more sustainable Consumer Surplus right now: Jeff Bezos and Amazon, OR Alexandria Ocasio-Cortez.
Feb 26 2019 at 5:05am
At the beginning they talk about the lobbying problem firfcapitalism advocates and how it’s similar to corruption/totalitarianism problem for leftists.
Honest (and interesting) starting point. But, I think it’s easier to frame the problem without also framing it in literal political-economy terms.
Socialists see rich people and think “They’ll find a way to turn money into power over politics, influencing the government for their benefit. We can’t have rich people or the system is doomed. Eat the rich.”
Capitalists see the same problem and think: They’ll find a way to turn money into power over politics, influencing the government for their benefit. We can’t have a a public purse. Eat the government.”
Feb 26 2019 at 8:49am
I’m really curious how we get people to act ethically once it’s set in that not taking advantage of people is being a sucker.
As an example what has Japan done that has their crime rate so low. I’m only guessing it wasn’t always so low. 100, 150, 200 year ago. Is it just luck of some great people’s lasting influences in education or culture? Is it government education? In other words is there anything we can apply in the west there? Basically like Russ’s example of finding a wallet the % of people that would give it back and/or go out of their way to make sure it gets back to its owner is unbelievably high here.
Note, I am not saying Japan is perfect. There are plenty of issues here. Only in this one area they seem to be doing a good job so wondering if there are any lessons or insights and if they can be applied to both kinds of issues.
Feb 26 2019 at 12:36pm
I haven’t seen any research on it, but we do have examples of subgroups in the US coming to believe ethical behavior is for suckers. It is a trope for dramas such as the country rube being honest and taken advantage of by the city slicker. It is commonly portrayed in regards to the Mafia, and other urban immigrant crime groups.
I do not know if acting ethically is still for “suckers” in NYC, NJ, Chicago, etc. culture.
On the other hand, I’ve lived a sheltered life. I have friends who are small business tradesmen who tell me that it is routine for clients to refuse to pay until they send notice of suit in hopes of cheating the contractor. Of course, the dishonest contractor, mechanic, etc. is also a stereotype that isn’t uncommon.
Those of us not on the front lines of markets and engaging with multiple people for cash or services do not have an appreciation for how many unethical people there are in trade today.
Feb 26 2019 at 10:51am
How is this the capitalists problem to defend? It is only possible with state power. A state power supporter/socialist drops the poison pill in your capitalist wine and then asks you why the wine tastes bitter and causes you to choke? JK Brown is exactly right, cronyism is just another form of corporate socialist welfare and is not a critique of capitalism but of democracy or excess state power.
However let’s assume it is a flaw of capitalism. Well then Shanye Cook stole my thunder because:
Fake capitalism >>>>>> all forms socialism
So we take one imperfect over a much much worse imperfect.
Both guests assume that the lobbying guarantees profits forever, but it doesn’t and competition and innovation can overcome even the lobbyist’s efforts. There is at least some market check on just allowing the government to protect you, although with a large enough state power health insurance companies have done an amazing job at locking that market up.
The way you manage a society is conductive to corruption but ultimately you can probably govern moral people in nearly anyway sem-effectively and with an immoral unethical people it will matter less and less what the government structures are.
If you need a society that agrees on the standards how will large scale legal or illegal immigration from countries where corruption is common and crony capitalism is almost the only form or capitalism, impact our country?
Feb 26 2019 at 11:09am
Though the United States has always suffered from the abuses of political privilege, the party didn’t really get started until the Progressives took over the government in the late 1800s and early 1900s. During those years, Progressives sought to, and largely succeeded in, cartelizing industry and banking through government regulatory agencies such as the Interstate Commerce Commission, the Federal Trade Commission, and the Federal Reserve Bank. Additional layers of top-down control were added under FDR’s New Deal, and LBJ’s Great Society.
The Progressive dream was a technocracy – society ruled by experts. And when you need experts on industry, where do you go but to industry itself? Yet Progressives are now shocked, shocked that industry has an outsized say in the agencies that are supposed to regulate it.
The problem is not the culture, societal norms, bad people in government, or bad people in industry, the problem is a government that tries to regulate what it does not, and cannot, understand. Until that changes, crony capitalism will remain.
In the meantime, free marketers should not apologize for what Progressives created.
Jon L. Pritchett
Feb 26 2019 at 1:21pm
Yes, excellent point, Richard!
Feb 26 2019 at 12:52pm
Over my years, I’ve made two observations
In America, it was, and was suppose to be, that all things were permitted to the citizen, except that which was specifically prohibited. To the bureaucrat/government worker in their duties, all things were prohibited, except that which was specifically authorized. Over the 20th century, this was flipped where now the citizen is prohibited by default and the bureaucrat is permitted by default.
Real character is only revealed by what you do when their is no, or little, chance of being held accountable. This accountability may be because no one sees what you do, you have the power (such as cronies in the DoJ) to prevent accountability, or what you do is legal.
Feb 26 2019 at 1:48pm
I enjoyed the podcast as usual.
At one point during the cast, it is mentioned that Ford never used the fact they didn’t accept the bailout in a commercial.
In fact Ford did briefly advertise:
The ad was quickly pulled amid speculation the administration put pressure on Ford to do so.
Ford later accepted a multi-billion dollar loan that was arguably part of the auto bailout.
I haven’t search for the info but I recall banks who didn’t need bailing out were pressured to accept bailout funds by the administration. I recall correctly these were mostly large regional banks like BB&T who were took bailout money they didn’t need.
Feb 26 2019 at 2:41pm
First, great episode.
Russ asks, how did the corporate culture in America disintegrate? To some this is apparent. Racism fuels cronyism because it distorts morals.
The thesis is simple: southern GOP (powered by the corporate $s) sells the white voter on the story of an indolent colored man who unjustly benefits from white men’s hard-earned tax dollars. Corporations conveniently support GOP under the auspice of “lower taxes fuel growth” and then starve the beast by depriving it of education and health care (Russ’s favorite concept: Baptist and a bootlegger). Keep them ignorant and you’ll keep them in check. (Thank you Mike for recognizing that the opportunity makes the thief…)
You’ll ask, what’s the evidence?
Let’s start with my favorite LBJ’s quote “If you can convince the lowest white man he’s better than the best colored man, he won’t notice you’re picking his pocket. Hell, give him somebody to look down on, and he’ll empty his pockets for you.”
This quote still echoes in 2019. If you believe that Charlottesville was a fluke and that majority of Southerners have disavowed racism you need to smell the coffee or explain how Roy Moore – a white GOP judge credibly accused of pederasty – captures 48% of the vote in Alabama Senate race in 2017.
Or how is it possible that two high schools in Alabama whose students are 90% African American still bear the names of Jefferson Davis and Robert E. Lee. To some of us, this is no different than having Jewish kids in modern day Germany attend a hypothetical Erwin Rommel high school.
If you convince a majority group that a minority disrupts the status quo, then the morality disintegrates. A homogeneous group will apply morality and norms to their own group, but exclude the outsiders from the equation. This is why Scandinavians happily pay taxes to support less fortunate ones, a thing they recognize as the price of a civil society (Knack, S., & Keefer, P. 1997. Does Social Capital Have an Economic Payoff? A Cross-Country Investigation. QJE)
Most contentious issues that disrupt and dissolve morality are rooted in America’s race issues. Gun rights is another example. Gun manufacturers tout the 2nd Amendment at all costs so that folk can protect itself against ‘those people’ (another B&B parallel.)
Finally, Russ asks what has changed – our morality is not what it used to be. Well, demographics disrupts everything and people with a stake in the status quo reason that the morality should not apply equally to our leaders (no matter how flawed he is) as it should to an outsider. And so the domino goes…
Feb 26 2019 at 3:14pm
You do know that LBJ was a democrat right? You do know the other infamous quote about how he would get [racial slur] to vote for him forever?
The rest of your comment is just poisoning the well by making accusations of racism and its not worth having a debate about whether or not certain people are racists because you say they are. For myself I am grateful to live in a land so bereft of racism that it needs to be manufactured by actors by hiring others to beat them up.
Feb 26 2019 at 5:46pm
I think your podcast series has improved my quality of life a lot, so thanks very much.
In general, I think there is too much attack on lobbyists and attribution of ill good from their activity. I was reminded of this point yesterday when I was getting feedback on a policy paper i had written for an industry association. The lobbyist did some very detailed notes and was very demanding that the footnoting and references were of a high standard. He insisted that some of the marginally inflated language was pulled back to represent only the facts. In this case, the lobbyist was a force for good policy. He made a positive contribution and, by the way, the client wanted to go “harder”. The lobbyist stood his ground against the client.
I worked for many years at an organisation that lobbied on behalf of large banks. A couple of very interesting facts that are often missed. In terms of phone calls, I would say that for every outward phone call that was made to someone in government (bureaucrat or politician), there would be five incoming phone calls.
There is a much higher level of dependence on lobbyists than you think. They are used by government and bureaucrats to help push policy agendas.
The government uses contact with lobbyists to pull their business clients into line, to support a policy proposal even if it is against the interest of the client’s shareholder. In other words, to convince their clients to take some bitter medicine over some issue. They like talking to lobbyists because most a very smart and understand all the dimensions of an issue.
Once this dynamic is understood, it is surprising that firms end up paying lobbyists at all. I know from where I worked, we believed we destroyed more shareholder value of our clients than we added.
Many businesses employ lobbyists to ‘tick a box’ so they can’t be accused of failing to do everything they could to manage an issue. Government has a mystique and a language and lobbyists serve a role in just explaining how things work.
In terms of finance, the industry I know best, the work of a lobbyist is pretty easy. The main force against competition are the bureaucrats and regulators that are paid to ensure financial stability. Lobbyists just sit there are watch government itself erect barriers to entry, advised by bureaucrats who live in fear of a banking crisis and whose own career relies on stability.
In conclusion, I think lobbysts are pretty marginal to the way things pan out. They often serve a useful role in explaining Government and help both sides move things along.
The real impact is found in the academic sphere where research into issues such as stability vs. competition and behavioral economics have profound impacts on the regulatory settings over time. In this respect, I fully endorse your plea that economists take moral stands on issues of great importance, such as bailouts of large firms. That simply is not on. At least in my opinion. And, of the lobbyists I know, 90% would also oppose bailouts.
The theory of lobbying is much more corrosive than the reality.
Feb 26 2019 at 6:25pm
The Ford commercial does exist! See below from ~2011.
Mar 2 2019 at 2:30pm
Was it cronyism when Ford asked to be included in the TARP bailout even though it chose not to be bailed out? Apparently, at first, it was worried that GM and Chrysler might get a competitive advantage with TARP money. Was it cronyism when Ford did borrow government money to the tune of $5.9 billion in 2009? Why consider the morality of the manufacturer or country of origin when purchasing a vehicle? For me, what matters is the value of performance and maintenance infrastructure. Most U.S auto manufacturers and many foreign ones are acceptable. Car rental companies understand this. Meaning I am able to buy and rent vehicles that I can drive to the hinterlands and still get decent service. I don’t care if the vehicle was made in a cronyistic, totalitarian, communist, socialist, fascist, democratic, republican, libertarian, or whatever society as long as it completes the tasks I want it to perform.
Feb 26 2019 at 9:35pm
Saturday last my guild, the Kansas Academy of Family Physicians, sent an urgent request: please write your local representative, who served on a committee considering a bill to grant nurse practitioners the right to practice free of physician supervision.
They provided me a canned response at the click of a mouse. However, I responded that our profession was an apprenticeship trade; that many of the 20,000 hours I had spent earning my shingle had been wasted, given my chosen scope of practice; and that nurses, who already had experienced much of the nuts-and-bolts of medical practice, could safely practice within a self-limited scope given an appropriate apprenticeship under a qualified physician.
Today, horrors! The bill passed favorably out of committee, with the proviso that NP’s desiring independent practice spend 4,000 hours of apprenticeship. Man the lifeboats!
The vote from the full Kansas House of Representatives will come on Thursday, and I won’t predict the results. I succeeded once before in stopping a prohibition against unlicensed hair-braiding at the Kansas City Renaissance Festival, and another time in eliminating the medically untenable “no-nits” policy from public schools. But no one bats 1.000.
What does it take for crony capitalism to succeed? For good men to do nothing.
For us Tolstoyans, it’s a year-by-year battle, sometimes against self-interest.
Feb 26 2019 at 11:26pm
My summary of this episode: two very smart and savvy minarchists struggle to accept that minarchy is unstable and for some reason they think this has something to do with capitalism. 🙂
Seriously Russ and Mike: you’re talking about human fallibility and how power corrupts, it has nothing to do with capitalism. There isn’t a law or agency or training program that can solve this inside existing systems. Your only choice is to accept cronyism (whether it’s fully socialist or “managed” capitalism) or give up on the idea of a non-crony government and pursue deeper alternatives like choosing to live in a self-selected community that is like-minded on a philospcial level like some religions or voluntaryism or a new blockchain government or something even more exotic.
Be honest about the participants and incentives and try to convince yourself that any form of coercive central government will keep itself constrained. Lots of attempts have been made for thousands of years now, what lessons do you learn from this? Do we just need to try the same things over and over again, or should we try something different? Is cronyism really related to voluntary trade (i.e. capitalism), or is it more fundamental (e.g. the ethics accepted by your society)? Can you solve moral problems with laws (think: prohibition)?
Or do we need just a few dozen more regulatory agencies, more indoctrination of the young, more laws, greater use of top-down coercion to impose a particular pattern on society, etc? By all means if you’ve got an idea that will constrain the scope of government to exclude cronyism (whether socialist or whatever), please do reply and share it!
To all who read this: have a great week!
Feb 27 2019 at 4:25pm
Well said. I enjoy Econtalk, I like both Russ and Mike and have learned and benefitted from their work. But the endgame of public choice, even in what starts as a small, relatively weak, constitutionally limited federal government is the largest government in history. Not the most controlling, at least yet, but still the largest, and showing no signs of becoming smaller. Conservatives declare victory when they can get a rare piece of legislation passed, or executive order signed, or court case decided in their favor, thats simply slows the rate of growth.
Others have already commented on how the regulatory web extends deeper than either Mike or Russ really acknowledge here, though much of that is not at the federal level. Nonetheless, as soon as some people realize they can vote to appropriate other people’s things, even just a tiny bit, and as soon as the politicians realize they can use that to their power advantage, the end result is inevitable. With something like a constitution, strong institutions and a relatively widespread culture of liberty in general, the decline is slower, but it is still inevitable.
The only real Q is, since flawed and inevitable as the situation is and has been, we’ve still done better and achieved more prosperity than anyone else in human history, is this a win? Or do we try the untested but only possible actual solution that *might,* if it works as we think it might and hope it does, be able to stop it – the Anarcho-Capitalist world as imagined by David Friedman or Michael Huemer, Bryan Caplan or Bob Murphy?
Feb 28 2019 at 9:18pm
It seems to me we should support decentralization / secession type movements so as to allow those who want to live under Emperor Bernie Sanders to get their way in the Soviet Republic of California, while maybe part of New Hampshire or similar could attract enough self-selected libertarians to have their own private-property society there. I see no reason to force everyone into one arrangement: it incentives fighting over the levers of power as opposed to just letting people go their own way. If ancapistan turns out to be the bees knees then presumably the ideas will spread.
Feb 27 2019 at 3:57am
Great conversation on a very important topic!
Parts of the talk reminded me of the book Minds make society by the French anthropologist Pascal Boyer. He made the point that our minds have been shaped in an environment where we mostly traded with people that we know and that we are therefore very keen on monitoring other people’s reputations. Hence, trust naturally serves as a governance mechanism in such a local context, but we have largely lost these mechanisms in today’s “anonymous” mass markets. With the rise of digital technology, it seems to be possible to restore some of this “trust” economy, but it obviously is not exactly the same thing.
Feb 27 2019 at 9:53am
I’ll speak the unspeakable. We need good people. I recommend Friedman and others consult our founding fathers
“Is there no virtue among us? If there be not, we are in a wretched situation. No theoretical checks, no form of government, can render us secure. ” Jame Madison
Now the problem shifts to how to foster virtue.
Feb 27 2019 at 12:26pm
Toward the end of the discussion, Dr. Munger talked about a society’s institutions – which include social norms – and how they benefit everyone, but that individuals can benefit by violating those norms. It seemed to me that he was describing the rules of the game as a “commons.” Everyone benefits when people “play by the rules,” but individuals can benefit by breaking those rules. We need Elinor Ostrom back.
Feb 27 2019 at 2:04pm
At approx 33:45
“…Or everything that’s legal should be allowed? And the flip side of that is: Everything that’s bad should be illegal.”
There may be another flip side, that is:
Not everything that is illegal is bad.
Maybe a healthy black market in imported sugar run by very good people.
Feb 27 2019 at 2:26pm
As much as I enjoyed this episode, I have to say that there’s one thing I found a bit frustrating. You cite many examples of the problem that you’ve complained about before, such as the bank bailouts or the baptists who believe in their moral crusade. However, it feels like you’re being willfully ignorant of the role that the libertarian mentality has played in the erosion of the cultural norms you admit are essential to checking back on this behavior.
Now, obviously Milton Friedman was not in favor of lobbying and government assistance. But he did not say “a company does not have any social responsibility except for the one which is to not lobby government for a legally obtained advantage.” He said “a company’s only extralegal responsibility is to produce profit.” Whether he knew it or not, his advocacy for a complete abdication from all moral norms includes an abdication from a responsibility to not make some cronies. I think libertarian rhetoric has generally assumed implicitly that the rules of the game can be sanctified such that they are untouchable to companies, so whether companies feel a moral responsibility or not they can’t change them anyways. And since that’s obviously not true, I think libertarian advocacy has played a role in making cronyism acceptable which you have not acknowledged here.
Feb 27 2019 at 9:32pm
I completely agree with you! Though they didn’t exactly mention it, I think this is really the main point underlying Mike Munger’s argument. I unfortunately don’t feel like paying to read the article and find out, but it seemed to me this is what he was getting at, especially in the sections where they specifically discuss whether it’s a problem of a few bad eggs or a more pervasive issue. This is also what I think a lot of the commentators here are glossing over. Reducing the size of government does not kill the incentive for firms to lobby. You will always need some form of a state to ensure private property rights are respected (and additionally I’d say you need some way to deal with market externalities), and thus the opportunity to pursue profits through lobbying will exist. Judging from the summary on The Independent Review I feel as if Mike Munger would agree that the problem will always exist in some form, all we can do is try to limit it.
Feb 27 2019 at 3:46pm
To summarize… if you shrink government down to the size that it can be drown in a bathtub… just who exactly is it that you think will be doing the drowning?
Feb 28 2019 at 8:41pm
Great question Doc.
Feb 27 2019 at 4:01pm
Mike Munger @ 00:07:00 said, “Capitalism in a democracy is not sustainable.”
This statement is both true and false. An understanding of the nuances of why it is both true and false is vital to both the discussion these two men had in this podcast and in explaining why Economics as a discipline is an ineffective policy tool at present.
Both capitalism and democracy are rationing tools. They are different approaches for doing the same job—deciding who gets what. As such, they are direct competitors. One technique is dramatically better than the other, which is an empirically testable statement. The difference in efficient use of scarce resources will show up as differences in general standard of living when these two separate systems are run head to head in a prospective experiment.
Given the nature of capitalism and democracy, it is true that capitalism in a democracy is not sustainable. The reason is simple. Democracy is rationing though violence directed by voting. Capitalism is rationing in the absence of violence except to prevent violence and to maintain property rights. Therefore, democracy displaces capitalism by undermining the assumptions about violence that are necessary to free trade capitalism to occur. They are not simultaneously sustainable because one destroys the environment necessary for the other to exist.
But the quote is false at least in the sense that the reverse can also be true. That is, in a true capitalist society, democracy is not sustainable. That is to say, in an environment where no one will allow anyone to hurt them or take their property using force, violence cannot be used as a tool for rationing. Democracy cannot exist in such a world.
Feb 27 2019 at 7:13pm
But a republic can exist in that world.
Feb 27 2019 at 8:24pm
Republic: “a state in which supreme power is held by the people and their elected representatives, and which has an elected or nominated president rather than a monarch.” Google dictionary.
This definition of republic is identical to the definition of democracy. (I am interpreting “supreme power” to mean the power to make rationing decisions and I further assume that those decisions are backed by the threat of violence. This is not explicitly stated in the definition above but it could not work without it, so I feel it is assumed or implied in the word “supreme”.) This definition of republic leaves no room for voluntary trade, except in those places the “republic” chooses not to ration in this manner of elections and representatives and presidents. The one—democracy—requires violence to operate. The other—capitalism—requires an absence of violence to operate except in the service of eliminating violence and maintaining property rights. The idea that these two can operate in the same space together—called Socialism—is false. Thus, The Road to Serfdom.
Feb 28 2019 at 3:07am
Thanks for the great discussions you have and present for us to consume. Now, I shall quibble.
While Crony Capitalism involves the word capitalism, I think many are too generous in where they allocate this on the spectrum. If the state (as a representative of the people, workers) makes a large effort to dictate where profits should be spent, what industries should be allowed, etc. that is effectively a socialist effort on the state’s part. This assumes that we look at socialism not purely as ownership fo the means of production but as effective ownership through regulatory control.
On your disdain for the 2007 bailouts, I agree that it would have been interesting and probably better to burn the equity. In doing that though, we have to kind of willfully ignore the pressure that the government put on lending institutions in the first place. Bailing out homeowners would have been worse in my view.
Feb 28 2019 at 1:35pm
I felt like a big important question is what types of rules, particularly rules at the level of a constitution that cannot be easily changed, would disincentivize this behavior.
It seems as if the vector through which the crony capitalism will occur is through businesses’ influence on politicians. This makes the case stronger for campaign finance reform, which typically libertarians are against.
Feb 28 2019 at 8:09pm
On character, you may chuckle… a grocery store apparently forgot to lock the door during the February 2019 public holiday. With no staff, no checkouts, shoppers left money on the counter.
Kingston, Ontario Canada has a population of 125,000, including a university and Canada’s largest prison; median household income C$62,000.
P.S. Love EconTalk, thank you.
Mar 1 2019 at 12:56am
In practice we don’t see all countries in which markets play a role become more and more cronyistic without limits – so there must be some countervailing forces that get us to an equilibrium middle-ground.
Almost all places muddle through with political and economic systems that are a mess, and a mix of different philosophies. Part of that is that all systems are self-undermining to some extent, as described here.
Yet we carry on and can do alright.
Mar 2 2019 at 9:57am
For those of you interested or curious in how a capitalist society might defend itself from democracy, here is my best stab at the problem told through an introductory allegory.
Adam Smith and the Tower of Justice
Adam Smith and the Violent City
The work is informed, at least in part, by none other than Michael Munger’s work, Choosing in Groups.
Mar 2 2019 at 9:59am
In over thirty years in business in multiple countries and states, it has been my experience that businesses first engage lobbyists as a defensive measure from over aggressive government regulation or taxation. Once businesses are at that table, the lobbyists and government officials then envision further advantages they could bestow to keep them there, and keep the money flowing their way. What you see now as “crony capitalism” has its roots decades in the past as big bad government.
Mar 2 2019 at 10:02am
Once again a Munger appearance on Econtalk is a delight.
If I could share a few thoughts:-
Before I started listening to Econtalk I was seized by the importance of Culture. Since I have been listening I have taken on board the importance of Incentives, so I am now interested in how the two interact. More concretely, in the context of this particular podcast:
a). Does anyone think it is relevant that the US has a lot of lawyers and an adversarial legal system; ie that part of the culture is for a lot of smart people to be engaged in an activity in which they are incentivised to win, rather than to get the right answer?
b). Lobbyists exist to lobby! Like Nick Hossack, who commented above, I was involved in bank regulation for a number of years – in my case bank capital regulation but not in the US. In contrast to Nick my experience was not that lobbyists were working to improve the system in a detached way – but rather what they were almost invariably arguing for was lower requirements, and preferably that they could meet without changing their behaviour and still made them look financially strong. They often collected proposals from their various members and added them together without worrying whether they made sense. They weren’t looking for onerous standards that would exclude new entrants because big banks did not believe that new entrants could materially damage their business.
But my point is that this way of acting was entirely in accordance with their Incentives. That is what they were being paid to do – not to create a better, safer banking system. Of course I am not saying either that they thought they were doing actual material harm. But they did not spend time trying to think through what was the ‘right’ level of capital. No one was paying them to do that. All they had to do was to buy into the mantra that banks knew how to control risk – there had been a few bad eggs but that was in the past and lessons had been learnt – and lower requirements were good both for banks and society at large.
Sorry I have no solutions to offer
Mar 2 2019 at 10:04am
The bigger government gets, the bigger the role of lobbyists. Lobbyists become a permanent fixture ingratiating themselves to specific politicians and political networks as fundraisers and donors. The result is a political environment in which no citizen or business can get the attention of any elected official without going through lobbyists.
Mar 2 2019 at 12:39pm
Another great podcast, but also disheartening. I was disheartened by the throwing up of hands in resignation as if there is nothing that can be done. I think the resignation starts at the statement of your premise:
You cannot say, ‘Good people.’
I think if you amend this to “Everything relies on the moral leadership of individuals”, then the way becomes much clearer.
Laws are a way of communicating a society’s values but are a weak paper barrier at enforcing them for the reasons you stated: “constitutions are either ineffective or unnecessary”.
So if laws “communicate” values but do not create them, or effectively enforce them, what does? I think I heard you say culture. So what is culture except the emergent property of the actions of individuals? Personal conduct -> culture -> laws.
Every single one of us is leading-by-example every day. The lowly of us are looked up to by someone who will follow your example. We are all leaders! This responsibility that you carry whether you accept it or not.
Society is not a machine that can be configured and then put on automatic. If you want to live in a just and good society, then you must reflect those values every day and in every way. I think your premise denies the very thing that matters most.
In fact stating that you can’t say ‘good people’ is like telling people that they don’t have to take responsibility for their actions because you designed a society/machine that will take care of it for them. Its a very top-down technocratic statement. After listening to you for over 10 years I think this is antithetical to your core beliefs! Yet I think it lives right there in your statement “you can’t say good people”.
Can’t say it any better then Edmund Burke:
“The only thing necessary for the triumph of evil is for good [people] to do nothing.”
Mar 2 2019 at 12:44pm
If we want to reduce crony capitalism and reduce “rent-seeking” by companies and lobbyists we have to be able to publicly name it when it occurs and push back against it as a bad thing. Mike and Russ mentioned several examples of crony capitalism that currently exist, e.g., the sugar tariffs, licensing requirements, financial bailouts. While I agree with these two that these examples were bad actions, I don’t see that as a widespread consensus. We can’t expect that capitalists will forgo the benefits of cozy regulations when it isn’t even widely understood as wrong. The Institute for Justice works on some of these issues and has some success, but it is not easy even for them. If those of us who think crony capitalism is wrong could do a better job of explaining what it is, point out where it is occurring, and what is wrong with it, we might find a point of leverage where we could harness the power of public opinion against it. Currently we can’t even build a consensus that the bail-out of the auto companies, or the banks in 2008 or the subsidies to Solyndra were wrong. Those who publicly support those actions as good are not shamed or condemned. The work that needs to be done by our side is in defining and building a clear understanding of what is over-the-line and wrong in terms of crony capitalism or rent-seeking from the government. If cronyism and rent-seeking were defined and understood by the public then politicians could run on opposing it and support legislation that limited it. If we don’t do that, then the socialists have a ready answer–more government regulation.
Mar 2 2019 at 4:10pm
This is why I am an anarchist. Russ and Munger are very perceptive with this concern. However Russ seems to conflate his ideal form of limited government (limited socialism) as capitalism. The capitalists element is robust against such rent seeking. It is only the means of production being controlled by the state that creates this problem, which is socialism not capitalism. He may contend that state run courts are necessary, even taking that for granted, dispute arbitration is a market good, so the states monopoly on laws and courts is socialist.
A limited state is more Utopian than having no state, because public choice will always lead to a growth in rent seeking. The state will always grow with cooperation from corporations seeking protection from the market. The people who seek power are disproportional sociopathic. To make it to the top of politics you must, 1) think you are worthy or ruling other 2) be willing to sacrifice family time to run for office 3) distort the truth or outright lie. A politician who says unpopular truths cannot be elected so honest people are systematically selected out of the pool. These traits all lead to the worst people being put in power. At the same time profit maximizing firms know that controlling the legal system will increase profits. They lobby, bribe and influence these politicians to increase profits. Politicians then select judges. Seeking power they will select judges who expand there own role. Over time the power of the state grows, as can be seen in the United States history. This is the clear economic incentive of any constitutional republic, no matter how limited it starts out, the power of the state will expand. Pieces of paper are no protection.
Democracy will break down into a majority backed mob robbing the minority. This is basic incentives in both case.
Munger is correct that norms are hugely important. He is also correct that under “capitalism” a few bad actors will be selected for in the market, because of their advantages from coercion with the state. The problem is this is not capitalism but statism. It is only the states monopoly on violence that allows bad actors to rent seek. If there were no monopoly on violence than the corporations could not rent seek. The only way to make a profit would be to make consumers better off with there products.
The world will never be perfect but the market puts a check on this type of crony capitalism, not possible in a limited government setting. A public court has no financial incentive to provide justice. Complex archaic laws increase the cost of lawyers, and judges. If a judge is bribed or bias toward a large institution, individuals are forced to use that judge, since the state has a monopoly on law. Judges are appointed by politicians who have a vested interest in promoting their own power and the power of the contributors to their campaign. This leads to a systematic bias in court rulings that expands the power of politicians, and the power of large interest groups. At the same time lawyers and judges are incentive to create ever more confusing and complex laws.
It is true that A private judge could be bribed. But if consumers see that a judge is systemically biased they will not select him for arbitration on the market. This adds a cost to corny capitalism and collusion by courts. Since the courts are not a monopoly consumers can select from thousands of judges on the open market, these judges may or not be located in the same city as them. If judges use simple law, the costs of trial goes down, and their profits will increase. Meaning the private judges have a market incentive to create simple clear law, unlike today’s courts which make money based on the complexity of law. Taken as a whole private courts have an incentive to create unbiased rulings, at low cost and high quality, and to “specialize and trade” forming many specialty courts that focus on different types of law (water rights, theft, divorce law, etc).
Further state officials can not declare peaceful actions to be illegal. Since law is derived from the precedent of courts, and not from politicians. There wont be arbitrary constraints on firms entering a market. For such a system to work society as a whole must respects property rights, but this was necessary under Russ’s ideal system. Unlike the constitutional system that requires socialized courts, there is no ratchet effect from regulatory capture.
Since courts are private, there is no need for taxation. Without taxation there is no “goody bag” for crony capitalists to fight over. They must face the market forces head on.
This provides a backstop to so called crony capitalism. Unlike today, a company seeking rent seeking is punished.
I agree with Munger that crony capitalism is inherent in today system. However this is only because of the state distorting market forces. His arguments are best applied to the state and not the system referred to as capitalism. Communist refer to this cronyism as capitalism in and off itself, and the term capitalism was popularized by market. That is why I do not usually refer to myself as an anarcho-capitalist. Under that definitions of capitalism, yes this is a innate problem with capitalism. However the voluntary interaction of humans in a market has no driver towards cronyism.
Mar 4 2019 at 7:43pm
Only government actors can put the “crony” in capitalism.
The primary focus should not be on the actions of businessmen.
Mar 3 2019 at 3:50pm
Thank you for another thought-provoking podcast conversation, chock full of insights, wisdom, and questions. You have created a new genre: Platonic dialogues without Socrates!
I would like to share a scatter of pertinent academic resources, and some observations:
1. Re: Competition
Compare Andrei Shleifer, “Does Competition Destroy Ethical Behavior?,” American Economic Review 94:2 (May 2004) 414-418; available online here:
2. Re: Constitutional democracy and special interests
Compare Bryan Caplan,The Myth of the Rational Voter, Lecture at CEPOS (Copenhagen, Denmark), 13 August 2018:
3. Re: Competition and special interests
Michael Munger quotes a 2004 paper by Raghuram Rajan and Luigi Zingales:
However, again, interest groups are more likely than voters to favor free trade. See, for example, Klas Rönnbäck, “Interest-group lobbying for free trade: An empirical case study of international trade policy formation,” Journal of International Trade & Economic Development 24:2 (2015) 281-293:
4. Re: Norm entrepreneurship
“I’m asking the economists out there listening to this, and in theory the ones who aren’t listening, to join me in what is effectively a moral crusade.”—Russ Roberts
Compare Robert Ellickson, “The Market for Social Norms,” American Law and Economics Review 3:1 (Spring 2001) 1-49, available online here:
5. Re: Morality, individualism, and markets
Compare Jon Elster, “Ethical Individualism and Presentism,” The Monist 76:3 (July 1993) 333-348, available online here:
Given principles of methodological individualism and ethical individualism, why should consumers use the allocation of bailouts a decade ago as a criterion for current auto purchases? Why reward current Ford workers (and punish current GM workers) who (a) might not have been employees at those firms at the time of the bailout and (b) in all likelihood weren’t among the few decision-makers at auto firms at the time of the bailouts? There is a difference between virtue signaling and distributive justice.
Given principles of methodological individualism and ethical individualism, shouldn’t we admit that markets often don’t reward virtue and hard work, insofar conscientious workers suffer adverse outcomes through no fault of their own, when executives make mistakes, and when innovation has disparate impact, and when consumers boycott brands?
On a brighter note, John Meadowcroft meets the Left on its own terms about motivations, and makes the case that markets are crucial for altruists:
Mar 3 2019 at 6:58pm
Great episode. I was in full agreement with Munger. (I did audit a Roberts’ class in the late 80s at Wash U.) One question: Any reason why the defense industry wasn’t mentioned as a prime example of crony capitalism? I’ve just recently discovered the podcast, so maybe I missed an episode where this was covered.
Mar 4 2019 at 7:03am
I have two simple points to make.
1) The discussion persistently makes the common error of confounding (classical) liberalism or a free society with democracy. They are not the same thing.
2) I think Russ actually said, “Democracy is incompatible with capitalism,” but then failed to follow up on the point or emphasize it enough.
Mar 4 2019 at 12:33pm
Russ’s complaint about economists who condone the government’s bailout of the big banks was one of his finest moments. It annoys me severely to read and listen to the accounts of the Great Recession faulting the capitalist system and praising Paulson, Bernanke, Geitner et al for their courage and quick action to save the American economy, not to mention Congress’s legislative fix, passed in haste, without properly understanding the causes of the collapse or recognizing the mistakes that were made in response to it. There is hardly a voice, outside of Roberts’, pointing out the incredible damage done by their actions to belief and confidence in the fairness of our economic system. Ten years on, the results are a banking industry, more confident than ever of their next bailout, continuing the same risky practices, while many, especially the young and not-yet-established, believe the system is rigged against them and that maybe it’s time to give socialism a try.
Please continue to making those excellent points you’ve made before, Russ, and taking your colleagues to task who ignore them.
Mar 6 2019 at 4:35am
I see a few possible problems in your logic chain.
My largest concern is that you are assuming that your moral compass is shared by others – assuming that things that you see as immoral are universally seen as immoral. In a world of motivated reasoning I think it’s easy for many groups to consider their special privileges are anything but special privileges – you even touch on examples such as industry licensing in which I’m certain that those creating the licensing rules are convinced they are on the side of the angels in saving consumers from charlatans and hucksters.
Even more broadly than that, in a country in which you acknowledge that agricultural subsidies are endemic, in which many industries are protected by walls of patents and copyrights that have some level of justification, but almost certainly are hard to morally justify at their current level given the rents they are protecting, a country in which a sizable percentage of citizens voted for a President who explicitly promised tariffs (with the belief that in so doing they were subsidising basically all of America), how can you with a straight face argue that there is a cultural norm against cronyism? It seems to me that in fact the problem for most in America isn’t cronyism, it’s that I might not be getting my fair share of cronyism.
Less cynically, I think the employer who is making what they believe to be a high quality product, providing local jobs, delivering what they believe to be excellent service to their local customers, feels entirely morally justified in asking his local representative to help them out in the bad times (because the good times will surely come again, and we need that employment), to restrict unfair competition from the other who pays their staff less, creates carbon miles with their importing, unfairly gets subsidy from their own local govt, doesn’t meet important local safety standards, or any of a million other perceived public good arguments. If your argument is that the cultural norm is not to cheat or to unfairly receive advantage, then you need to start from a position where that business owner perceives what they’re asking for as an unfair advantage, as opposed to genuinely believing that it is for the public good. Did all those bailed out bankers think what they were doing was immoral, or do they believe they averted a crisis? Did the GM management think their bailout was immoral, or did they save millions of American jobs?
I think when you talk about examples such as murder being accepted as wrong, you’re picking simplistic examples. At the margin it’s not so clear. Is capital punishment wrong (is it really murder?). Is abortion wrong (is it really murder?). Is turning off the life support on someone who is brain dead wrong (is it really murder?) Is euthanasia of the terminally ill in dreadful pain wrong (is it really murder?) I’d agree that not many business people have an active strategy to create public rents that protect their profits. But a lot of them ask for that marginal thing that isn’t really rent seeking, it’s just a little bit of regulation to make sure things are safe for all of us. It’s more like euthanasia than it is like murder – it’s arguably helping not hurting.
Mar 6 2019 at 12:17pm
I am confused by the outtake below. Aren’t ‘single step’ and ‘start’ similar enough? I think the word ‘tendency’ was what Mike wanted to convey, but adding “if you start” negates that.
Mar 7 2019 at 12:51am
First-time commenter here. I’ve been listening to EconTalk for roughly a year now, and I just want to say how fantastic this podcast has been for me.
I lean left, mostly in the sense that I tend to favor using the resources of the state to aid those who are oppressed, vulnerable, or just left behind by free markets. As I get older, I try to think these things through more and more, so I don’t harden into dogmatic positions. I’ve found that this podcast is a fantastic source of ideas and arguments from a conservative/libertarian perspective. I have really enjoyed chewing on them, learning from them, etc.
EconTalk is an oasis of sanity in a media environment that, at this point, seems to be 90% sensationalism, hot air, partisan posturing, and vitriol.
This was a particularly fantastic episode. It’s so refreshing to hear someone from the Right side of the ideological spectrum actually pointing out that – gasp! – capitalism is vulnerable to corruption not just by state actors but by capitalists themselves. Most right-wing thinkers are so busy pointing the finger at the ‘lazy poor’ and the ‘nanny state’ that they just don’t have time to call out the enormous corruption happening at the corporate level every day. And it’s hard not to think that this reticence is not an accident.
So it’s great to hear Munger address these issues, because I think they are real and need addressing, and because it shows that he is a libertarian who genuinely stands on principle and is willing to apply his principles impartially. Rather than applying them selectively to serve a pro-corporate, pro-wealthy agenda, as so many seem to do.
In any case, just wanted to say I love this podcast so damn much I could marry it. Thanks.
Mar 7 2019 at 3:31pm
Good comment. Picking up on one of your points, and adding to your portfolio of thoughts and arguments.
Many of us on the right would argue that many of the largest problems with crony capitalism come from the left’s policies, not from the right’s. The logic here is that a small and constrained government has quite limited ability to give favours. A large state has many more dimensions of activity and therefore of cronyism, and as we move more and more into a regulatory state where the laws are principle based and the regulations made by bureaucrats, we increase the potential for those bureaucrats to knowingly or unknowingly work with insiders to create barriers to entry.
Consider for example the regulations in the financial sector. These have generally been pushed over time by the left, but they’re intensely complicated and jointly designed by a series of industry insiders in the sector themselves and in the bureaucracy. In turn those regulations stultify innovation and prove massive barriers to entry for smaller organisations, where large banks with 1000s of people working in compliance departments (a cost to be sure) are at least able to navigate that thicket. And of course incumbents have a much easier time satisfying regulation of that sort than newcomers do – both because the regulators look less closely at an incumbent, and because they have the benefit of years of experience and accumulated organisational knowledge in what the regulators will consider acceptable and what they will not.
I think part of the reason you don’t often find people on the right talking a lot about crony capitalism as a problem engendered by capitalism is that many of us don’t see it that way – we see it as a problem engendered by the increasing regulatory state and increasing size of government – changes that we see as problems of the left not problems of the right.
Mar 9 2019 at 10:43pm
I will take that into consideration. I have honestly just begun my exploration of principled conservative stances on these issues, as opposed to the stuff that lands more on the bad-faith rhetoric/partisan pundit end of the spectrum.
Most conservatives and Republicans I’ve heard from/interacted with have spent a great deal more time on racialized invective against the state giving handouts to poor single black mothers than against crony corporatism. They don’t really want small government as such. They want it small when it hurts their goals and big when it can help them. Which is why these days I don’t focus on government size but on who it’s working for.
I know I cannot generalize from these examples to the right as a whole (to whatever extent that even exists). But it is certainly a real phenomenon and it has gone a long way toward giving the entire right end of the spectrum an intolerable stink of bad faith.
I think Russ and Mike did address this issue a bit in their discussion. Russ made essentially the point you speak of, that the tendency to crony capitalism is not an indictment of capitalism in itself but yet another reason to shrink the size/power of the state. But Mike (borrowing from another philosopher, I forget his name) retorted that Constitutions are either ineffective or unnecessary. Or as my dad always says “Locks are for keeping honest people out.”
Which is just to say that I think shrinking the size of government probably won’t obviate crony capitalism, since as long as you have any government at all, market participants have incentives to outdo each other in seeking rents from this apparatus, and indeed to expand its power so as to increase the rents to be gotten from it. Government has not grown over the years solely due to the incentives endogenous to government. It has grown to serve the purposes of special interests, many – though certainly not all – of which are organizations representing market agents.
In other words, start with a free market and a minimal state, run it forward, and you’ll soon end up with a bloated state with special interests suckling away at the monster they created. While objecting to others doing the same, of course, in the name of unfettered markets.
So if what you’re saying is true, it seems to me the right should be far more vocally anti-big-business than it is, and far more often. I grant that, from the perspective of genuinely principled conservatives like Russ, Mike, this may be a source of grief as well, to have the true principles besotted by self-serving charlatans. Certainly there’s plenty of this happening on the left as well.
Mar 8 2019 at 11:55am
The sociopathic culture where “if you leave money on the table you’re a sucker” is illustrated really well in the Star Trek episode “Mirror, Mirror” (1967). And more episodes on the sociopath theme are listed in https://reason.com/archives/2018/11/26/how-star-trek-explains-donald-trump
Mar 9 2019 at 3:02am
This is the first time I write a comment. I really wanted to share a perspective from outside the US, and from someone who generally leans to the left. I feel like we were having this discussion for a long time, and maybe I have something to contribute.
Pointing out the tendency towards crony capitalism, and using standard libertarian arguing points (unintended consequences, relying on “good people”) is something the left started doing recently in the United States. But certainly the impact of culture, and the corrosive effect of how the Milton Friedman quote is actually interpreted by CEOs (and aspiring CEOs) was talked out frequently since the 90s.
Outside the US, we don’t need the financial crisis or the political influence of tech giants as examples, because we had privatization. And during privatization, it became very clear that right wing economists would support any business man, no matter how corrupt, and any model, no matter how uncompetetive, as long as it shrinks the size of government. Privatization is cronyism almost by definition, but certainly as it was actually practiced, and the people who now owned the refineries, railways, and ports, often became powerful oligarchs, or even used their empires to go back to politics.
Now there is no shortage of people who would call themselves “classical liberals” or ‘libertarians” in these circles, but objecting to cronyism became close to what paying taxes is in a society where nobody pays them. You use the “market economy” argument to get the opportunity, and then abuse it as much as you can, and if you don’t, somebody else will. The typical Russian oligarch in the west for example, owns at least one right leaning newspaper and contributes to liberal think tanks.
So I don’t think Mike’s “moral resurgence” defense against the left would work, for the same reason communist parties in the West never succeed in distancing themselves from Stalin – people remember that back in the day, when you were on offense and not defense, you didn’t care much about any of those issues..
A second point I would like to make, is that when you ask “what changed?” I would argue that one of the big things that changed is that even mid-sized companies have to work in markets outside the US that were opened by privatization and feature extreme cronyism. So you meet your Chinese investors, or Russian partners, or try to sell your software to an Israeli or Brazilian company, and everybody quotes Milton Friedman, and all of you decide that you are actually doing the right thing. And when it works – why wouldn’t you try it at home?
Mar 11 2019 at 1:01pm
Long time listener first time commenter.
I really enjoyed this episode as I do many of them.
I understand where you are coming from when you say we need better people but I think it comes down to that and what has changed is American culture. There was a time not so long ago when we taught national fables such as George Washington and the cherry tree but I think most modern classes will say that it isn’t true and leave kids thinking if you believe that you are a sucker. Beyond that we have pop culture which idolizes lack of restraint. Think of some of the most famous lines from movies:
The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.
Now we might know what that means but I think it cuts both ways.
Now I understand that the speaker isn’t a hero in the movie but a big man who many would aspire to at least the life that he achieves and if we believe that the only way to get to that level is to do what is legal even if not right we are left with worse people. Remember the movies spend 90%+ of the time showing the person on top. Even if they end in jail we don’t see it and probably remember them mostly as heroes.
Mar 19 2019 at 6:52pm
Most examples I see splashed in “news” are actually crony socialism.
OTOH, an early ethics lesson taught to me was patronage, doing repeat business with people you get to know, people introduced by people you have already found to be trust-worthy, relatives…
Toward the end of FDR’s Great Depression, a young husband & father takes the car to a nearby shop. The construction firm where he had worked as laborer/rough-carpenter & apprentice stone-mason has closed, the proprietor retired. He explains he needs the car to find work, but cannot pay for the needed repairs. The shop owner puts it in the queue, takes the man to lunch, and tells him about the new plant soon to open to make aircraft engines for lend-lease to England. A month later he’s a machinist, pays back the shop-owner, the wife becomes head QA tester, they help defeat the Nazis & imperial Japan, and go back to the shop for fuel, maintenance, repairs for the next 40-50 years… Various family members enlisted. Later generations helped defeat the Soviets, became professors, school-teachers, software engineers, counselors…Win win win.🇺🇸
Not every protagonist or even “hero” in a movie is ethical (many at least deviate from the local standards), not every CEO or mayor or governor or president is really a “leader”. Not every “innovation” is good. “norm” is a snailman who wastes far too much time hanging out in a bar; I have little respect for “norms”, nor “‘social’ ‘scientists'”, few of whom engage in science, and even fewer are pleasant conversationalists. But highly-skilled economists, scientists, engineers, carpenters, brick-layers, HVAC techs, power plant operators, gardeners… are fine.😎
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