Political Capitalism

I’ve just published a book, Political Capitalism: How Economic and Political Power Is Made and Maintained, with Cambridge University Press. The book, aimed primarily at an academic audience, lays out a theoretical foundation for understanding why cronyism and corruption are becoming increasingly common in capitalist economies. Political capitalism is displacing market capitalism.

Political capitalism is a distinct economic system. Our twentieth century way of thinking about economic systems is to view them on a single-dimensioned continuum, with capitalism at one end, socialism at the other, and with mixed economies in between. But political capitalism is not some mixture of capitalism and socialism or government intervention into a market economy.

Supporters of free markets often criticize government interference in a market economy, and tax and regulatory burdens have a clear negative effect that harms productive businesses. That’s one problem with a mixed economy. But political capitalism allows those with connections to profit from government intervention. The well-connected benefit at the expense of others. The problem is not so much how big government is, but what government does.

The book draws heavily on public choice theory, which explains how some are able to use the political process to benefit themselves at the expense of others. Many readers will be familiar with the ideas of rent-seeking, regulatory capture, and the way that the political system benefits concentrated special interests.

Public choice theory has not been clear about noting that the “some” who benefit at the expense of others are the political and economic elite. It is the same well-connected people who consistently benefit at the expense of others. In the Occupy Wall Street language, the 1% systematically benefit at the expense of the 99%. A substantial literature in sociology and political science has developed an elite theory to explain who benefits from the political process, and public choice theory explains how they benefit. Combining these already-existing theories lays a foundation for understanding political capitalism.

Looking at the politics of political capitalism, it has been enabled by the acceptance of the ideology of Progressive Democracy. The ideology of Progressivism justifies imposing costs on some to benefit others, while the ideology of Democracy says that when this is done by a democratic government, it represents the preference of the citizens, as revealed through a democratic political process.

Most people, from the political left to the political right, object to the cronyism and corruption that manifests itself as a result of political connections. The left and right part ways regarding what should be done about it. The left wants more government oversight, more government programs, more regulation to limit the reach of those with economic power. The right sees government as the problem, not the solution.

Think about this within the context of the Occupy language. The 99% complains that government policy benefits the 1% at the expense of the 99%, and clamors for government to do something to shift the balance toward the 99%. But government is run by the 1%–the elite–so when government gets more power to do something, they use it to benefit themselves. The 99% argues that the 1% should have more power, which gives the 1% even more ability to create policies that benefit themselves at the expense of the masses. This is how political capitalism expands to displace market capitalism.

Nobody overtly champions political capitalism, cronyism, and corruption. But some of capitalism’s greatest enemies are capitalists themselves. They argue for regulatory barriers to protect their markets, for trade barriers to protect themselves from foreign competition, for tax breaks, and for subsidies. Most of the time, when people claim to be pro-business, the policies they advocate are anti-capitalism.

One of my motives in writing the book was to try to get supporters of free markets to focus more on the negative impacts of the regulatory state, which lies at the foundation of political capitalism. I’m no fan of the welfare state, but the welfare state is not the biggest threat to a market economy. Supporters of free markets should understand that the threats to capitalism do not come so much from how big government is but from what government does. The regulatory state is much more of a threat to free markets than the budgetary state.

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Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America.