Don’t confuse the free market with crony capitalism

In American political discourse, those on the side of the sick, poor, and underprivileged tend to favor more federal government intervention and involvement across the board; they see government as accountable to the people, an instrument rather like a charity, through which a community helps those of its members who find themselves in dire straits.

Their account of the free-market economy sees it as a pitiless world divided between winners and losers, wherein the winners are unfeeling corporations that put profits over people, devoted only to their false idol, the almighty dollar. In this story, the free market, at least in its purer forms, is fundamentally irreconcilable with the common good.

{mosads}And it’s actually quite easy to understand why the free market’s detractors believe, almost always in complete good faith, such easily debunked myths about it. They are confusing the free market with something like its opposite, today’s gamed and rigged, government-dominated economic system, wrongly represented as and believed to be a true free-market economic system (by friends and foes alike, it must be noted).

It’s not necessarily easy to determine when a specific economic transaction isn’t truly free in the sense required by sound free-market principles. Considering the question in the abstract is somewhat more straightforward: either one party is subject to duress in the exchange itself, or the exchange takes place in an environment shaped by coercion, corrupted by anti-competitive privilege—for example, government-granted monopolies and licenses, subsidies (directly or indirectly as cost-offsetting), and bailouts. The list could go on. Each such form of privilege is a special case of favoritism that could be its own article, or series, or book.

As a name for this system, created by the government and ruled by its friends, moneyed commercial interests, we might quite justifiably, if surprisingly, borrow the Marxist concept of state monopoly capitalism.

The seedy history of this corporate-monopoly system gives the lie to the deeply confused notions that government is the harmless and attentive protector of the poor and powerless, and that the United States has ever been the home of unadulterated free enterprise. As a matter of historical fact, government actors have helped the modern corporation avoid competition, building and concentrating its power.

As Jonathan B. Baker of the Washington Center for Equitable Growth points out in a new report, “Large institutional investors such as BlackRock Inc., FMR LLC’s Fidelity Investments, State Street Corp., and The Vanguard Group Inc. now collectively own roughly two-thirds of the shares of publicly traded U.S. firms overall, up from about one-third in 1980.”

As a matter of course, then, many competing companies actually “have common financial investor ownership,” which may further discourage competition. It is worth remarking upon the fact that many of the oligopoly industries highlighted in the Center’s report are among the most heavily regulated, among them, banking, medicine and hospitals, and airlines.

The American Action Forum similarly reports, “Regulatory burdens have grown in concert with business consolidation leading to greater concentration.” Examining seven industries, AAF’s study measured market concentration using the Herfindahl-Hirschman Index (HHI), under which “0 represent[s] a hypothetical market with an infinite number of firms of equal size, and 10,000 represent[s] a perfect monopoly with no competition.” In all but one of the sectors that AAF reviewed, more regulation meant more consolidation; in fact, in five of the seven industries, positive correlation coefficients exceeded 0.7 on a scale in which 1.0 denotes perfect correlation. The banking industry, for example, saw a 700 percent increase in major rules in the period from 2000 to 2014, leading to “an incredible increase in concentration.”

Banking tied health insurance as the market sector with the highest correlation coefficient at a near-perfect 0.96.

So while none of this is to suggest shadowy conspiracy theories, it does seem to be the case that the U.S. economic power is increasingly gathered in the hands of a savvy few, adept in using government power to attain private advantage.

The reader may, at this juncture, be somewhat surprised, for our analysis and diagnosis of the problems inherent in America’s corporate economy seem the stuff of the political left. And, indeed, there is considerable overlap between leftist—socialist or communist—class analysis and that of classical liberals, because the former adopted many of the theories earlier developed by the latter.

Today’s political left wrongly blames market competition for the very problems caused by the want of market competition, for the failures of state monopoly capitalism (or, more popularly, crony capitalism). Identifying this mistake almost 125 years ago, the labor advocate and free-market libertarian William Bailie remarked that “where it [that is, competition] is assailed today, a close analysis reveals, not the evil effect of competition, but the need of more liberty.”

Regulations, no doubt well-intentioned and designed to moderate the excesses of market power, have backfired, aggravating the lack of dynamism and competition in the American economy. 

The AAF study observes that markets became less competitive and more concentrated during the Obama administration. The means, regulations, simply don’t serve the ostensible ends of free, fair marketplaces with robust competition in each sector; instead they reliably serve vested economic interests by disproportionately harming their competitors, actual and potential.

The most effective regulator of corporate power and its excesses, the best guarantee of competitive markets with low entry barriers, is a genuine free-market system, established on the universally-applicable principles of individual rights and respect for contracts and private property.

David D’Amato, an adjunct law professor at DePaul University, is a policy advisor at the Heartland Institute.

The views expressed by contributors are their own and are not the views of The Hill.