An Economy of Liars

Democracy and Power 114:  The Power Players

Who actually controls the force of government?   The politicians and interest groups control the American political process.  As stated, the politician seeks power.  Special interest groups – big business, small business, unions, education, seniors, and a multitude of others – seek favors: tax breaks, subsidies, exclusive legislation, etc.  Interest groups give enormous money to political campaigns, and receive gigantic benefits in return.

When government and business collude, it’s called crony capitalism. Expect more of this from the financial reforms contemplated in Washington.

Gerald P. O’Driscoll JR of the Cato Institute writes in the Wall Street Journal of crony capitalism:  the corrupt relationships between politicians, regulatory bureaucrats and big business.  Citing Madoff, Lehman Brothers and the allegations against Goldman Sachs, Driscoll argues the regulators were unable to prevent fraud because of “cognitive capture” caused by the corrupting relationships between politicians, bureaucrats and the regulated.  O’Driscoll writes:

Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect.  In a paper for the Federal Reserve’s Jackson Hole Conference in 2008, economist Willem Buiter described “cognitive capture,” by which regulators become incapable of thinking in terms other than that of the industry. On April 5 of this year, The Wall Street Journal chronicled the revolving door between industry and regulator in “Staffer One Day, Opponent the Next.”

Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.

We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.

Correct, this is not capitalism or the free market.  Government has created and condoned mutually corrupting relationships.  Campaign money goes to the politicians, special laws and benefits enrich big businesses, and individuals with access become wealthy alternating between government and business.

O’Driscoll ends with following refrain:

If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets. That means the end to price-distorting subsidies, which include artificially low interest rates. No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice.

Piling on more rules and statutes will not produce something different than it has in the past. Reliance on affirmative principles of truth-telling in accounting statements and a duty of care would be preferable. Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism.

O’Driscoll is indirectly calling for limited government: a government of limited and defined powers.  Read the farewell address of Ronald Reagan calling for the need of a limited government, and the more of Democracy and Power 114:  The Power Players.

But back in the 1960’s when I began, it seemed to me that we’d begun reversing the order of things – that through more and more rules and regulations and confiscatory taxes, the Government was taking more of our freedom. I went into politics in part to put up my hand and say, “Stop!” I was a citizen-politician, and it seemed the right thing for a citizen to do.

I think we have stopped a lot of what needed stopping. And I hope we have once again reminded people that man is not free unless government is limited. There’s a clear cause and effect here that is as neat and predictable as a law of physics: as government expands, liberty contracts.