Tuesday, February 14, 2012

Crony Capitalism vs. Free-Market Capitalism

Is capitalism good or bad? Does it create prosperity for the average citizen or enslave them in low-paying labor? The answer is not simple, because there are various types of capitalism.

In the history of the United States, we have seen two main sorts of capitalism in action. Free-market capitalism, known by the phrase laissez-faire, calls for open competition between companies, and for the government to refrain from regulating economic activity so that this competition can be fair - "a level playing field."

The other form of capitalism in American history is called crony capitalism. In this system, companies hope to enlist the government on their side in competition against other companies. Large corporations lobby or otherwise influence legislators and regulators to write rules which will hinder competitors; they also seek subsidies and other support from the government.

These two types of capitalism are directly opposed to each other. Not only are they opposed in their methods - free markets vs. regulated markets - but they are opposed in their goals and outcomes: the goal of crony capitalism is monopoly. One business hopes to use the government as a weapon against its competitors, and hopes to corner the market in its products. Indeed, a true monopoly can only arise and exist when the government intervenes in the market.

Free-market capitalism ensures that a monopoly cannot have a solid hold on the market. As soon as one company seems situated to become a monopoly, there is a strong profit motive for a competitor who believes that there is a way to undersell or outsell the would-be monopolist.

The result of free markets is efficiency. The result of crony capitalism is waste. This can be seen clearly in the transcontinental railroads of the 1860's. When the Union Pacific and the Central Pacific enjoyed subsidies from the federal government and were thus shielded from market forces, their construction quality was low and their waste massive.

By contrast, other railroad lines built without government support were built better, quicker, and were operated more profitably.

It is very important to distinguish between these two types of capitalism.