How Do You Solve Crony Capitalism?

“Crony capitalism” is the idea that politically well-connected owners of productive factors – land, labor, capital, entrepreneurial skill – can use the government’s coercive power to limit competition and increase their return on those factors. More generally, it’s the use of the coercive powers of the state to redistribute resources to specific groups and their associates.

As Gordon Tullock was fond of pointing out, while government protection is not a factor of production, it can be a factor of profit. If an owner can “invest” a certain amount to obtain government action that will generate a given amount of profit, it makes as much sense for the owner to invest that money in rent seeking as it does to invest the money in a productive activity that would generate the same level of profit. But while it’s an equal call for the profitability of the rent seeker, there is a social loss to rent seeking given that devoting resources to obtaining government protection does not produce anything to consume.

Yuval Levin over the years has heralded the call for conservatives to focus more attention on crony capitalism. In a November 3 column he suggested that the sense among supporters of President-Elect Trump that the economic system is “rigged” against them comes at least in part from the current system’s openness to well-connected rent seekers using the government to protect their markets from competition.

I suspect Levin intended the column to contribute to post-election soul-searching on the part of conservatives in light of Hillary Clinton’s then-expected presidential win. Given the attention that Trump gave the topic during the presidential debates, it’s possible that the topic might receive even more sustained attention among conservatives today than it would have if Clinton had won.

Granting that it is an economic as well as a political issue, what are the prospects of seeing something actually done about crony capitalism? It’s a big problem. Levin identifies it as a problem endemic at the local, state, and national levels. He sees it entrenched in the administrative state.

To be sure, there have been popular movements against crony capitalism in the U.S. in the past. Politicians in the 19th Century, for example, resurrected James Madison’s concerns about factional politics. One could hear politicians denouncing “partial legislation,” meaning factious legislation. Numerous states adopted constitutional provisions limiting “special legislation” in attempts to prevent legislatures from legislating factiously in favor of individuals and classes. This was a feature of Jacksonian populism in antebellum America, and throughout the 19th Century.

This feature of populist politics evolved at the state level, and then at the national level, into judicial doctrines of “substantive due process.” Judges would review the “reasonability” of legislative enactments to determine whether they advanced the common interest, or simply represented the leveraging of government power for the benefit of individual or class interest.

As is well known, substantive due process in the realm of economic policy died off in the national judiciary, and in many state judiciaries as well, in the 1940s and 1950s. (It lives on, controversially, in the social jurisprudence of the U.S. courts.)

But it is difficult to believe that crony capitalism can be taken on in a broad and sustained fashion without an expanded role for the judiciary. The incentives for sustained popular action just aren’t there: Interest groups that would receive concentrated benefits have it easier in overcoming barriers to collective action relative to the public at large, that would receive only diffuse benefits spread over a vast number by preventing or reversing any particular instance of rent seeking.

But conservative jurists and academics tend to split over the advisability of resurrection economic substantive due process. There is a long and vibrant tradition among conservative legal scholars in which they advocate the wholesale resurrection of economic substantive due process. There’s another tradition in which conservative judges, in particular, and a fair number of scholars as well, argue against the (re)extension of an activist judiciary into economic matters. While attractive in the form of abstract doctrine, it is unclear that, in application, the doctrine of substantive due process applied to economic legislation resulted in much more than indeterminate outcomes and doctrinal confusion.

The upshot is this: Even while we all can decry “crony capitalism” in the abstract — and I do — it’s not obvious what can be done systematically to root out the phenomenon. And if attempted on a policy-by-policy basis, I fear the result might be that only the less-well-connected interests would be unhinged from government protection, thereby actually increasing the popular sense the system is rigged against the common person, and potentially even increasing the amount and associated costs of rent seeking. This doesn’t mean the attempt to address the problem shouldn’t be made. But as with so much, the devil is in the details.