cronyism capitalism free market rent seeking

Land Booms, Capital Stretch-Out, & Banking Collapse
land boom banking collapse credit

Crushing the Free Market & Promoting Rent-Seeking

When conservatives critique the establishment, we feel hope for the possibility of fundamental reform. We trim, blend, and append three 2012 articles from: (1) the Heritage Fdn, Aug 28, on cronyism by R. Boccia; (2) Wikipedia on Léon Walras; and (3) Op-Ed News on fiscal capital, Aug 28, by M. Gaffney.

by Romina Boccia, by Wikipedia, and by Mason Gaffney

Imagine your son or daughter aspiring to be a government crony instead of an engineer or business owner. That nightmare scenario plays out in a new video by Crony Chronicles, a website that fights cronyism.

In the video, kids who might otherwise have become doctors and architects aspire instead to work in powerful government agencies or to become lobbyists to help put rules in place that favor their friends. Crony Chronicles describes cronyism as follows:

Cronyism occurs when an individual or organization colludes with government officials to create unfair legislation and/or regulations which give them forced benefits they could not have otherwise obtained voluntarily. Those benefits come at the expense of consumers, taxpayers, and everyone working hard to compete in the marketplace.

A system of political favoritism is increasingly encroaching on America’s free-market system. In a recent Wall Street Journal op-ed, Luigi Zingales, a professor at the University of Chicago’s Booth School of Business, argues that crony capitalism is at the root of the West’s economic situation and that the U.S. is not far behind Italy and Greece when it comes to fiscal woes:

The U.S. tax code is filled with loopholes and special exemptions. Political connections increasingly count more than innovative ideas; young entrepreneurs often learn to lobby before they learn how to run a business. Seven out of the 10 richest counties in the U.S. are in the suburbs of Washington, D.C., which produces little except rules and regulations. Even worse, the slow growth and decreased social mobility of the last decade have damaged the free market’s reputation as a creator of prosperity.

Some of the best-known examples of crony capitalism include the Detroit auto bailout and the loan guarantee to the now-bankrupt solar company Solyndra. But crony capitalism comes in many more forms and shapes than bailouts and loan guarantees.

A recent report by Mercatus Center scholar Matthew Mitchell lists the various forms that government-granted privileges take and explains their harmful consequences, including less economic growth, more government spending, and rent-seeking.

Additional examples of cronyism are barriers to entry granted through monopoly or regulatory privileges, tax privileges, bailouts, and tariffs and quotas imposed on foreign competition.

Free enterprise, limited government, and individual freedom form the bedrock of America’s greatness. They allow the American economy to flourish and its people to prosper. To strengthen these principles, we must root out crony capitalism by attacking its source: big government.

We can do this by cutting government spending, eliminating all government subsidies to industry, and reducing harmful regulation.

To read more

JJS: Funny how they tend to fault the politicians who hand out the favors more than the rich and powerful insiders who ask for them. That aside, it’s still nice to have conservatives critique the system that made them rich. However, their analysis does not go far enough.

It was not free enterprise that let America prosper so much as it was the free land, free for the taking from the previous inhabitants. That, and the size of the land. America was big so its economy was big and bigger economies allow more specialization and more trade, or simply put, more ways to make a buck or even get rich.

And the timing was perfect. America was born right at the dawn of the Industrial Revolution, and techno-progress is one of the ways that lets people prosper. And with government being young, hence it was small and its taxes fewer, falling mainly on imports. Indeed, taxes were hardly necessary since government was selling off its newly conquered lands to settlers. Yet some taxes did hinder trade and government was still handing out favors, as governments always do.

Tho’ the phrase is newish, rent-seeking itself is hardly new. Historically, handing out favors and public treasure to insiders -- such as monopolies on trade or sweetheart contracts to supply the military, etc. -- has been the main raison d’etre of government for almost ever. And the separation between business and government was not all that great. Business people were married to government people. Government people invested into businesses, etc.

And this sort of business lobbying is called “rent-seeking” for a good reason. While modern critics use “rent” to refer to unearned profit due to favors in general, the granddaddy “rent” was the unearned income from land, specifically the land one is not using but charging others to use, or “landlordism”. Back then, landowners -- from king on down -- were the government and the tenants who paid them rent were the peasants, the hoi polloi, the lower classes.

While squeezing land rent out of peons may seem to be a thing of the past or confined to Third World countries, it’s not. It still goes on in America and Europe but more subtly. Now in the developed world the majority pay land rent when they “rent” (lease, actually) an apartment or pay the interest on a mortgage. Next, banks sell those mortgage debts to Wall St who bundles and resells them to the unwary. Thereby, rent gets concentrated into fewer and fewer hands, just like in the old days, but not quite so blatantly.

There is an obvious solution to rent-seeking and rent-winning. That is, don’t pay an individual owner for land but pay one’s community. Each resident would pay land dues into the public treasury and get rent dividends back. Thus everybody would be compensated for keeping off each others’ land, land being something to which we all have an equal right, since all of us need land in order to live. Another ethical underpinning is that the value of one’s land is not generated by the landowner but by the surrounding community -- location, location, location, as the realtors say.

Some places use parts of this geonomic reform. Sydney Australia and many places levy a land tax. Aspen CO, Alaska, and British Columbia pay rent dividends from various sources and to various degrees. But the world still awaits total implementation.

To accomplish this simple reform, some famous thinkers have suggested a more heavy handed approach.

Léon Walras (French pronunciation: [val_as]; December 16, 1834 – January 5, 1910) was a French mathematical economist. He discovered the marginal theory of value (independently of William Stanley Jevons and Carl Menger) and pioneered the development of general equilibrium theory. Much like the Fabians, Walras called for the nationalization of land, believing that land's value would always increase and that rents from that land would be sufficient to support the nation without taxes.

To read more

JJS: Some thoughtful modern economists also advocate land reform and use rent -- a society’s spending for land -- to explain the business cycle and much more.

When land is first overpriced, credit is extended farther in order to accommodate it. That is, banks lend on overpriced land, counting on a further rise. When the rise slows, they extend the loans, sometimes even granting new loans for paying interest on old loans. They use political pressure to get governmental agencies (e.g. the World Bank) to extend or underwrite these risky loans (e.g. in Latin America). When the bubble bursts, the loans are not repaid. This destroys capital.

To read more

JJS: Studying the economy while ignoring rent is like studying anatomy while ignoring blood. Yet professional economists get paid to do just that. And economic policy, and the people who must live by it, suffer for it.


Editor Jeffery J. Smith runs the Forum on Geonomics and helped prepare a course for the UN on geonomics. To take the “Land Rights” course, click here .

Also see:

A New Heresy -- Abolish Corporate Income Taxes

The New Rentier Class

Connecticut bill takes aim at vacant lots

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