TeeJaw Blog

Crony Capitalism — An Illinois Example — The Texas Exception

Posted in Government and Politics by TeeJaw on Wednesday, May 11, 2011, 10: 42 AM

Adam Smith wrote An Inquiry Into the Nature and Causes of The Wealth of Nations in 1776 to argue against Mercantilism and in favor of the free exchange of goods and services produced by private entrepreneurs as the source of wealth in any nation. To be exact, Smith argued that consumption was the driver not production alone, but that’s a quibble. Capitalism triumphed as Mercantilist regulations were steadily removed over the course of the Eighteenth Century in Britain, and during the 19th century the British government fully embraced free trade and Smith’s laissez-faire economics.

Smith had warned that while Capitalism held the promise of a higher standard of living for all people, there is a dark side that has its origins in Mercantilism. In theory capitalism delivers its benefits because it rests on free market competition among capitalists who stand equal before the law and compete with each other on a more or less level playing field. However, An alliance between capitalists and government always looms. Wherever it appears it is always destructive of free markets and any notion of equality before the law, Smith warned. In modern times this is called crony capitalism.

Crony capitalism displaces the free market as the determining force in business success or failure. The free market is capitalism’s self-correcting mechanism to weed out inefficiency and incompetence. It allows entrepreneurs to take risks and rewards those who make the best decisions and punishes those who don’t with business losses and failure. All this is wonderfully accomplished by the thousands of smaller decisions made by each of the many individuals and organizations acting in what they believe to be in their best interest. When government gets into the act by entering into special relationships with a select few enterprises, a monkey wrench in thrown into the machinery of commerce which results in market distortions and official corruption as rent-seeking politicians and bureaucrats make deals with equally rent-seeking business executives, allowing them to obtain privileges and subsidies.

H.L. Mencken said, “Equality before the law is probably forever inattainable. It is a noble ideal, but it can never be realized, for what men value in this world is not rights but privileges.” Rights allow a person to work at what he chooses and to enjoy the fruits (or suffer the losses) of his labor and investment. Privilege gains him the fruit without the labor or risk of capital. The public is the “Forgotten Man” who must pick up the tab in crony capitalist transactions between private-sector business executives and government plutocrats.

Right now there is a drama going on in the Illinois governor’s office that demonstrates a contrast between the free market approach to business/government relations and the crony capitalism approach. Caterpillar CEO Douglas Oberhelman is pressuring Democrat governor Pat Quinn to use his power and influence to make Illinois more business friendly. Oberhelman has given the governor a list of things that Illinois could do to attract more business to the state and to encourage businesses thinking about leaving for more friendly pastures to stay put. Oberhelman’s suggestions range from lowering taxes on business to improving the state’s stifling regulatory structure. He points to the Texas example under Governor Rick Perry where a lower tax and less costly regulatory climate is attracting companies making a mass exodus from high-tax and burdensome regulatory states. Oberhelman is not asking for special privileges for Caterpillar. Every proposal he has made to Governor Quinn is general in nature, applicable across the board to every enterprise doing business in the state.

Two other long time corporate residents in Illinois are taking the cronyism approach, and Governor Quinn is responding to their demands. Both Motorola and Sears are threatening to pull up stakes and relocate in whichever state offers them the best deal. Both have shopped several other states and have numerous proposals in hand. They are using these to pressure Quinn and the Illinois legislature to give them special tax breaks as an inducement to keep the several thousand jobs they control in Illinois.

Quinn can meet these demands for tax breaks applicable to Sears and Motorola only by raising taxes on every other business in Illinois. That is exactly what he now attempting to do, which in Motorola’s case amounts to $100 Million in relief from taxes it would otherwise owe the state. Corporations do not actually pay corporate taxes. Taxes are like any other cost of doing business and must be passed on to the customers of the those companies, so Quinn is picking the pockets of all Illinois residents to give Sears and Motorola a competitive advantage in the market. While costs must be passed on for a company to stay in business, windfall profits don’t.

So there we see the difference two states take to attracting and keeping business. Texas under Governor Rick Perry thinks making Texas a good place to do business for everyone is the way to go, while Illinois under Governor Pat Quinn favors special privileges for the few paid for by sticking it to the many. He probably thinks that the diffused interest of the many is less politically powerful that the concentrated interest of a couple of large corporations such as Sears and Motorola, and in Illinois that is probably about right.

Some may think that the way to change this is for Illinois to start electing better politicians. That brings to mind the wisdom of William F. Buckley who said that waiting for the “right” people to be elected is a false promise. None of us will live long enough to see that. The “wrong” people will continue to be elected. What must happen is the creation of a political climate where the wrong people are forced to do the right thing. That is what makes the rise of the Tea Party movement so important, and promising.

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