The American Economy is Not a Free-Market Economy

Cronyism extends far beyond the financial sector

by David Gordon

Those of us who favor the free market must confront a problem. The virtues of the market, and the vices of socialism and interventionism, have been made incontestably clear by Mises, Rothbard, Hazlitt and others. The case for the free market, as these great figures explain it, can readily be grasped and demands no esoteric knowledge. Yet many academics reject the market. They condemn capitalism for leaving many in poverty and for glaring inequalities. How can so many academics fail to grasp what seem to us obvious truths?

In Crony Capitalism, a vital book, Hunter Lewis solves our problem. Those who condemn the free market do so by considering bad features of the present economy, both in the United States and elsewhere in the world. In judging the free market in this way, they rely on an unexamined assumption. They take for granted that the present order of things is the free market in action.

As Lewis explains and documents to the hilt, this assumption is false. What we have today is not the free market but “crony capitalism,” an altogether different matter. Government and business are in a predatory partnership that extracts wealth to its own benefit. The fact that many suffer under the present system should occasion no surprise. Predatory “cronyism” has existed throughout history and has been the main block to economic progress.

Lewis states his arresting thesis in this way: “indeed it may be argued that cronyism is as old as recorded human history and has always been the dominant system. This is precisely why the human race has made so little progress in overcoming poverty. For most of human history, there has been no economic growth at all. People born poor died poor. Whenever economic capital began to be accumulated, it was generally stolen by rulers or their friends or allies.” (p. 9)

Fortunately for the world, supporters of the free market were able in the eighteenth century and after to gain important victories against the older system of predation; but now matters have been reversed, and cronyism is once more the order of the day. In the United States, we no longer live under a predominantly private market. “But taking into account companies and other organizations that are directly or indirectly controlled by the government, it becomes clear that most of the economy is in the ‘public’ sphere.” (p. 12)

The result of this governmental takeover of the economy has predictably been dire. “Many of the new mega rich of the 1990s and 2000s got their wealth through their government connections. Or by understanding how government worked. This was especially apparent on Wall Street. ... This was all the more regrettable because, in a crony capitalist system, the huge gains of the few really do come at the expense of the many. There was an irony here. Perhaps Marx had been right all along. It was just that he was describing a crony capitalist, not a free price system, and his most devoted followers set up a system in the Soviet Union that was cronyist to the core.” (p. 17)

Those inclined to dismiss Lewis’s claim as exaggerated must confront the solid body of evidence he amasses. Everyone knows that governmentally-sponsored mortgages helped to fuel the housing bubble that burst in 2008 with disastrous consequences. As Lewis points out, though, the situation is much worse than most people imagined. “By the end of 2007 government-sponsored mortgages accounted for 81% of all the mortgage loans made in the US and by 2010 this had risen to 100%.” (p. 39)

Government dominance is of course bad for the economy, but it works to the benefit of a small group of the powerful. A great strength of the book is that Lewis names names: he tells us who the predators are. “Clinton’s choice for Fannie CEO, Franklin Raines, took away $90 million in pay and stock option gains, in part because of misleading accounting practices. Obama advisor James Johnson took only $21 million. For 2009-2010, the chief executives of Fannie and Freddie got a combined $17 million, even as these organizations were being bailed out. The top six executives got $35 million over the same period.” (p. 45)

An especially glaring example of a predatory partnership between government and business followed the financial collapse of 2008. It was widely alleged that massive government subsidies to prop up failing banks and investment houses were required lest the entire economy be destroyed.[1] “So in the fall of 2008, the US supposedly stood on the edge of an abyss, with a likely shutdown of the entire financial system, and a Depression from which we might never emerge.” (pp. 110-11)

The allegation of imminent collapse served as an excuse for massive transfers of money to a favored few investment bankers. Lewis devotes particular attention to Goldman Sachs. “At the center of Wall Street stands Goldman Sachs, master of the crony influence game.” (p. 86) Lewis devotes six pages of his book to a chart of what he terms the “revolving door” between Goldman Sachs and the government. (pp. 86-91) The result of these close connections, together with the large amount of money spent by Goldman Sachs in lobbying, will occasion no surprise: “Government connections conferred many other benefits ... in some areas of the market post-Crash, Goldman Sachs enjoyed what former employee Anthony Scaramucci called a ‘near monopoly.’” (p. 102)

Cronyism extends far beyond the financial sector. Lewis has for many years been active in the natural health movement, and he is thus keenly aware of the manifold ways in which crony capitalism risks our lives, health, and safety in pursuit of profit. Shunning a genuine free market, the predators strike at products that, if widely distributed, would threaten their ill-gotten gains. “In general, the FDA maintains a resolutely hostile stance toward supplements. It will not allow any treatment claims to be made for them, no matter how much science there is to support it, unless they are brought through the FDA approval process and become drugs. ... Who can afford to spend up to a billion dollars to win FDA approval of a non-patented substance? The answer is obvious: no one. So the real FDA intent is simply to eliminate any competition for patented drugs, since these drugs pay the Agency’s bills.” (p. 171)

The crony capitalists have naturally enough endeavored to find an ideological justification for their control of the economy. They look down on the masses and allege that only an educated elite is fit to rule. “The implicit skepticism about voters’ ability to make disinterested and sound judgments about where the country should go is certainly nothing new. It is the theme of Plato’s Republic, ... by the 20th century, the debate had subtly shifted and ... the choice was now between ‘average people’ and ‘smart people,’ or, in the usual formulation, ‘experts.’” (pp. 310-11)

In this controversy, there can be no doubt on which side Hunter Lewis sides. “However bad things have become, the new populist forces may yet prevail and roll back today’s crony capitalist system. If so, it will be the people who have done it, not elitists urging less democracy and more delegation of power to ‘experts.’”