The American Economy is Not a Free-Market Economy Mises Daily: Tuesday, September 24, 2013 by David Gordon Crony

Capitalism in America, 2008-2012. By Hunter Lewis Those of us who favor the free market must confront a problem. The virtues of th e market, and the vices of socialism and interventionism, have been made inconte stably clear by Mises, Rothbard, Hazlitt and others. The case for the free marke t, as these great figures explain it, can readily be grasped and demands no esot eric knowledge. Yet many academics reject the market. They condemn capitalism fo r leaving many in poverty and for glaring inequalities. How can so many academic s fail to grasp what seem to us obvious truths? In Crony Capitalism, a vital book, Hunter Lewis solves our problem. Those who co ndemn 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 h ave today is not the free market but crony capitalism, an altogether different mat ter. 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 o ccasion no surprise. Predatory cronyism has existed throughout history and has bee n the main block to economic progress. Lewis states his arresting thesis in this way: indeed it may be argued that crony ism 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. Pe ople 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 eighte enth century and after to gain important victories against the older system of p redation; but now matters have been reversed, and cronyism is once more the orde r of the day. In the United States, we no longer live under a predominantly priv ate market. But taking into account companies and other organizations that are di rectly 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 dir e. Man 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 esp ecially 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 ex pense of the many. There was an irony here. Perhaps Marx had been right all alon g. It was just that he was describing a crony capitalist, not a free price syste m, and his most devoted followers set up a system in the Soviet Union that was c ronyist to the core. (p. 17) Those inclined to dismiss Lewis s claim as exaggerated must confront the solid bod y of evidence he amasses. Everyone knows that governmentally-sponsored mortgages helped to fuel the housing bubble that burst in 2008 with disastrous consequenc es. As Lewis points out, though, the situation is much worse than most people im agined. By the end of 2007 government-sponsored mortgages accounted for 81% of al l 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 benef it 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, Fr anklin Raines, took away $90 million in pay and stock option gains, in part beca use of misleading accounting practices. Obama advisor James Johnson took only $2 1 million. For 2009-2010, the chief executives of Fannie and Freddie got a combi ned $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 mas sive government subsidies to prop up failing banks and investment houses were re

quired lest the entire economy be destroyed.[1] So in the fall of 2008, the US su pposedly stood on the edge of an abyss, with a likely shutdown of the entire fin ancial 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 t o 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 mo ney spent by Goldman Sachs in lobbying, will occasion no surprise: Government con nections conferred many other benefits ... in some areas of the market post-Cras h, Goldman Sachs enjoyed what former employee Anthony Scaramucci called a near mo nopoly. (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 manifo ld 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 tha t, 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 inte nt 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 ju stification for their control of the economy. They look down on the masses and a llege that only an educated elite is fit to rule. The implicit skepticism about v oters ability to make disinterested and sound judgments about where the country s hould 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 a verage 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. Howe ver bad things have become, the new populist forces may yet prevail and roll bac k 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. Crony Capitalism and Lewis s complementary book, Free Prices Now!, are important w eapons in this struggle for a genuine free market. Notes [1] The fallacies in this all-too-often-repeated claim have been comprehensively set forward by David Stockman, in his magisterial The Great Deformation (Public Affairs Books, 2013), Part I, pp. 3-52.