macroresilience

resilience, not stability

Crony Capitalism Thrives In The Absence Of A Safety Net

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In his book ‘The Rise And Decline Of Nations’, Mancur Olson argued that over time stable democracies will experience a progressive increase in the power and influence of special interests and crony capitalists. Olson also identified the self-preserving nature of this phenomenon. Once rent-seeking has achieved sufficient scale, “distributional coalitions have the incentive and..the power to prevent changes that would deprive them of their enlarged share of the social output”. Olson’s diagnosis was accurate on both counts. Most developed economies are currently stuck within various stages of Olsonian demosclerosis.

But Olson also believed that there were limits to just how much of a nation’s GDP crony capitalists could extract before public anger or social instability would rein them in. Olson was almost certainly too optimistic in making this argument. In an earlier post I explained how crony capitalists can avoid these limits by piggybacking upon progressive programs that are meant to help the masses. As I concluded, “The masses become the shield for the very programs that enable a select few to extract significant rents out of the system. The same programs that are supposed to be part of the liberal social agenda like Fannie/Freddie become the weapons through which the cronyist corporate structure perpetuates itself, while the broad-based support for these programs makes them incredibly resilient and hard to reform once they have taken root”.

A common feature of most crony capitalist economies is the pervasive presence of subsidies targeted at the middle class. Progressives often view middle-class subsidies as the unavoidable price required to secure widespread support for the welfare state. But in reality middle-class subsidies act as the carrot that aligns the interests of the middle class with parasitic crony capitalism. However, along with the carrot comes a very hefty stick – the absence of a safety net. The absence of a safety net that protects individuals against catastrophic outcomes breeds middle-class insecurity. The fear of falling through the cracks causes the middle class to support the very rent-infested programs and corporate bailouts that sustain the plutocracy. In the absence of a safety net, the middle class seeks safety in the safety of the incumbent firm that employs them. I have often described the neo-liberal era as the era of “stability for the classes and instability for the masses”. But the two are not independent. It is precisely the fragility of the masses that provides stability to the classes.

Government provision of a safety net is not just a matter of social justice. It is in fact a critical component of a free enterprise economy. Just as those on the left of the political spectrum need to appreciate the insanity of supporting a system that ties the security of the masses to the security of its incumbent crony capitalists, those on the right of the political spectrum need to, as Reihan Salam argues, “embrace the idea of a social safety net as an important element of a free enterprise economy, not just as an unfortunate accommodation to political reality”. An employer-independent safety net promotes free enterprise by enabling us to dismantle the privatised welfare state that is the lifeblood of crony capitalism. Only if we construct a safety net for individuals can we dismantle the hammock that incumbent crony capitalists in our economy currently enjoy.

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Written by Ashwin Parameswaran

March 11th, 2013 at 3:06 pm

Posted in Cronyism

5 Responses to 'Crony Capitalism Thrives In The Absence Of A Safety Net'

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  1. Is that a call for a a basic income guarantee?

    Floccina

    14 Mar 13 at 11:39 pm

  2. Not quite. It is a call for direct cash transfers as I made in this previous post http://www.macroresilience.com/2011/11/07/rent-seeking-the-progressive-agenda-and-cash-transfers/ .

    Ashwin

    15 Mar 13 at 8:54 am

  3. This sounds like Denmark’s flexicurity. Generous state benefits, greater labor market liquidity. And it’s easier to make the case for international free trade.

    Marc Brazeau

    2 Apr 13 at 2:34 am

  4. What are the examples of crony capitalism to which you are referring here?

    bjssp

    2 Apr 13 at 4:08 am

  5. Marc- Yes, Denmark is an excellent example. Generous benefits and they let their banks fail, uninsured depositors even take haircuts, firms are not bailed out etc.

    bjssp – an example would be the bailouts of the banks and auto companies. Another would be the existence of Freddie/Fannie.

    Ashwin

    2 Apr 13 at 10:21 am

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