The Economist on our Crony Capitalist System

The Economist is a centerist, pro-business, pro-capitalism publication from London. As such it is the perfect voice for echoing the essential thesis of my book Lawless Capitalism: high inequality has led to a rigged legal system that has displaced capitalism with crony capitalism.

Or, in the words of The Economist:

Class warriors and free-market devotees alike are worrying about rent-seeking. American libertarians fear an elite has rigged their country’s economy; plenty of ordinary Joes reckon the government and Federal Reserve care more about Wall Street than Main Street.

My main difference with The Economist is their outlook on this crucial issue and their so-called "Crony Capitalism Index." In an apparent effort to take the spot light off inequality, they gerrymandered an index that they admit is "crude" and subject to severe limitations. This allows a level of optimism I do not share.

My focus is instead on the relationship of inequality to the durability of the rule of law in the economic sphere. I contend that when more money is concentrated in fewer hands the costs of collective action plunge and the subversion of law follows. Lawless Capitalism catalogs this process law by law and regulation by regulation in all areas where big money would most seek to bend the law to their interest and against true meritocratic competition.

My view is tightly bound to empirical economic science (such as here, here, and here) which emphasizes the relationship between inequality and legal subversion--but without my focus on specific legal and regulatory frameworks. Economists Daron Acemoglu and James Robinson state the case well:

economic inequality will lead to greater political inequality, and those who are further empowered politically will use this to gain a greater economic advantage by stacking the cards in their favor and increasing economic inequality yet further -- a quintessential vicious circle. And we may be in the midst of it. The U.S. tide has lately not lifted all boats; over the last 40 years, while the richest Americans have seen a sharp increase in their incomes, the income of the median household has hardly budged. Predictably, this has gone hand-in-hand with political inequality.

If the appropriate focus is on the relationship between law, inequality and crony capitalism, then optimism is unjustified. Here is a snapshot of the most recent data compiled by the nation's leading economist on inequality, Emmanuel Saez:

 

Basically, inequality measured by the income at the very top (the only thing that matters under my thesis because that is where the power to bend law resides) rivals the historic pre-crisis high and matches the very high levels seen during the period of financial liberalization and other legal indulgences for the very rich and powerful. Too many resources concentrated at the top necessarily means too much disempowerment for others and lower growth for all as privilege displaces meritocratic competition.