SAS: Socialism is not the answer to crony capitalism

by Ben Ramanauskas, Policy Analyst

Despite lifting over a billion people out of poverty and raising the standard of living in a way that is unprecedented in human history, capitalism has an image problem. It is seen as an unfair system, which enriches a small group of elites at the expense of everybody else.

This has become the rallying cry of hard-left Momentum activists and emboldened anti-globalist campaigners alike. To be fair, it also seems to be a sentiment shared by a big chunk of normal people too.

They see certain companies having too much influence over public policy. They point to the meetings between top executives and senior politicians. They notice entire industries lobbying the government in order to pass or prevent certain laws, especially ones which would impact their bottom line. The revolving door between Whitehall and the board room. A tax break here, for a subsidy over there.  

Many people see all these failings and conclude government must be in the pocket of big business. As a result, the public may be losing faith in capitalism itself and increasingly be prepared to embrace socialism. For example, research conducted by YouGov found that 36 per cent of people in the UK have a favourable view of socialism, with only 33 per cent viewing capitalism in a favourable light.

Here’s the crunch though. Since well before 2016, when those findings were published, many high profile politicians, commentators and celebrities have been working hard to redefine British socialism. As they have waged the battle of ideas for a new generation, they’ve been quick to lay the blame for these failings at capitalism’s door. In doing so, they’ve ended up defining capitalism more than the capitalists.

But oversized and powerful government, susceptible to lobbying and willing to intervene in industry and shape policy to help out the elites is hardly the vision of a capitalist economy. In fact, it has nothing to do with free market capitalism. Rather, it is quite simply ‘crony capitalism’.

So, what exactly is crony capitalism? Nicholas Kristof writing in the New York Times describes it as an economic system in which, rather than take risk and innovate in order to add value to consumers, businesses rely on the government - through regulations, permits, and tax breaks - in order to maintain a dominant position in the market and exclude other companies. This reduces competition and means that the big players can set high prices for their products, while giving consumers little choice but to play along.

Often, it is not just one company involved in this type of behaviour. Rather, it is a group of businesses, operating as a cartel, in order to fix prices. This shouldn’t be news to most capitalists. As the economist Adam Smith explained: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

These companies, acting together, can lobby the government for all kinds of perks. They can insist that anyone who wants to operate in their industry must hold a permit, or comply with convoluted regulations, or have obtained certain qualifications. The cartels benefit as they raise barriers to entry into their industry. Competition disappears and the businesses keep charging high prices. The cronies win again.

Fundamentally, this lack of competition means that capitalism can’t work properly. Firms are not forced by the market to innovate, improve their services, and offer competitive prices to consumers. The biggest loser in all of this is the public. They have fewer options to choose from, there is a decrease in new, exciting goods and services for them to use, and they are forced to pay higher prices. That’s when you get a small group of elites winning at the expense of everyone else.

So how do we stop them getting away with it? Surely government must act? But governments often go even further in looking out for vested interests at the expense of the public. More government is the problem, not the solution. For example, the government forces energy companies to include minimum shares of energy from renewable sources in their portfolios. This is effectively a subsidy to the renewable energy sector, which is paid through energy bills. To make matters worse these sources of energy are less efficient, and increase fuel bills for households. One more win for the cronies.

Then there are the banks. During the global financial crisis, the government bailed out the major banks based in the UK. Given the widespread nature of the crisis, and the importance of the financial services industry to the UK economy, this was, on balance, the right thing to do. However, over a decade later we still have banks which are seen as ‘too big to fail’. They are able to take risks safe in the knowledge that ‘heads’ they win, ‘tails’ taxpayers lose.

Capitalism is about profit and loss. Companies who make wise decisions are rewarded by the market, whereas those that make foolish decisions or are badly run go bust. Under crony capitalism, certain companies, no matter their level of incompetence and risk-taking, are bailed out through the taxes of hard working people and profitable businesses. A capitalist economy would allow individual banks to go bust. That’s what would happen in almost any other industry. But it didn't, so 3-0 to the cronies.

Crony capitalism is just another example of government action increasing the cost of living for people in the UK. Whether it is taxes levied on incomes or on the things people buy, or the regulations which make housing and childcare more expensive, it is the actions of governments which hit household budgets. Socialists believe in more government, more taxes, more subsidies, and more giveaways. They couldn’t be more wrong.

If we want to see the cost of living decrease, and for more people to enjoy the benefits of economic growth, then we need to let free market capitalism work. Vested interests should not be able to use the government to stifle competition and innovation, and maintain their dominant position. If we leave capitalism to the cronies, no wonder it has an image problem.