Political Capitalism: Understanding the Beast that Broke the Cage (Part I: what is political capitalism?)

Editor note: This piece is reproduced from the website www.politicalcaptitalism.org with the permission of the author. This post, the first in a series, is germane to the current debate over climate/energy legislation that is backed by a number of large U.S. corporations (Enron then; GE, Duke, DuPont, etc. now).

Political capitalism is a private-property, market-oriented system that is compromised by business-sponsored government intervention. It is a socioeconomic system in which many or most regulations, subsidies, and tax-code provisions result from the lobbying efforts of directly affected businesses and their allies.

Today in the United States, there is greater political transparency and competition between political elites than was evident in the business-dominated past (the 19th and most of the 20th centuries). Interventions routinely result from non-business special interests representing education, the environment, labor, minorities, religion, retirees, science, and taxpayers, among others. Still, business interests—unified or in opposition—are arguably the most important of the elites that compete for special government favor in American politics today.

There are two avenues to business success under a private-property, profit-and-loss system. When using the economic means, or free-market means, businessmen provide goods or services in an open market and rely on voluntary consumer patronage. When using the political means, businessmen obtain a governmental restriction or favor that provides the margin of success beyond what consumer preference alone would give. Market entrepreneurship is the way of capitalism; political entrepreneurship, or rent-seeking as it is known in the economics literature, is the way of political capitalism.

Business interests welcome competition for the things they buy (to minimize costs) far more than for things they sell. They may profess support for free enterprise in general but not in their particular area. There, competition is disparaged as “unbridled,” “cut-throat,” “excessive,” or “unfair,” and calls are made to constrain the free market.

Historian Gabriel Kolko has defined political capitalism as “the utilization of political outlets to attain conditions of stability, predictability, and security—to attain rationalization—in the economy.” Much of the intervention that he and other historians documented in U.S. history was for business, by business to “allow corporations to function in a predictable and secure environment permitting reasonable profits over the long run.”

Mercantilism in Adam Smith’s day was a prominent form of political capitalism. Under this doctrine, the wealth of nations was perceived to result from the inflow of monetary species (primarily gold) from international trade. Business and political elites worked together to restrict competition from imported products to reserve home markets for home products and to keep specie at home. Adam Smith and other free-trade proponents argued that the wealth of nations resulted from capital accumulation and a global division of labor, not protectionism.

For much of the 19th and 20th centuries, American business capitalism was political capitalism. (Non-business government intervention—the welfare state, public education, legislated morality, etc.—was more reformer- than business-driven.) Thus, major programs such as the Interstate Commerce Act of 1887, public utility regulation by the states and then the federal government, wartime planning during the world wars, and 1930s New Deal planning were driven more by the for-profit businesses than by any other constituency. Business participation in foreign-policy decision making coupled “domestic intervention (corporatism) with overseas intervention (empire).”

The following constraints on rivalry have characterized political capitalism, particularly from the mid-19th century until today:

• Import restrictions. A tariff or quota on foreign goods that can raise prices and increase market share for domestic industry
• Price supports. A price floor, as for an agricultural product, that allows a firm or firms to have greater and more predictable revenue
• Grant protection. A government permit, franchise, or license to enter into a line of commerce that reduces the number of competitors in order to advantage the established firm(s). Under “natural monopoly” public utility regulation, franchise protection is accompanied by rate regulation (the so-called regulatory covenant).
• Loan guarantees. Taxpayer-backed obligations that reduce or eliminate risky business investments such as those undertaken in a developing country.
• Antitrust laws. The spectrum of laws against charging more, the same, or less than one’s rivals—called “monopolistic,” “collusive,” or “predatory” pricing respectively—which result in many more private than government antitrust lawsuits.
• Subsidies. Grants for research and development that are made in areas considered to be in the public interest, such as non-polluting energy technologies.
• Quality standards. Minimum standards that advantage larger firms or firms at the high end of the quality range at the expense of lower-end competitors.
• Tax favors. Special tax provisions that favor some companies or industries at the expense of other companies or industries.

These interventions alter the production of goods and services compared to what would exist from consumer demand alone.

Political capitalism is closer to capitalism than socialism because private property and profit-and-loss accounting are at work. Political capitalism is also different from the macroeconomic planning of the so-called mixed economy. Activist fiscal and monetary policy are broader than policies enacted on behalf of particular firms or industries, although the major institutions of intervention (the Federal Reserve Bank, for one) can be established and influenced by national business organizations such as the U.S. Chamber of Commerce.

Political capitalism is the unplanned, opportunistic result of transient interest-group coalitions and temporary political majorities. It is not the work of a central plan in part or whole, although elements of central planning can coexist and, indeed, inspire dispersed special-interest politicking.

“Follow the money” has led many historians studying political capitalism from effect to cause, from intention to result. In an economic system in which the use of the political means is accepted and common, the entrepreneur weighs whether the benefits of government lobbying are greater than the costs ex ante. If so, a firm or trade association is likely to pursue government favor. Such decisions to proceed often prevail over the interests of the less organized opposition because the benefits are concentrated in the involved firm(s) and the cost is spread out over all taxpayers and/or consumers, making the per capita burden negligible. But this disparity has closed over time as taxpayer, consumer, and other “common good” groups have been formed to lobby alongside other interests.

Political capitalism has aroused strong criticism and calls for reform. Marxists and socialists have sought to break the link between politics and capitalism through a government takeover of the economy. However, this radical coercion would make all life, not just business, political. The real problem is the “political” side of the political capitalism equation, where businesses turn into foes of capitalism, and private-public “government” causes distortions in the economy and a loss of public support for capitalism proper. Some defenders of political capitalism may view competing elites as democracy in action, but the ideal of a transparent, free society points toward a limited role for government and the need to minimize politics in business.