Free Market Capitalism vs. Crony Capitalism

You Don’t Hate Capitalism – You Hate Crony Capitalism

Hot take: most young Americans don’t actually hate capitalism.  They just don’t know what it is.

In recent years, it’s become popular in the United States to blame all sorts of problems on capitalism.  High gas prices, student debt, poor healthcare; they’re all chalked up to one perceived societal ill – capitalism. You can barely scroll the internet for five minutes without seeing a meme decrying the evils of capitalism.

But in reality, true capitalism could actually solve many of these problems.  No, capitalism isn’t the true  bad guy here.  What we really should be putting on blast is something called crony capitalism.

What’s the difference, you ask?  First, let’s revisit what capitalism actually is. The Oxford Dictionary defines capitalism as “an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.”  Free market capitalism, more specifically, is an economic system driven by supply and demand, in which the value of goods and services is determined by the consumer.

The result is an economy that runs on mutual benefit.  Not greed, not power, and not stepping on the little guy.  You can read other articles on the GH blog for more on how capitalism works, but the basic gist is this: true capitalism only works when everyone is benefitting.  A greedy business-owner will soon lose her customer base if she raises her prices too high, because the business across the street will charge lower prices, attracting the customer base and forcing the first business owner to lower her prices in order to compete.  The only way to get ahead in a capitalist economy is to provide value to others.

But what happens when a greedy business owner can get the government and other big businesses to show her preferential treatment?  This is crony capitalism at its simplest.  The Oxford Dictionary defines crony capitalism as “an economic system characterized by close, mutually advantageous relationships between business leaders and government officials.

Here’s the breakdown: a business owner (we’ll call her Molly) creates a product or service.  She lobbies for the government to give her preferential treatment – maybe they contract with her, maybe they give her subsidies, maybe they pass regulations making it harder for smaller businesses to compete with her.  Next, she raises her prices.  Now, normally, this would encourage a competitor to start a business offering a similar product, but cheaper.  So let’s say Jane tries.  She launches her business (assuming she gets that far – government regulation has an incredible ability to squash new enterprises before they even start), offering the same service as Molly, but cheaper.  But because Molly has that government contract, she has an edge on Jane.  So even if Jane’s product or service is better or cheaper, it doesn’t matter, because Molly has the government in her pocket, it doesn’t matter if Jane actually makes the consumer happier.  The consumers have lost their market power.  Eventually, Jane either has to raise her prices exorbitantly high in an attempt to compete with Molly, or she goes out of business.  Meanwhile Molly has lost her incentive to improve her product – she just offers the same poor-quality product, while receiving high value from the government, because her aim is no longer to please the consumer.  Her concern now is making politicians happy.

In this system, Jane is lucky if she stays in business.  And even if she does, most people can’t afford her product, because she’s had to raise her prices so high to stand a chance against Molly.  Instead, people are forced to keep buying Molly’s product, even if it’s poorer quality (and it often is).  With the squashing of competition, consumers have lost all their power.

A perfect example in the U.S. is healthcare.

It’s easy to blame expensive doctor appointments, for example, on capitalism.  Hospitals and doctors are just part of a greedy, classist system, people say, because they’re a part of a capitalist economy, where people’s health is just a moneymaker for mercenary elites.

But let’s imagine for a moment what a doctor appointment would look like in a true capitalist economy.  Dr. Molly would offer a service, and people would pay for it if they saw it as valuable.  If Dr. Jane offered the same service for cheaper, or a better service, more people would see her, and Dr. Molly would be forced to either improve her service or lower her prices to compete.  Both Dr. Jane and Dr. Molly would have to keep their prices within a range that people could afford – if no one could afford their services, they would both go out of business.  Just as with any other good or service, competition would drive quality up and prices down.  The consumers have great market power!

But what happens under crony capitalism?  Again, Dr. Molly offers a service.  Dr. Jane offers the same service for cheaper.  But Dr. Molly gets into various insurance networks.  She works with pharmaceutical companies to prescribe their drugs at higher rates, and takes payouts from them.  And because her patients’ insurance is what’s actually paying her, she can raise her prices and lower the quality of her services without fear of losing business – she’s in her patients’ network, after all.  Not only that, but she may not be doing what’s best for her patients, because they’re not the only ones she has to keep happy.  Meanwhile, Dr. Jane’s services are too expensive for many people; she’s out of network, and only the elite can afford her services.  As a result, patients receive poorer care.

Now, neither Dr. Molly or Dr. Jane are necessarily good or bad doctors, or good or bad people.  They’re both part of a broken system – they’re operating within a fixed market, one that doesn’t create mutual benefit.  And once again, the real loser here is, as always, the consumer.

If you think that capitalism is synonymous with back-door deals, government contracts, and monopolies, then yeah, it makes sense to hate capitalism.  But do you really hate capitalism, or do you hate crony capitalism?  Many people advocate for socialism because they believe that the only alternative is their false view of capitalism.  But in reality, capitalism is a system of mutual benefit that gives power to the people, equalizes classes, and fosters innovation.  Let’s stop demonizing capitalism because of the evils of crony capitalism, and instead embrace free-market principles, and champion policy that fights corruption and protects the rights of suppliers and consumers alike.

Written by Becca Weigel for Gratefully Helena