Crony capitalism arises when an expansive Central State dominates the economy.


by Charles Hugh Smith from Of Two Minds

Crony Capitalism And The Expansive Central State  

Crony Capitalism flourishes in an economy dominated and controlled by a Central State.

Crony capitalism arises when an expansive Central State dominates the economy. The Central State can then protect crony-capitalist perquisites, cartels, quasi-monopolies and financialization skimming operations of the sort which now dominate the U.S. economy’s primary profit centers.

If we step back, the larger context is the purpose and role of establishing a State to protect its citizens from foreign and domestic predation and exploition.

The Central State is granted the sole power of coercion by its membership (citizenry) to protect the membership from the predation of individuals, concentrations of wealth and other subgroups seeking monopoly. They grant the State this extraordinary power to insure that no subgroup or individual can gain enough power to dominate the entire membership for their private gain and to protect freedom of faith, movement, expression, enterprise and association.

Granting this power to the State creates a risk that the State itself may become predatory, supplanting the parasitic elements it was designed to limit. To counter this potential, the State has self-limiting mechanisms such as an independent judiciary, armed forces under civilian control, etc., a separation of powers such that no one institution or agency can dominate the State and thus the nation. The goal is to create a stable but flexible equilibrium between comparably powerful institutions, all of which are tasked with enabling and defending the members’ freedom of movement, expression, enterprise and association against the encroachment of powerful subgroups.

In this sense, the State is ultimately an immune system for the nation, a system designed not to dominate but to recognize and limit potentially destructive forces within the ecosystem (nation). To monitor and limit the influence of individuals and subgroups within the State itself, an internal immune system of regulation, auditing and enforcement is built into each institution.

The State is thus designed to be a self-regulating immune system, protected from abuse of power by its own internal immune system.

We can understand the tradeoff of the citizenry in establishing a State as a risk-gain hedge: the risk of granting extraordinary powers to the State is offset by the gain of being freed from local or foreign tyrannies and the predation of criminals and exploitative Elites. This establishment of liberty is worth the risk of a self-regulating State becoming predatory.

The self-regulation mechanisms are supposed to act as a hedge against a runaway parasitic State.

We can properly understand the State as a concentration of risk and gain: its extraordinary powers of coercion render it a great risk to the membership, even as its protective shield of liberty offers the freedom to pursue individual happiness and self-fulfillment.

Since the State is a concentrator of both wealth and power, it also concentrates the risk that ontologically accompanies concentrated power and wealth: with such great power, the abuse, repression, exploitation and predation which the State could unleash on its citizenry are fearsome.

This concentration of wealth and power makes the State the primary attractor in the economy for those seeking to increase their private gain. What better way to enforce a monopoly than to persuade the State to limit your competition? What better way to lower the risk of enterprise than to persuade the State to grant its own contracts to your company? What better way to amass a fortune than to harness the coercive powers of the State to your own self-interest?

The State is thus the ultimate lever within the ecosystem. While $1 million buys little influence within the market, if spent to influence State policy then it will buy more power than $10 million spent in the marketplace.

There is a great irony in this concentration of power in the State: the power is concentrated to protect the citizenry from predation and exploitation, but that concentration becomes an irresistible attractor for all those seeking to increase their private gain via monopoly, cartels, collusion, fraud and other forms of predation.

The wealth that can be concentrated in private hands is not limited or self-regulated, and so private concentrations of wealth inevitably exceed the threat-gain threshold of individuals within the State.This structural imbalance leaves the State ontologically vulnerable to the influence of private wealth. Once this wealth has a foothold of influence within the State, it can then bypass the State’s internal immune system and become the financial equivalent of cancer: a blindly self-interested organism bent solely on growth at the expense of the ecosystem as a whole.

This financial/political cancer of single-minded self-interest creates a self-reinforcing feedback loop within the State: the more power and influence it gathers, the more it can weaken the State’s own immune response to its rising dominance. This erosion of restraint further frees it to increase its influence, which then gives it more power to weaken the State’s immune system, and so on, until private concentrations of wealth, in partnership with self-serving State Elites, bypass the State’s immune response.

At that point, the collusion of private wealth and State Elites comes to dominate the entire ecosystem. The State’s function as the system’s immune system has been subverted by private wealth and the State’s own extraordinary powers have been directed to serve the self-interests of private Elites and their cronies within the State.

Another name for the collusion of private wealth and State Elites is crony capitalism, which has reached its apex in an economy dominated by an expansive Central State (i.e. the Federal government).

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