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The American Economy is Not a Free-Market EconomyMises Daily: Tuesday, September 24, 2013 by David GordonCrony Capitalism in America, 2008-2012. By Hunter LewisThose of us who favor the free market must confront a problem. The virtues of the market, and the vices of socialism and interventionism, have been made incontestably clear by Mises, Rothbard, Hazlitt and others. The case for the free market, as these great figures explain it, can readily be grasped and demands no esoteric knowledge. Yet many academics reject the market. They condemn capitalism for leaving many in poverty and for glaring inequalities. How can so many academics fail to grasp what seem to us obvious truths?In Crony Capitalism, a vital book, Hunter Lewis solves our problem. Those who condemn the free market do so by considering bad features of the present economy,both in the United States and elsewhere in the world. In judging the free marketin this way, they rely on an unexamined assumption. They take for granted thatthe present order of things is the free market in action.As Lewis explains and documents to the hilt, this assumption is false. What we have today is not the free market but crony capitalism, an altogether different matter. Government and business are in a predatory partnership that extracts wealthto its own benefit. The fact that many suffer under the present system should occasion no surprise. Predatory cronyism has existed throughout history and has been the main block to economic progress.Lewis states his arresting thesis in this way: indeed it may be argued that cronyism is as old as recorded human history and has always been the dominant system.This is precisely why the human race has made so little progress in overcoming

poverty. For most of human history, there has been no economic growth at all. People born poor died poor. Whenever economic capital began to be accumulated, itwas generally stolen by rulers or their friends or allies. (p. 9)Fortunately for the world, supporters of the free market were able in the eighteenth century and after to gain important victories against the older system of predation; but now matters have been reversed, and cronyism is once more the order of the day. In the United States, we no longer live under a predominantly private market. But taking into account companies and other organizations that are directly or indirectly controlled by the government, it becomes clear that most ofthe economy is in the public sphere. (p. 12)The result of this governmental takeover of the economy has predictably been dire. Man of the new mega rich of the 1990s and 2000s got their wealth through theirgovernment connections. Or by understanding how government worked. This was esp

ecially apparent on Wall Street. ... This was all the more regrettable because,in a crony capitalist system, the huge gains of the few really do come at the expense of the many. There was an irony here. Perhaps Marx had been right all along. It was just that he was describing a crony capitalist, not a free price system, and his most devoted followers set up a system in the Soviet Union that was cronyist to the core. (p. 17)Those inclined to dismiss Lewiss claim as exaggerated must confront the solid body of evidence he amasses. Everyone knows that governmentally-sponsored mortgageshelped to fuel the housing bubble that burst in 2008 with disastrous consequences. As Lewis points out, though, the situation is much worse than most people imagined. By the end of 2007 government-sponsored mortgages accounted for 81% of all the mortgage loans made in the US and by 2010 this had risen to 100%. (p. 39)Government dominance is of course bad for the economy, but it works to the benef

it of a small group of the powerful. A great strength of the book is that Lewisnames names: he tells us who the predators are. Clintons choice for Fannie CEO, Franklin Raines, took away $90 million in pay and stock option gains, in part because of misleading accounting practices. Obama advisor James Johnson took only $21 million. For 2009-2010, the chief executives of Fannie and Freddie got a combined $17 million, even as these organizations were being bailed out. The top sixexecutives got $35 million over the same period. (p. 45)An especially glaring example of a predatory partnership between government andbusiness followed the financial collapse of 2008. It was widely alleged that massive government subsidies to prop up failing banks and investment houses were re

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quired lest the entire economy be destroyed.[1] So in the fall of 2008, the US supposedly stood on the edge of an abyss, with a likely shutdown of the entire financial system, and a Depression from which we might never emerge. (pp. 110-11)The allegation of imminent collapse served as an excuse for massive transfers ofmoney to a favored few investment bankers, Lewis devotes particular attention to Goldman Sachs. At the center of Wall Street stands Goldman Sachs, master of thecrony influence game. (p. 86) Lewis devotes six pages of his book to a chart ofwhat he terms the revolving door between Goldman Sachs and the government. (pp. 86-91) The result of these close connections, together with the large amount of money spent by Goldman Sachs in lobbying, will occasion no surprise: Government connections conferred many other benefits ... in some areas of the market post-Crash, Goldman Sachs enjoyed what former employee Anthony Scaramucci called a near monopoly. (p. 102)Cronyism extends far beyond the financial sector. Lewis has for many years beenactive in the natural health movement, and he is thus keenly aware of the manifold ways in which crony capitalism risks our lives, health, and safety in pursuitof profit. Shunning a genuine free market, the predators strike at products that, if widely distributed, would threaten their ill-gotten gains. In general, theFDA maintains a resolutely hostile stance toward supplements. It will not allowany treatment claims to be made for them, no matter how much science there is tosupport it, unless they are brought through the FDA approval process and becomedrugs. ... Who can afford to spend up to a billion dollars to win FDA approvalof a non-patented substance? The answer is obvious: no one. So the real FDA intent is simply to eliminate any competition for patented drugs, since these drugs

pay the Agencys bills. (p. 171)The crony capitalists have naturally enough endeavored to find an ideological justification for their control of the economy. They look down on the masses and allege that only an educated elite is fit to rule. The implicit skepticism about voters ability to make disinterested and sound judgments about where the country should go is certainly nothing new. It is the theme of Platos Republic, ... by the20th century, the debate had subtly shifted and ... the choice was now between average people and smart people, or, in the usual formulation, experts. (pp. 310-1In this controversy, there can be no doubt on which side Hunter Lewis sides. However bad things have become, the new populist forces may yet prevail and roll back todays crony capitalist system. If so, it will be the people who have done it,not elitists urging less democracy and more delegation of power to experts.Crony Capitalism and Lewiss complementary book, Free Prices Now!, are important w

eapons in this struggle for a genuine free market.

Notes[1] The fallacies in this all-too-often-repeated claim have been comprehensivelyset forward by David Stockman, in his magisterial The Great Deformation (PublicAffairs Books, 2013), Part I, pp. 3-52.