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Minority-Owned Businesses Were Hit Hardest By Government Lockdowns, While Corporate America Raked In Windfall Cash.

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Since the beginning of the COVID-19 pandemic, minorities have disproportionately suffered from the virus’s health effects. A new study reveals that the government-mandated economic lockdowns have also hit minorities hardest.

In response to the outbreak and under the guidance of federal agencies such as the Centers for Disease Control, state and local governments imposed quarantine orders and mandated shutdowns for many businesses deemed “non-essential.” Whether one supports lockdowns as a public health measure or not, they undoubtedly resulted in tens of millions of Americans and counting filing for unemployment and a sharp economic downturn.

Like all government interventions into the economy, the unprecedented shutdown has not affected everyone equally. The government’s response to this crisis contained clear carve-outs and favoritism for politically connected large corporations, yet imposed disproportionate negative impacts on less politically influential minority-owned small businesses.

A new paper from Professor Robert Fairlie of the University of California, Santa Cruz exposes this reality for all to see.

“The number of active business owners in the United States plummeted by 3.3 million or 22 percent over the crucial two-month window from February to April 2020,” Fairlie found in his analysis of nationally representative government survey data. “The drop in business owners was the largest on record, and losses were felt across nearly all industries and even for incorporated businesses.”

This is a troubling economic observation in and of itself, yet the data are even more concerning when broken down along racial lines.

“African-American businesses were hit especially hard experiencing a 41 percent drop. Latinx business owners fell by 32 percent, and Asian business owners dropped by 26 percent,” the professor reports. For context, white business owners only faced a 17 percent drop.

“Simulations indicate that industry compositions partly placed these groups at a higher risk of losses,” Fairlie continues. “Immigrant business owners experienced substantial losses of 36 percent. Female-owned businesses were also disproportionately hit by 25 percent.”

(Source: Robert Fairlie, University of California, Santa Cruz)

Remember that these abstract figures represent millions of actual people whose livelihoods were destroyed by the COVID-19 response. And as revealed in new reporting from the New York Times, the massive government programs passed as COVID-19 “relief” and “stimulus” efforts—we’re set to add a whopping $8 trillion in debt—are failing to help many of those who are most in need.

“Black-owned businesses also appear to be benefiting less from federal stimulus programs,” the paper reported. “Only 12 percent of black and Hispanic business owners polled between April 30 and May 12 received the funding they had requested.”

“It’s unfortunate that the businesses that need the funding, help and assistance the most are not receiving it,” the owner of a hair salon in the Bronx told the Times. “It’s like the Titanic. Where was the water coming up first? It was coming from the bottom. The people on the bottom were drowning first.”

Meanwhile, wealthy corporations are benefiting mightily from tax carve-outs in the congressional COVID-19 relief bill that was passed, the CARES Act.

Companies will receive more than $155 billion in benefits. This includes a whopping $862 million tax refund for the massive multinational corporation Boeing.

“The tax breaks were supposed to help ease companies’ red ink and keep paychecks flowing for workers,” Axios reports. “But most of the companies mentioned above, for example, have either furloughed employees or are pushing for buyouts.”

The lesson here is quite clear. When the government launches massive interventions into the economy and then passes 300+ page bills to “fix” the problem it helped create, political distortions will result in costs disproportionately borne by disadvantaged groups in society and benefits that skew toward the well-connected.

“I believe crony capitalism—the alliance between business and government—is the biggest problem of our age,” said economic historian Robert Higgs. “Crony capitalism, unfortunately, has a very active, organized, well-funded, and vocal constituency. It is the greatest threat to our prosperity and our freedom.”

“A free-market thwarts lobbying by taking the power that corporations seek away from government,” former Libertarian presidential candidate Mary J. Ruwart once said. “The only sure way to prevent the rich from buying unfair government influence is to stop allowing government to use physical force against peaceful people. Whenever government is allowed to favor one group over another, the rich will always win, since they can “buy” more favors, overtly or covertly, than the poor.”

The facts offered by this new paper and emerging COVID-19 data confirm theoretical predictions and offer a warning as to the unequal costs associated with mandating another lockdown if a “second wave” of COVID-19 emerges.

“Since bills keep piling up even when revenue isn’t coming in, many of these small [minority-owned] businesses face an uphill climb as it is,” the Wall Street Journal editorial board notes. “If they’re now getting back to work, and if they think they’ve taken the necessary precautions to do so safely, then the last thing they need is a politician ordering them to close shop for another month or two.”

Government lockdowns amid public health crises are ultimately a question of cost-benefit analysis. Whether one supports future pandemic lockdowns or not, we should all keep in mind that Americans do not bear the consequences of big government equally.

Brad Polumbo is a journalist and the Eugene S. Thorpe Writing Fellow at the Foundation for Economic Education, at whose website this article first appeared.

Entrepreneurship Brings Innovation And Betterment For All. Government Regulation Throttles It.

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Even in an age of hyper-partisanship, people still like a good underdog story and few are better than the small start-ups taking on the giants of industry. Entrepreneurialism helps create jobs, innovations, and other economic and social opportunities. It’s a story everyone can get behind.

Everybody, that is, except the incumbents and their political lackeys, who do not want pesky upstarts disturbing the status quo. Those companies and policymakers will take steps to protect their market and political turf—primarily through the creation and preservation of regulations. They usually sound well intentioned, but ultimately they only serve their interests at the expense of competitors, consumers, and the public.

This partially explains the decline in business dynamism in recent decades. “Business dynamism, is the process by which firms continually are born, fail, expand, and contract, as some jobs are created, others are destroyed, and others still are turned over,” explain Brookings scholars Ian Hathaway and Robert E. Litan. This dynamic process of entry, entrepreneurialism, and constant Schumpeterian “creative destruction” is essential to a well-functioning economy. Unfortunately, Hathaway and Litan, along with many other economists, have documented how this dynamic process has been slowed by various factors.

A new NBER working paper, “The Failure of Free Entry,” finds that “regulations and lobbying explain rather well the decline in the allocation of entry.” Economists Germán Gutiérrez and Thomas Philippon show that, “regulations have a negative impact on small firms, especially in industries with high lobbying expenditures.” Their results also document how regulations, “have a first order impact on incumbent profits and suggest that the regulatory capture may have increased in recent years.”

The problems of excessive lobbying (or “rent-seeking”) and “crony capitalism” are well-documented, especially by public choice scholars. But almost all economists and political scientists agree that competition and new entry are essential for expanding economic opportunity and enhancing consumer welfare. With openness comes dynamism.

Too often, however, regulatory systems are rigged to guarantee to opposite—stasis. “Time and again, the losing interest groups created by scientific progress or technological change have been able to convince politicians to block, slow, or alter government support for scientific and technological progress,” says Mark Zachary Taylor, author of The Politics of Innovation. “The losers and their political representatives have interfered with markets, public institutions and policies, and even the scientific debate itself—whatever they can do to protect their interests.”

When the status quo can be protected through political shenanigans, it creates perverse incentives for firms. As Tyler Cowen notes, “lobbying reorients the culture of a company toward politics and law, and away from innovation.” Instead of being market entrepreneurs, they become what scholars refer to as “political entrepreneurs” or “unproductive entrepreneurs.” Such entrepreneurs are not creating value for society; they are just expropriating it from others.

Economists George Stigler and Mancur Olson did pioneering work explaining how and why this occurs. Stigler identified how firms will “invest” in legislation or regulation as they did any other input. “The state—the machinery and the power of the state—is a potential resource or threat to every industry in the society,” Stigler wrote in 1971. “With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries.”

Olson explained how special interests accomplished this in practice. “Lobbying increases the complexity of regulation and the scope of government,” he argued in his 1982 book, The Rise and Decline of Nations. It also gives rise to what Olson referred to as the problem of “complex understandings” of law and regulation.

“When regulations are established through lobbying or other measures, there is an incentive for ingenious lawyers and others to find ways of getting around the regulations or ways of profiting from them in unexpected ways,” he noted. “The more elaborate the regulation, the greater the need for specialists to deal with these regulations,” and, “[w]hen these specialists become significant enough, there is even the possibility that the specialists with a vested interest in the complex regulations will collude or lobby against simplification or elimination of the regulation.”

In his 2015 book, The Business of America is Lobbying, Lee Drutman confirmed Olson’s insight using hard data to show how lobbying has become “sticky” over time in the sense that “lobbying has its own internal momentum” and has become self-perpetuating. “As companies lobby more,” Drutman argues, “they have a greater capacity to tackle big issues, and they have more lobbyists encouraging corporate managers to think of public policy as a strategic advantage.” This is the essence of Olson’s problem of “complex understandings” in action.

These complex understandings result in mountains of regulatory restrictions. For example, Mercatus Center research documents how the Code of Federal Regulations contained over 1,080,000 total restrictions as of 2016 and that “regulation has grown steadily by about 13,000 restrictions per year.” As this sea of red tape swells, the “landscape that entrepreneurs have to navigate becomes ever more twisted and tortuous,” notes Stony Brook University finance professor Noah Smith. “The eventual outcome is a reduction in both dynamism and the forward march of technology.”

This has troubling implications for the innovative capacity of business as well as the overall competitiveness of the entire economy. These acts of political favoritism “not only misallocate resources in the short term but they also discourage dynamism and growth over the long term,” note Brink Lindsey and Steven Teles in their recent book, The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality.

Indeed, as additional Mercatus Center research shows, “[e]conomic growth in the United States has, on average, been slowed by 0.8 percent per year since 1980 owing to the cumulative effects of regulation.” This means that “the U.S. economy would have been about 25 percent larger than it actually was as of 2012” if regulation had been held to roughly the same aggregate level as it stood at in 1980.

Moreover, another Mercatus study found that, “a 10 percent increase in regulatory restrictions on a particular industry is associated with a reduction in the total number of small firms within that industry by about 0.5 percent.” And a 2016 study by Boston University economist James Bessen also found that, since 2000, growing regulation and political activity accounted for a large share of the rise in valuations and profits among established corporations.

Excessive lobbying and rent-seeking also make efficient government impossible and lead to what Jonathan Rauch has labeled “demosclerosis,” or “government’s progressive loss of the ability to adapt.” “[A]s layer is dropped upon layer,” he notes, “the accumulated mass becomes gradually less rational and less flexible,” he argues.

So how do we address this problem? In a previous essay, I argued a periodic “spring cleaning for the regulatory state” was essential if we hope to address regulatory accumulation. For starters, we need to get the problem of over-licensing and over-permitting under control at the federal, state, and local level. While sometimes justified, licenses are a direct restriction on entry and entrepreneurialism and should only be employed for the riskiest activities and professions. “Permissionless innovation” should be the default.

Many other laws and regulations create direct or indirect barriers to the emergence of new ideas and organizations. “Sunsets” can help get that problem under control. Lawmakers should take the regulatory state off of autopilot and ensure that all laws and regulations are sunset on a regular timetable to keep rules fresh. This would also help get rid of the many regulations that have outlived their usefulness, or did not make sense to begin with.

To be sure, reform will be slow, but we need to start somewhere. As I noted before, some states are finally getting serious about cleaning house and are using sunsetting efforts and other regulatory reforms. If we all really care as much about new business start-ups and innovation as much as we all profess, then it is time to get serious about removing simple obstacles to a happier, healthier, and wealthier country.

Adam Thierer is Research Fellow at the American Institute for Economic Research

Elizabeth Warren Gets Something Right: Government And Big Corporations Are Aligned Against Small Businesses.

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Elizabeth Warren has been talking a lot about small business, a constituency that hasn’t figured in Democratic Party politics in a long time. The senator from Massachusetts and Democratic presidential candidate has sparred with Amazon over how the tech giant treats the businesses that rely on its platform to sell their goods. She’s unveiled a plan to put small businesses on a more equal footing by closing tax loopholes that allow “the very largest companies to pay a lower effective corporate tax rate than smaller companies.” She’s pledged to reverse consolidation in the banking industry on the grounds that the decline of local banks has “made it more difficult for small businesses and farms to get loans.”

In her speeches, Warren has linked the hopes and fears of small businesses with those of a more familiar constituency of the left. It’s time, Warren has said on the campaign trail, “to put more economic power in the hands of the American people — workers and small businesses.”

To connect these two groups today is to confound our expectations about who belongs on which side. Americans have grown accustomed to seeing small businesses as supporters of the GOP. Since the 1970s, lobbyists backed mostly by big corporations have portrayed taxes, labor unions, and government regulation as the primary threats to the success of smaller enterprises. In reality, the interests of Main Street businesses and the largest corporations are often at odds, but Democrats have done little to discourage the latter from speaking for the former.

Warren is now advancing a different theory—that big corporations’ political influence and market dominance are killing smaller rivals, and that small-business owners share interests with other victims of corporate power. (Full disclosure: Warren’s team contacted my organization for input on policy proposals. We provided feedback, as we have for other candidates.) While other Democratic presidential hopefuls have questioned the power of the tech giants, Warren’s rhetorical embrace of small business has been emphatic. She is at once bidding for votes that Democrats don’t normally seek and inviting her party to see small businesses in a new light. She’s also reviving what once was a core tenet of her party: In a democracy, a primary purpose for government is to disperse economic power.

The past three Democratic presidents—Jimmy Carter, Bill Clinton, and Barack Obama—all oversaw and indeed welcomed periods of significant economic consolidation. But before then, from the 1930s until the 1970s, Democrats recognized the threat that monopolies and other corporate behemoths posed to workers and small-business owners alike.

In accepting renomination at the 1936 Democratic convention, President Franklin D. Roosevelt decried the concentration of economic power in the hands of “new dynasties” of “economic royalists.” “There was no place among this royalty for our many thousands of small-business men and merchants who sought to make a worthy use of the American system of initiative and profit,” Roosevelt declared. “They were no more free than the worker or the farmer.”

As Democrats of this era saw it, forming a union and starting a business were two avenues toward the same ends: checking corporate power and giving ordinary people economic agency and a fair share of the returns from their labor. The career of Senator James E. Murray was a case in point. Elected in 1934 with support from Montana’s miners and timber workers, Murray spent the next 26 years championing the twin causes of labor and small business. He blocked several bills that would have made it harder for workers to unionize. He also founded and led the Senate’s Special Committee to Study Problems of American Small Business. Through a remarkable series of reports, his committee detailed how the same monopolistic corporations that menaced the rights of workers were also using their market power against their smaller competitors.

Another leading Democrat of the period was Estes Kefauver, who served in Congress from 1939 until 1963. The son of a Tennessee hardware-store owner, he was a lifelong supporter of organized labor and a fierce opponent of concentrated economic power. During a live address on ABC in 1956, Kefauver denounced President Dwight Eisenhower’s support of a bill to limit the ability of workers to strike. “It is easy to see what happens when an administration favors big business over the working man,” he said. He then turned to the plight of the nation’s independent enterprises. “Small businesses are not getting protection against the onrush of monopolistic big entrepreneurs,” Kefauver declared. His signature legislative achievement was the Celler–Kefauver Act, which vastly expanded the government’s authority to review and block mergers.

For more than four decades, Democrats governed from this vantage point. They sustained majorities in both the House and the Senate for nearly all of those years.

But then, in the 1970s, the party underwent an ideological shift. A group of young, newly elected lawmakers spurned economic populism and dismissed concerns about the power of big business as old-fashioned. This new bloc used its growing majority in Congress to marginalize the party’s long-standing anti-monopolists. It helped elect Carter, who, beginning with the airline and trucking industries, dismantled regulations that had previously constrained big business. Ronald Reagan continued this project in sweeping fashion. His Justice Department reinterpreted the nation’s antitrust laws in a way that all but gutted them.

Clinton went further still. In 1992, the Democratic Party scrubbed all references to economic concentration and antitrust from its platform. Clinton then led a successful, multiyear effort to overturn the Depression-era laws that had constrained the size and reach of banks. Obama followed in the same vein, presiding over a period of extreme consolidation that saw aggressive new forms of monopoly power emerge, uninhibited, from Silicon Valley and Seattle. While Democrats still evoke the image of small business in political speeches, it’s not a serious focus of the party’s policymaking.

Meanwhile, small businesses have seen their numbers and market share plummet in one industry after another. From 2005 to 2015, the number of independent retailers fell by 85,000 and small manufacturers by 35,000. Local pharmacies, community banks, family dairy farms, and independent grocers have all been in decline. Meanwhile, starting a business has become much harder. The number of new firms launched each year has fallen by nearly two-thirds since 1980.

These trends are often dismissed as proof that larger corporations are simply better and more efficient than smaller ones, but the evidence suggests otherwise. Take local pharmacies. As they shutter their doors, we assume that they just can’t compete with national chains. But according to studies by Consumer Reports and by my organization, local pharmacies provide lower drug prices and better care. The problem is that their reimbursement rates are set by three dominant pharmacy-benefit managers, all of which also run their own competing pharmacies. Last year in Ohio, the largest of these, CVS Health, further slashed the rates it pays local pharmacies and then sent many of them letters offering to buy their struggling stores.

This kind of predatory behavior is widespread. It can be found in the hefty swipe fees Visa and Mastercard impose on independent retailers that have no alternative but to pay up, and in the loss of shelf space that local breweries face when Anheuser-Busch InBev buys or bribes their distributors. Over the past few years, I’ve talked to hundreds of small-business owners about the challenges they face. Most describe dynamics in their industry that are largely about the exercise of unconstrained market power. In 2016, my organization surveyed more than 3,000 independent businesses. By a 61 percent to 7 percent margin, they said the federal government “should more vigorously enforce antitrust laws.”

Right now, though, neither party speaks to these fears and frustrations. It’s not only that Republicans and Democrats alike are corrupted by corporate dollars and lobbyists. Both parties are ideologically captured by the very idea of bigness itself. As a result, efforts by groups such as the U.S. Chamber of Commerce to blame government—rather than monopoly power—for the troubles of small business go largely unchallenged.

While reliable data on the actual voting habits of small-business owners are hard to come by, surveys suggest that they’re only loosely attached to either party and that, like other Americans, many identify as independents. What might happen if the Democratic Party offered a different story to explain what’s happening to America’s small businesses—a story that speaks to the common cause that entrepreneurs and workers share in breaking the grip of dominant corporations?

For many voters, the idea of independent business evokes something they desperately want: the freedom, as Kefauver put it, to govern their own fate, subject to no master. Warren’s focus on small business is more than an appeal to a constituency that lacks a political home. It’s also a kind of shorthand for Americans’ deep-rooted desire to govern ourselves.

Half The Economy Is Classified as Highly Regulated. To Unrig The Capitalist System, We Must Get Government Out Of The Way.

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Once again, some leading capitalists are worried about capitalism’s future, as indeed they should be. Their voices join those of critics from the left who think America’s version of capitalism is rigged. And rigged it is.

Recently, JPMorgan Chase CEO James Dimon and large hedge-fund manager Ray Dalio expressed concern about the health of American capitalism. First off, major political voices and freshly announced presidential candidates are highly critical of today’s capitalism, some to the point of endorsing socialism. They are getting a lot of attention and enthusiastic support.

Second and more tellingly, the two capitalists agree in part with capitalism’s critics. As they see it, plenty of people are smiling while closing loans on their second mansions, but a lot of ordinary people are not sharing in capitalism’s prodigious outpouring. More central to their concern, Dimon and Dalio see a hamstrung federal government incapable of doing anything about it.

Of course, economic systems evolve, and business historians have given more than a handful of monikers to America’s capitalist system. In the industrial heydays when automobiles were first produced in large numbers and steel mills pumped out miles of railroad track, we had “industrial capitalism.” When the ability to raise large amounts of capital for giant enterprises became critical, “financial capitalism” was born. And following the Great Depression and the regulatory remedies to counter it, the name changed to “government capitalism.”

Whatever affected capitalism the most got added to its name. In its current mode, we might accurately call our system “regulated capitalism,” and it is becoming more so.

Between 2000 through 2016, the number of regulatory restrictions written into the Code of Federal Regulation for all industries, as reported in the Mercatus Center at George Mason University’s RegData tally, has risen from a staggering level of 857,793 to 1,083,318. That’s a 26 percent increase.

Here’s another way to look at it: The share of American employment accounted for by economic sectors that might be termed “highly regulated”—including education and health, finance, government and utilities—rose from 31.5 percent in March 2000 to 49 percent in March 2019.

The system is rigged, you say? That’s where much of the rigging takes place. Half the U.S. economy is now heavily intertwined with Kudzu vine-like regulation that claims to remedy problems yet favors big, influential businesses and snuffs out creativity.

So yes, the critics are correct. Sadly, it seems, some call for the dog that bit them: More regulation.

How does regulation equal rigging? First and foremost, large corporations or businesses are better equipped to lobby government than us little guys. Successful encounters in congressional and regulatory offices are critically important for firms weighing whether or not to venture forth with new products and expanded plants.

And coincidentally, those powerful, favor-seeking businesses actually gain market power when a new regulatory fence is raised. In addition to their outsized influence in crafting regulation, they are better able to bear the costs than their mom-and-pop competitors.

As a result, larger firms and organizations and their CEOs are prospering relative to smaller ones. And not just firms like Amazon, Uber, Lyft, and General Motors. Included among the regulatory favor seekers are regional hospitals, universities, and the operators of major retail chains. As these larger entities prosper, smaller organizations without lawyers on standby scrap for survival.

So yes, those who say the system is rigged are dead right. But breathing new life into it will require more than just cutting back the regulatory vines—that necessary first step is already underway in the Trump administration. Reinvigorating American capitalism will require clearing a wider path for new growth and replacing the vines with the right kind of nothing.

Who knows? Maybe, just maybe, regulated capitalism will be replaced with free-market capitalism.

Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business and Behavioral Science.

Can Capitalism Survive Democracy? Yes, When It Decentralizes And Leaves Government Isolated.

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Michael Munger is pro-capitalism. You can check his academic credentials and his many appearances on EconTalk. He recently co-authored an article in the Independent Review under the title The Road To Crony Capitalism (echoing Hayek’s title, The Road To Serfdom, which we have serialized here). Briefly, the proposition is that capitalism in a Democracy has an inevitable tendency towards crony capitalism (which is not capitalism at all) and that this path will get us to a state-run economy quite quickly. It’s a pessimistic and fatalistic argument. We disagree about the inevitability of the tendency, but let’s first summarize Munger’s case.

Capitalism is a system of private property rights.

First, we start with a definition of capitalism. It’s an economic system of individual rights including private property rights, where goods, both producer goods and consumer goods, are owned privately. Individual private citizens can trade their privately owned goods, including their labor and ideas, with each other. They can also save some of what they produce, invest their savings in technology and service improvements, and thereby create better future conditions for each other. By means of these voluntarily arrangements, a capitalist economy results in betterment for all. While the self-interest of any one individual lies in his or her own betterment, the economic mechanism of mutual voluntary exchange results in betterment for all.

In a democracy, capitalism must accommodate the State and live by its rules.

Because we live in a democracy, we must accommodate the existence of another actor: the State or, as we more usually refer to it, the Government. The Government has a different motivation than the betterment of individuals. It aims to increase and expand its own power. Certainly, there are individual bureaucrats and elected politicians who will also experience – and seek – personal betterment, however they may define it, but the road lies through the power of the State.

The State wants to organize special interest groups into a coalition of permanent support.

The mechanism the State uses in a democracy to maintain its support is to create a number of special group interests which it can assemble into a coalition to keep the State in power. We are not so much discussing the electoral coalitions of Democrats and Republicans here, although those are highly relevant, but the more continuous and permanent coalition that keeps the State in power over the long term, and keeps State revenues and employment growing. Why do we have a powerful government? Because there is a majority coalition of special interests that want it.

Business interests are one type of special interest group that is particularly useful….

Among the many special interest groups that the State can cultivate for its support are businesses and business owners who seek a corrupt deal with the government to protect or reinforce their market position. Under what circumstances would businesses seek this special protection? In economic language, it would be at the point where, when thinking about the efficient allocation of resources, a business realizes that a dollar spent on lobbying government for special treatment is a better allocation than the same dollar spent on investment, because the benefits dispensed by government improve the accounting profits of the business.

…..so the State brings them into being via rigged regulatory incentives.

Government bureaucrats and elected politicians actively create the scenarios in which businesses can generate better accounting profits through lobbying and securing protection and special treatment than they can through honest and responsible capitalism. For example, they will institute a tax to damage a business’s profitability. Then they will offer a loophole in that tax for a company that is prepared to trade for it, perhaps by paying a fee, or paying for a politician’s election, or contributing to the coffers of a specific political party, or performing services for the government, or providing knowledge to the government.

Protections from government can include tariffs on the goods and services of foreign competitors, or the establishment of barriers to entry into a company’s industry (such as minimum capital requirements or special licenses). Or the government can establish a regulatory threshold that is so difficult to comply with that new entrants or under-funded competitors will not be able to afford the cost. The “crony” company is thereby protected by its ally, the government.

Now we no longer have capitalism. We have irreversible crony capitalism.

This “crony” capitalism is no longer capitalism. It no longer fits the definition we set out. Can the tendency to crony capitalism be stopped? Not if there exists a State that is driven by its need for expanding power to intervene with business to divert resources and effort towards keeping government strong and growing. Can we expect our business executives to be morally superior and refuse to crony up to government? Not realistically. Once one of their competitors secures an advantaged position by accepting the government’s incentives to move towards collaboration with the State, a firm would have to commit commercial suicide to refuse to comply with the new conditions for competing in the industry, and they won’t risk the loss of Wall Street and global investor assent.

Don’t de-regulate. Decentralize.

What’s the solution? There are two potential answers, but only one is practical. The impractical answer is to campaign to limit government intervention in business matters. No more tax loopholes, no more industry regulation that favors large incumbent corporations over innovative new entrants, no more legislation that favors cartels and anti-competitive behavior. Good luck with that. None of the legislative and regulatory ketchup is going to go back into the bottle.

The only practical answer is a revivified entrepreneurial capitalism. Small companies, driven by innovation, serving segmented customer needs with specialized services, funded by small investors and private capital. A highly decentralized economy. An end to the giant corporations who sidle up to government and collaborate so closely that it’s hard to say where one ends and the other begins. If it weren’t for the regulatory apparatus of the State economy, giant corporations would not exist. They lack the agility to move as fast as the dynamic entrepreneurs of the decentralized economy, and can’t innovate as quickly, so they would quickly fall behind and realize that they must break into smaller units to achieve the same dynamism.

The decentralized economy is on its way. Artificial intelligence and interconnected global trading platforms that can assemble – and just as quickly disassemble and reassemble – supply chains on the fly will make the giant crony capitalist corporations an artifact of history, and not of the future.

 

 

How Crony Capitalism Ruins Free Market Competition

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Imagine, for a moment, that you are a runner preparing for a race. You know that in order to beat the competition, you are going to have to train as hard as you possibly can in order to be the best you can be. You sacrifice your free time to hit the gym and workout, give up all unhealthy foods to be in peak physical condition, and when the day of the big race finally comes, you feel prepared and confident in your abilities.

And all this hard work makes crossing the finish line ahead of the rest feel even better than you imagined because you know you put forth your best effort. But just as you are about to be awarded your cash prize for all your hard work, the judges tell you that your win was unfair. “The other runners were not as prepared as you were,” the judges claim. “It’s unfair that you should win when others didn’t have the training that you had.”

And after talking amongst themselves, the judges decided that the only way to make this race fair for everyone is to demand that your prize money be split up among the other runners so that they may pay for gym memberships, healthier food, or whatever ever else they may need in order to “level the playing field” for future races.

This, of course, would never happen. If it did, there would be massive outrage as this type of action would negate the entire purpose of competitions altogether. No one should have to pay to strengthen their competitors and give them a leg up in the competition. And yet, in the business world, this happens all the time.

Cronyism in Massachusetts

Just a few years ago, Massachusetts became the first state to force a company to help fund its competition. Levying a five-cent-per-ride on companies like Lyft and Uber, the revenue collected from this tax goes directly towards subsidizing the traditional taxi companies that operate within Massachusetts.

Kirill Evdakov, Chief Executive of the Boston-based ridesharing service Fasten, commented on this matter, saying, “I don’t think we should be in the business of subsidizing potential competitors.” Kirill is absolutely right: forcing ridesharing services to subsidize the taxi industry, which has been trying to regulate businesses like Fasten into nonexistence, is not only unheard of, but completely ridiculous.

The law is justified by saying the revenue will go towards helping the traditional cab companies create “new technologies and advanced service, safety and operational capabilities.” In other words, this new tax will be used to help cab companies achieve what ridesharing services have been able to do without any access to subsidies.

Though only five cents per ride will be going to the traditional taxi industry, the new law will actually place a 20 cent tax on ridesharing companies overall. The remaining 15 cents will be divided, with 10 cents going to the city where the service is operating, and the other five cents going towards a “state transportation fund.”

While subsidizing the taxi industry is easily the worst aspect of these regulations, giving a portion of this tax to the cities is going to make it harder to repeal or reform these types of regulations later, after local governments become accustomed to receiving this money.

In Massachusetts, ridesharing companies are responsible for 2.5 million rides per month. Those benefiting from this new tax stand to make millions of dollars from this regulation, something Massachusetts city governments are sure to be happy about receiving.

Competition Makes Everything Better

The government should never be responsible for picking losers and winners. The taxi industry has failed to evolve and innovate over the years, which has allowed ridesharing services to fill a void in the market. Instead of being praised for their success, ridesharing services are being punished while taxi industries are being rewarded for failing to innovate.

We recognize how silly this practice would be in the realm of sports, but for some reason when it comes to business, many champion these policies. But just like athletic competition makes us better and stronger, so does market competition. The only reason we have Uber and Lyft is because someone saw the shortcomings of the taxi industry and thought, “I can make this better.” Imagine how much better ridesharing would be if the taxi industry tried to make the Uber model even better.

But instead, the losing entities use governments to inhibit and steal from their competitors. In a truly free market, consumers would vote with their dollars, thus choosing the winning entity. Only consumers should be trusted with this decision, not governments. Hopefully, Massachusetts serves as a cautionary tale.

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