BackSaving capitalism from the government
Raghuram Rajan misses the fact that crony capitalism is the product of big government
Premium
In an ideal democracy, it is often said, government policy would be benign and responsive to the demands of voters. Free and fair elections, with the contest open to all, would lead to the weeding out of corrupt and inefficient politicians who do not fulfil the demands of voters; and honest, efficient politicians would enjoy patronage from voters.
But often, honest candidates fail to make the cut, and corrupt politicians continue to be patronized by voters. Reserve Bank of India governor Raghuram Rajan noted the same in a lecture presented last week: “Every so often we see the emergence of a group, usually upper middle class professionals, who want to clean up politics. But when these ‘good’ people stand for election, they tend to lose their deposits. Does the electorate really not want squeaky clean government?"
According to the governor, such an unhealthy status quo exists because the system is closed and the voter is left with no choice but to patronize corrupt politicians to gain access to essential services. Rajan notes, “The tolerance for the venal politician is because he is the crutch that helps the poor and underprivileged navigate a system that gives them so little access." Thus, he believes, reforming the system in such a way that the provision of public services is made transparent would clean the system.
What better way, then, to free the poor from the clutches of the “venal politician" than through direct transfer of benefits through cash? At last, the voter would no longer be dependent on the corrupt, inefficient politician to receive services. Sounds sensible prima facie, but the reasoning here is flawed for it assumes the voter is given no choice but to vote for corrupt and inefficient politicians in the first place.
It is generally agreed that voters are free to vote according to their wishes—yet they continue to patronize the corrupt and the inefficient. The real reason for such an inefficient status quo, then, lies in something much simpler: voters repeatedly cast their ballot in favour of it. Voters often prefer policies that perpetuate a “closed system" where the politician occupies the central role of handing out special favours—honesty is usually not one of them—in return for electoral votes.
Nature of government
The political market (be it in a democracy or a dictatorship) consists of politicians seeking the support of the Pauls to rob the Peters. The Pauls of the world consist of a variety of special interest groups ranging across the economy, from the poorest to the wealthiest of all. And as George Bernard Shaw famously quipped: “A government which robs Peter to pay Paul can always depend on the support of Paul."
In robbing the Peters of the world, the politician not only satisfies the Pauls (and continues receiving their patronage) but also lines his own pocket. After all, politicians are much like businessmen. In such a system, matters like political corruption are often relegated to the bottom by voters—unless of course they suspect corruption adversely affecting their own group. For instance, it is often concern about the latter kind of corruption that invites support for direct benefits transfer.
Government in any society thus represents the organized interests of the most dominant groups (or Pauls) that wish to live at the expense of others (the Peters). And, as mentioned before, the Pauls of the world vying for favours from the government include not just the common masses, but also crony business groups that seek to enhance their personal wealth at the expense of others. This is where Rajan, in his onslaught against crony capitalism, may be setting the cart before the horse.
Unlike the common view that crony capitalism is the illegitimate bypassing of government policy by business interests, it is often very well a part of government policy. In the absence of government discretion to regulate economic activity, crony businesses vying for favours would be left to fend for themselves in the competitive market. Thus, when Rajan says crony capitalism threatens to stall growth in India, it is important that he understands that crony capitalism finds expression through—not despite—government policy.
Government, in other words, cannot be the solution to crony capitalism, while it is in fact its root cause. Unfortunately, more government is exactly what the governor advocated in his speech by emphasizing on providing cash transfers to the poor (which will make inter-group wealth transfer more efficient and increase the deleterious effects of welfare), thus increasing the role of the welfare state. This is in line with the prescription in his book Saving Capitalism from the Capitalists co-written with Luigi Zingales where he even advocates a role for government to limit wealth concentration.
Unlike what Rajan may think, it is from the government (and not wealth concentration and economic uncertainty) that the institution of free enterprise needs to be shielded. A bigger role for government to dictate wealth distribution and provide services ignores the fact that government is often hijacked by interest groups. More specifically, it is government—whose nature is in favouring the interests of one group over another—that allows crony capitalists to live at the expense of others.
Be it the common masses, the middle class, or the wealthiest of all, what allows one to live at the expense of the other is the favour of state coercion. Thus, it is in curbing the powers of government that one can save capitalism from the threats each of them pose.
Natural Order runs every Monday, with a libertarian take on the world of economics and finance.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
