Confusing Corporatism with Capitalism

Bashing capitalism has been the chic thing to do for people who bear ideological spite on it or for those who advance statism as solution to social ills.

Yet in reality, current crisis has not been laissez faire capitalism but about the nefarious relationship of the welfare-warfare state, their private sector allies and their behind-the-scene guarantors or backers, the central banks. Such political arrangement comes in various nomenclature: state capitalism or corporatism or crony capitalism or economic fascism.

Professors Edmund S. Phelps and Saifedean Ammous at the Project Syndicate explains the difference, (bold emphasis added) [hat tip Peter Boettke]

Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation.

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the “public good.”

The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal.

This shift of power from owners and innovators to state officials is the antithesis of capitalism. Yet this system’s apologists and beneficiaries have the temerity to blame all these failures on “reckless capitalism” and “lack of regulation,” which they argue necessitates more oversight and regulation, which in reality means more corporatism and state favoritism.

In short, capitalism essentially is about serving consumers (or the needs of the masses), while corporatism is about fulfilling the interests of political masters.

Critics of capitalism have been engaged in equivocation by deliberately mangling the definitional context of capitalism.

Nevertheless, pushing for the same state based political solution will bring about the day of reckoning, as the Professors conclude,

The legitimacy of corporatism is eroding along with the fiscal health of governments that have relied on it. If politicians cannot repeal corporatism, it will bury itself in debt and default, and a capitalist system could re-emerge from the discredited corporatist rubble. Then “capitalism” would again carry its true meaning, rather than the one attributed to it by corporatists seeking to hide behind it and socialists wanting to vilify it.

I am with the professors that given the current direction of policymaking, the top-bottom or centralization based political economic system is likely headed for self-implosion.

And I am hopeful too that capitalism will emerge from their ashes, especially backed by accelerating advances in technology. But as caveat, nothing in life operates in a straight line or that the transition towards a decentralized-capitalist political economy could be messy.