Crony Capitalism Revisited (And Is Keynesianism What We Think It Is?) March 9, 2012

A speech given at the Mises Institute on March 9, 2012 by Hunter Lewis

It’s an honor to deliver a lecture named for Henry Hazlitt. He’s always been a beacon light for me. And also to speak to this group. Some years ago, as I was leaving a radio show, I heard the technician say to the host, “I didn’t understand a word he said.” I don’t think I have to worry about that today.

The major topic today is Crony Capitalism Revisited. Why Revisited? Because David Stockman, whom I have met and admire, gave the Hazlitt lecture last year and called it Money and The Triumph of Crony Capitalism. That talk focused on the Crash of ’08 and the corrupt bail outs.

It might seem odd to have two Hazlitt lectures devoted to Crony Capitalism. So far as I know, Henry Hazlitt did not use the phrase. Nor, so far as I know, did Mises or Hayek or Rothbard, but I could easily have missed a reference. Does anybody here recall seeing one? If you find one later, please let me know.

Although, so far as I know, Hazlitt did not use the term Crony Capitalism, he was, and through his writing remains, the world’s premier authority on John Maynard Keynes. And, at a deeper level, Crony Capitalism is Keynesianism and Keynesianism is Crony Capitalism. Or, to be more precise, Marxism is to Communism as Keynesianism is to Crony Capitalism. One is the sacred text; the other the actual system. The relationship between Keynesianism and Crony Capitalism is an interesting one, and I’ll return to Keynes shortly. But first a word about the phrase Crony Capitalism.

Where does this phrase come from? New York Times columnist William Safire wrote in 1998 that he had traced its first appearance to a Time Magazine article in 1981.The article was written by many hands and it is not clear who coined the phrase, if indeed that is the origin. Arthur Krock, New York Times Washington bureau chief, seems to have coined the phrase “government by crony” back in 1946, and it may have been used earlier. Samuel Pepys, the diarist, was writing about cronies in 1665, although the word was not so pejorative then.

I think crony capitalism is a useful phrase. My wife has a friend who loves books. When visiting my office, he saw a bookshelf and his eyes lit up. Then, approaching eagerly, he saw they were about economics and recoiled in horror. How do we explain Austrian economics to a person like that? Most people want the elevator speech version anyway. What are you for and, of particular interest in today’s tabloid media style, what are you against?

There are pitfalls everywhere. Am I for capitalism? I have to take care with my answer. It’s not just that Marx coined the term. A college professor friend of mine tells me that socialism is the economic system favoring workers; capitalism the system favoring business owners. I respond that, no, capitalism is the system favoring consumers, who, by the way, are also often workers. Many people haven’t a clue what capitalism is.

How about the term free markets? That’s clear enough, isn’t it? Well no. Many people think that free markets refer to a place where you can do anything you want to do. They think it’s the Wild West, or some kind of brothel.

In reality, of course, free markets operate according to some very specific and binding rules. Ignore them at your peril. Yes you can be selfish and willful, take advantage of others and put yourself first. But that’s a good way, not to add to your capital, but to go broke, if not sooner, then later. Markets are a place where you think of your customers and employees needs first or you suffer the consequences.

As Mises said, being your own boss really just means having many bosses, your customers. Markets are in fact a voluntary form of self-regulation, and because voluntary, it works. This is the only form of regulation that does work, but it’s dangerous to use the word regulation. That has become synonymous with government regulation, which does not work, which is oxymoronic. Better to say markets are a form of discipline, especially self-discipline.

When speaking to people like my wife’s friend, I speak of free prices instead of free markets. I sometimes imagine millions of people…marching in Washington waving placards that read: FREE PRICES NOW.

Many people, perhaps most, understand that controlled prices are not such a good idea. Of course there are plenty of economists who condemn price controls, love what the Fed does, and have not the slightest inkling of how inconsistent they are being. These economists are not so different from Occupy Wall Streeters who have referred to the New York Fed building as “a citadel of capitalism.” That would be a good joke if it weren’t so tragic.

In these great debates, terminology matters a great deal. Look how far FDR got by turning the word liberalism, which meant less government, on its head. Or by sending the word freedom into surgery, where the antecedent “to” was lopped off. The customary and logical freedom “to” suddenly became freedom “from” as in “freedom from hunger.” After this clever switch, an expansion of government could now expand our freedom. Too bad we didn’t have Jefferson around to call this down.

An old school friend of FDR’s said that he was a “champion liar” from boyhood. But debates have not gotten any more honest since FDR’s time, and it behooves us to try to set a standard both of honesty and clarity in our choice of terms.

Mises spoke of capitalism, socialism, and interventionism. These are crucial distinctions. Socialism and interventionism are both predatory and parasitical, and thus in the long run self-destructive. But interventionism can persist for a very, very long time– living off of, but not quite consuming, its host, whatever survives of a free price system. The trouble with interventionism as a phrase, however, is that, like capitalism, it requires an explanation, and not a sound-bite explanation.

Crony Capitalism has the advantage that people immediately understand that something is wrong, that people operating as capitalists may not be what they claim to be, and that these pseudo capitalists are unsavory. Not everybody however likes this phrase. Some people on the Mises website don’t like the phrase.

People commenting on the Mises site are a spirited lot. One, pen-named autocrat, cautions us against any use whatever of the term capitalism. Why? Because, he says, state capitalism is redundant, the state will always control capitalism, and so by extension crony capitalist is also redundant. Autocrat adds that if we must use the word capitalism, we might modify it with the adjective utopian, as in utopian capitalism. Ouch. I don’t think there is anything remotely utopian about capitalism, properly construed.

Another blogger on says that “there is no such thing as crony capitalism. It is a term created by the left in order to slander capitalism wholesale.” Someone agrees: “It would be better if people on our side would refrain from using the left’s terminology.”

But is this the left’s terminology? Noam Chomsky, longtime thought leader of the left, seems uncomfortable with such terms as crony capitalism or greedy capitalism. Why? Because in his view, such terms may confuse people into thinking that capitalism is not in itself bad.

Another blogger points out: “We have something in our language called a qualifier…. [The word] crony…totally changes the meaning of capitalism the way ‘non’ or ‘anti’ or ‘faux’ would.” Someone else agrees: “The two words together cannot possibly be a slam on capitalism.”

Another commenter, again on, tagged DD5, raises what I think is a very valid point. He or she argues that “using the term Crony Capitalism is a serious strategic mistake [because the phrase can] be taken…to describe an out of control unregulated market.” This is true. Just as there are many people today who think that the answer to a surfeit of spending and debt is to pour on even more spending and debt, there are people who think that the answer to government economic cronyism is to give the government even more power over the economy.

DD5 is right that if we attack crony capitalism, we will attract some people who have little or no understanding about what causes crony capitalism, or what we can do about it that would actually work.

But it’s not really hard to explain. If more and more government intervention in the economy is further corrupting government and business and all the other special interests such as unions and lawyers, even more government intervention cannot possibly be the answer.

Some people, no doubt, will never get it. To provide a moment of light entertainment, I shall read you a few sentences from an article describing Crony Capitalism in the International Encyclopedia of the Social Sciences, Vol. 2, 2008: “Some sociologists and political scientists have…maintained that some forms of crony capitalism may be indispensable for capitalist development, particularly when those forms of cronyism help prevent untrammeled corruption.” [Huh? Cronyism prevents corruption?]

The article continues: “As modern China shows, personal political networks tying central government leaders to regional industrialists may be invaluable in combating entrepreneurial corruption.” [Oh right! Big industrialists working with government combat entrepreneurial corruption?!] The article continues: “China’s increased movement away from state-owned enterprise has greatly increased opportunities for corruption at the higher ranks of society. [Sure– if government ownership prevents corruption, then why did the Russians or Chinese abandon it?] The article then really tops itself: “Much of the success of the Chinese economy may be due to…an uncorrupted political elite.” Well, as this audience knows, China is a massively corrupt place, top to bottom.

It is our partner in blowing up world wide economic bubbles, and it is only a matter of time before its present financial system, always insolvent to one degree of another, finally collapses.

After reading this last passage from the so-called International Encyclopedia of the Social Sciences, we can all agree that “crony capitalism” is not a perfect phrase to describe what we are against. But I think it is still better than the alternatives.

Fascism carries far too much non-economic baggage, although I like one blogger’s reference to Fascism Lite. Corporatism is an obscure term for most people, and suggests to some that corporations are the root of the problem or inherently evil.

Mercantilism is another alternative. It too is obscure for most people, although it has the advantage that Keynes himself flew this particular flag overhead. That he did so is just one more example of his numerous self-contradictions. And not just because he mocked mercantilism in the early years of his career before deciding to embrace it toward the end of The General Theory.

Note also that in the beginning of The General Theory, Keynes says that his ideas will no doubt be rejected because they are so novel and revolutionary. Toward the end of the same book, he seems to have forgotten this, because now he says he is reviving the same centuries old ideas that he had once dismissed as the most absurd fallacies. At least he acknowledges that he is changing his position, although he does not explain how his ideas can be new, revolutionary, and also centuries old.

This is of a piece with his describing himself as a member of “the brave army of rebels and heretics down through the ages” even as he recommends policies that appeal to the basest and most self-serving instincts of politicians–and even as he enjoys all the immense privileges that accrue from being at the top of the existing financial and political establishment.

Although it may be true, as the art historian Kenneth Clark said, that Keynes “never dimmed his headlights,” it cannot be said that he knew how to drive on a single side of the road. If we stay with crony capitalism as the least bad way to describe what’s wrong with the economy, that brings us back to Keynes, since he became the principal apologist for the current system. As all of you know, much of Keynes writing is intentionally obscure, although the threads can be unraveled and rebutted, as Henry Hazlitt so brilliantly proved in The Failure of The New Economics.

What I would like to do in the balance of my time is to ask: what is the very essence of Keynesianism? Can we describe it in the briefest and simplest terms, so that anyone can understand what is wrong with it, and thus strip away the intellectual fog that surrounds and protects crony capitalism.

At first glance, it might seem that the essence of Keynesianism is simply the endless self-contradiction to which I have already alluded. He was never in one place, intellectually or otherwise, for long.

For example, he railed at the love of money. He called it “the worm…gnawing at the insides of modern civilization.” But he also desperately wanted to be rich. He railed against investment speculation, but avidly speculated himself. At one point, he was completely wiped out, and had to turn to his father, a teacher, for rescue. Two more times, he could have been wiped out, one of them 1929, which he did not anticipate, the other 1937, which he did not anticipate either.

Keynes’s relationship with gold is a good example of his continual self-contradiction. In 1922, he wrote in The Manchester Guardian: “If the gold standard could be reintroduced…, we all believe that the reform would promote trade and production like nothing else….” A little later he described gold as the “barbarous relic.” Yet even when he called gold the “barbarous relic” he privately continued to recommend it as an investment diversifier.

When we turn to Keynes’s economics, perhaps the most fantastic self-contradiction was that an alleged savings glut, too much supposed idle cash, could be cured by flooding the economy with more cash, newly printed by the government. Perhaps even more bizarrely, Keynes says that we should call this new cash “savings” because it represents “savings” just as genuine as “traditional savings.” That is, the money rolling off the government printing presses is in way different from the money we earn and choose not to spend.

All this new “savings” enters the economy through the mechanism of low interest rates. At this point, Keynes further confounds his forerunners and elders by arguing that it is not high interest rates, as always thought, but rather low interest rates, that increase savings, even though we started by positing too much savings in the first place.

Keynes’s followers echo this even today. Greenspan, Bernanke, and Krugman have all written about a savings glut which is supposed to be at the root of our troubles, and have proposed more money and lower interest rates as a remedy, although they no longer call the new money “genuine savings.” They prefer quantitative easing and similar obscure euphemisms.

Keynesian Gregory Mankiw, one of two chief economic advisors named by Mitt Romney, has even proposed ramping up CPI inflation to create deeply negative interest rates, perhaps as negative as -6%. In other words, increase inflation to around 6% but keep interest rates repressed to near zero by buying bonds with whatever money has to be printed.

This latest proposal of deeply negative interest rates outdoes even Keynes. The General Theory does argue that interest rates could and should be brought to a zero level permanently (that’s pages 220-21 and 336). This idea of permanent zero interest rates appears first in Proudhon, although Keynes does not acknowledge or perhaps know that, and seems absurd on its face. Lending money at no interest is equivalent to giving it away, and it is hard to understand how anything can have value that is given away.

Nevertheless, Keynes said that it would be reasonable to get to zero interest rates (and zero level dividends) within a generation. By that standard, we have evidently failed him because we should have reached this utopia by 1966.

But note that even Keynes didn’t suggest negative interest rates. The idea of engineered negative interest rates reminds me of a Yiddish phrase which I am told is translated roughly as: “Smart, smart, stupid.” It takes very smart people to think it up but that doesn’t mean it isn’t stupid. And it is worrying that this is coming not just from President Bush or President Obama. One couldn’t be surprised at anything coming from those quarters.

President Bush, as David Stockman mentioned last year, said that “I have abandoned free market principles to save the free market system.” His successor President Obama said in his first budget message that he was taking us from “an era of borrow and spend” to an era of “save and invest”. Now we have Mitt Romney not only relying on a retread Bush advisor, but even a proponent of deep negative interest rates. A very nice man, I might add, but not someone we need in Washington again.

These Romney advisors also of course believe in the fairy tale of borrow and spend stimulus. It is usually forgotten that Keynes assured us that each dollar of such stimulus would produce as much as twelve dollars of growth and not less than four dollars. Each the most ardent Keynesians have of course been unable to demonstrate as much as one dollar. How did Keynes know that you would get four dollars at least? He didn’t. He told the governor of the bank of England, Norman Montague, that his ideas were “a mathematical certainty” but that was just a crude bluff.

What is empirically verifiable is that all debt, private or public, has been generating less and less growth for decades. In the ten years following 1959, the official figures say that you got 73 cents in growth for each dollar borrowed. By the time of the Crash of ’08, that was down to 19 cents. And I expect it was really negative by then and is deeply negative now.

Rather than follow Keynes and his followers down all these rabbit holes, let’s ask ourselves: is there a common theme to this nonsense? And there is a common theme. The common theme is that market prices don’t matter. In a system replete with paradoxes, this is the ultimate paradox.

In order to fix the price and profit system, we must subvert it. No free price or profit relationship must be left alone. The price/profit system must be poked, pushed, pulled apart, only to be left in a complete shambles. The assault on interest rates and currency rates is particularly destructive, but all of this madcap tinkering with prices is destructive.

Is this, then, the essence of Keynesianism, its blind destruction of the price mechanism on which any economy depends, as Mises demonstrated? Yes. But there may be an even deeper essence.

When we think of Keynes’s headline ideas, they have a kind of formulaic quality. You take a long established observation, for example, that over-spending and debt are the road to bankruptcy and ruin, and turn it on its head. No, spending and debt are the road to wealth.

For the Victorians, spending within your means and avoiding debt were not just financial principles. They were moral principles. Keynes, who was consciously rebelling against these same Victorians, described their “copybook morality” as “medieval [and] barbarous.” He told his own inner circle that “I remain, and always will remain an immoralist.”

You will recall Mr. Micawber’s famous admonition in Charles Dickens 19th century novel David Copperfield:

Annual income twenty pounds, annual expenditure nineteen, nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Keynes certainly subverted that idea. In particular, he insinuated the very odd, but now very prevalent idea, that old fashioned wisdom and morality is out of date, even a bit retarded, and odder still, in conflict with science. This is all such nonsense, but it permeates our culture. And the very people who preach honesty and sustainability outside of economics, for example in our treatment of the environment, entirely fail to understand that Keynes is preaching dishonesty and unsustainability in economics.

So, in conclusion, when we strip down Keynesianism to its essence, the relationship to crony capitalism becomes even clearer. Crony capitalism represents both a corruption of capitalism and a corruption of morals. Keynesianism also represents both a corruption of economics and a corruption of morals. Crony capitalism and Keynesianism are just two sides of the same debased coin.

Thanks for having me.