Crony Capitalism

Last week I was invited to participate in a discussion in Anaheim on crony capitalism. The event was sponsored by The American Conservative, an organization I’ve become quite fond of, and not just for featuring my work. I was joined in the conversation by Tom Tait, the mayor of Anaheim, who detailed many of his struggles with the Walt Disney Company, an organization many of you know I’m also quite fond of. A podcast with Mayor Tait is in the works.

I’ve not written specifically about the topic of crony capitalism—which is kind of a populist term of derision—and so I spent quite a bit of time pondering what I would say. Based on the reaction of the crowd, my thoughts resonated with some but made others quite uncomfortable.

Thinking of the “crony” part of the term, it’s obvious to me that cronyism is part of the human experience. A crony is a close friend or confidant. The concept of cronyism involves having favoritism for your close friends and confidants. This can be favoritism in making a job recommendation, giving out a congratulatory award, or deciding that the coach’s kid is going to play first base.

Let those among us who have not engaged in this kind of favoritism cast the first stone. We all have. As I said: it’s part of the human experience. Humans are social creatures. We are more likely to trust, appreciate, and forgive those with whom we have formed social bonds. Denying this is denying human nature.

And as a side note: I believe this is the strongest argument in support of affirmative action. Both of my college internships came from family connections, something I would not have had if members of my family had not progressed to positions of influence. Take away that opportunity and my path is less clear. Taking extra steps to provide opportunities to those who don’t benefit from cronyism, especially at the early stages of a career, is a prudent way to benefit society.

So, my problem with “crony capitalism” is less about the crony than it is about American capitalism. I tried to make this point delicately because I am a supporter of capitalism—the free market allocating capital based on the profit motive—but question whether we can honestly call our system capitalist.

Fundamentally, a capitalist system requires savings and investment, the balance of which is regulated by interest rates. When there is a glut of savings or reduced demand for investment, interest rates fall. When there is a lack of savings or an increase in investment demand, interest rates should rise. Since most of my adult life has been spent with low to negative savings rates and extremely high levels of borrowing in all aspects of our economy, it’s hard to grasp how this can be called capitalism.

When a company like Walt Disney, which had $25 billion in gross profits last year, can demand—and receive—decades of tax amnesty from a city like Anaheim, a city with a $1.7 billion budget that is struggling to pay pensions, maintain streets and provide basic services, something is broken.

If it’s not the cronyism that’s broken, then is it the capitalism? I think so.

The notion that Disney should be responsive first and foremost to shareholders, that it has an obligation to maximize shareholder value, casually ignores how the centralization of our entire economy has changed social relationships within a profit-seeking economy. This goes back to Adam Smith and his observations in the Theory of Moral Sentiments on the human dimension of economic transactions.

I see vestiges of this in my own community. The park named after the wealthy, local benefactor who built it. The old library built by a wealthy patron. The fountain, bandstand, and rock work donated by a prominent family of the past. These people all accessed the capital of the community (through local banks) to invest in their businesses in pursuit of profit. Those pursuits benefited the capital investor with a successful venture, the savers who received the interest, and the patrons of the enterprise who had needs fulfilled.

The idea that any of those people would have asked the community for a 40-year tax holiday is absurd. They were as dependent on the success of the place as everyone else was. In fact, they lived in close proximity of everyone else, sharing the same streets and public spaces, attending the same churches, and sending their kids to the same schools. Yes, they pursued profit, but the proximity of their endeavor to their patrons and their capital investors creates a social pressure—an invisible hand, as such—that caused a very different set of reactions.

Let me state this bluntly: If you were a wealthy capitalist in 1918 and wanted to showcase your wealth, to strut like the peacock you are, you would have built a great building in your community, improved the park, started a hospital, opened a library, or built a steeple for the church. Sure, you would have named it after yourself and maybe even expected others in the community to genuflect a little in your presence. You might have been a royal jerk who treated others with disdain. So what. The manifestation of your ego would have reflected the fact that you lived in a community and had social expectations as a result. People a century later would still enjoy the park you built, not even knowing who you were.

I doubt Mayor Tait or any of the Anaheim council members has ever met Bob Iger, the chairman of Disney, nor had any serious conversations with any of the company’s board members. There’s no crony aspect to this relationship.

I also doubt any residents of Anaheim will visit one of Iger’s homes, ride on his private plane, sail on his yacht, view his private art collection, or even swim in his pool. The manifestation of his ego—which may be vastly more generous than that of anyone in my city from a century ago—is subject to a different set of social expectations, pressures largely detached from the community where Disney’s capital is being put to work for profit.

Here’s the scenario I put to the crowd that drew a mixed reaction: Say a local entrepreneur comes to the city council with a plan to start a movie theater. There is no theater in town and the closest one is a thirty-minute drive away, so the investment would be welcomed by the community. The entrepreneur doesn’t ask for any subsidies or handouts, but does make one specific request: that the city council amend its zoning code to not allow a competing theater to open in town.

The entrepreneur explains that this is a very risky venture. They plan to take their savings, mortgage their home, and find local investors to back the undertaking. They anticipate working long hours to get it up and running. They anticipate making the space available in off hours to non-profits and community groups. They plan to bank locally, advertise in the local paper, sponsor a local softball team, and have a float in the 4th of July parade.

Their big concern is that, once they get things up and running, a national movie chain will show up and put them out of business. They don’t mind competition, but they can’t take that kind of risk. If they can’t be protected in that way, they won’t make the investment.

This scenario made people uncomfortable because it put into contrast two competing values—entrepreneurship and competition—that Americans want to identify with. Yet, I didn’t find it difficult at all.

Make the amendment to the zoning code. Get the theater up and running and protect it from competition. So long as the owner maintains their social obligations—to support community groups, use local businesses, volunteer in the Rotary Club, not flaunt whatever wealth they acquire—and as long as they don’t abuse their monopoly status, it’s likely they will maintain the support of the community.

And if they lose the support of the community, then it's a simple process to change the zoning ordinance back and remove their special protection. It’s a pretty powerful lever for the community to extract ongoing social good.

Is that crony capitalism? I think it is, but it doesn’t bother me at all. If we want to fix the crony capitalism that does bother us in America today, instead of a socialist revolution or some kind of consumer bill of rights, what we really need is to localize capital.

Instead of extracting wealth, we need cities to focus on building wealth within their neighborhoods. That’s how we experience enduring prosperity. That’s how we build a nation of Strong Towns.

Top image from Wikimedia.

---

---