The myth of crony capitalism

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Those who suggest that we are witnessing a crisis of "crony capitalism", rather than capitalism itself, are wrong, argues Jack Farmer

Suddenly everyone seems to be talking about the "crisis of capitalism". This matters - it's one thing to say that the current economic mess was brought about by a failure of regulation, finance, greed or state interference. It's quite another to admit that the system itself might be fundamentally prone to generate destructive crises.

Here's where "crony capitalism" comes in. This is a pejorative term which purports to describe a corrupted form of capitalism in which the owners of big businesses use their links with the state and the government to gain a decisive advantage over their competitors. In doing so, the argument goes, they distort the workings of the free market by preventing potentially more efficient and dynamic new firms from breaking through.

So, for example, governments injected enormous cash subsidies into banks that would otherwise have gone bust. Suddenly it becomes clear that the problem isn't capitalism - it's "crony capitalism". Instead we need a different type of capitalism - a "moral" or "responsible" capitalism. How can this change be achieved? We are to believe either that the crisis happened because states interfered with the natural equilibrium of the free market, so the solution is to cleanse markets of these fetters; or else that the market can be made ethical by the wise intervention of governments with progressive policies.

If either of these arguments were true there would be no need to fundamentally challenge the system. But in fact they are total nonsense. Here's why.

It's important to distinguish between the surface appearance of the system and its core structure. This is one of the cornerstones of Marx's analytical method. If you gaze at the stars, you might reasonably deduce that the earth is the centre of the universe, and is orbited by the sun. To penetrate this deceptive surface appearance, humans had to go through a process of abstraction, producing different hypotheses which could then be tested against reality.

There are, of course, differences in the way that capitalism is organised in different countries - there can be more or less welfare, more or less regulation, greater state ownership and control of industry, or less. Like ice cream, capitalism comes in different flavours, but its basic ingredients remain the same.

Capitalism is organised around the relationship between a class of exploited workers and their parasitic bosses. Everything and everyone is forced to dance to the tune of this profit-producing exploitation. Even though bosses benefit from the system they are not in control but are compelled, as if by an external power, to engage in cutthroat competition with each other in a race to accumulate the most profit. Those who fail go bankrupt.

This process of competitive accumulation has a tendency to produce larger, more centralised units of capital - many small companies are replaced by fewer big ones. At the time Marx was writing Capital, the cutting edge of capitalist production was to be found in towns like Bingley in west Yorkshire where numerous, mainly family-run, textile firms competed with each other. Today it is giant multinationals that dominate the world market.

A mutual dependency develops between these large capitals and their native nation states. The state relies on its domestic companies to maintain its international competitiveness, while companies must rely on the state to set taxes and labour laws, and to shield them from foreign competitors. States and large companies have become more and more interdependent. We are used to the idea that "the markets" pressure governments - but competition within markets gives rise to the regular use of personal influence by powerful companies to shape state policy. Cronyism, like greed, is not a cause of crisis, but a behaviour typically rewarded by the normal workings of the free market.

But this process has created big problems. Capitalism usually escapes crises through the large-scale destruction of unprofitable sections of capital - so-called "creative destruction" - that sets the scene for a new cycle of boom and bust by freeing up swathes of the market to be bought very cheaply. States have always intervened to protect their domestic companies, but as the system has aged and the size of companies has grown along with their integration with states, the destruction of capital on a sufficient scale has become increasingly perilous. Many companies, and not just banks, have become "too big to fail" because their elimination, far from restoring health to the system, could precipitate a serious worsening of the crisis as they drag other companies and even states down with them.

Mainstream economic textbooks teach that if markets are allowed to function freely, they will foster efficiency and promote growth without producing crisis. Any deviation from this rigid model must be the result of some outside interference. In fact, the free functioning of market competition typically produces monopolies and the integration of states with large companies. "Crony capitalism" is a tautology, because cronyism arises from the normal functioning of capitalism.

When earthquakes struck ancient Greece, its citizens looked to the heavens, assuming them to have been caused by the wrath of Poseidon, rather than the grinding of tectonic plates beneath the earth's surface. Today the crisis of capitalism cannot be conveniently blamed on any external force - it is a consequence of the clash of contradictions at the core of the system.