Dear Friends,
It seems to me that when government seeks to protect domestic industries with regulation, what government actually achieves, is oligarchal capitalism. Oligarchal capitalism is an example of what I call stupid capitalism, like all stupid capitalism, seeks to channel it‘s greed outside the normal market mechanism. It is where a few families or businesses, use their close connection with government, to protect themselves from competition, through the use of regulation.
Take for example Blockbuster. This company was a great company, they hired many people, they provided a needed service, better than any of their competitors and they earned a ton of money for their shareholders. Everything I like in a firm. But now they are on the ropes. Netflix and other new competitors are driving the movie rental business, Blockbuster’s core business, out of business.
This is resulting in Blockbuster’s demise and is an example of what Joseph Schumpeter called, “creative destruction.” The creation of a new business model destroys old business models. Blockbuster is the modern equivalent of a buggy whip maker. The product has been rendered outmoded by the advance of the Market’s dynamism.
Now consider this; What if the US government passed regulation protecting Blockbuster from competition? Blockbuster’s senior staff would argue that to do so would raise the wages in the country because with limited competition Blockbuster would raise wages for it’s employees. With the institution of regulations, protecting Blockbuster from any meaningful competition from domestic of foreign firms, Blockbuster would have a government granted monopoly and could charge monopoly prices… to increase the wages of it’s employees.
But Market dynamism would suffer. The material welfare of the people would suffer not only in the short term from lack of options in entertainment but in the long term the children will suffer from high unemployment, low wages, and a permanent underclass. Just as is in South America where oligarchal capitalism is rampant.
An example of how insidious oligarchal capitalism can be is when we look at General Electric. They made record profits but paid no income taxes at all. General Electric is in bed with the Obama administration and as such gets it’s back scratched as they scratch Obama’s. Regardless on your, or my, stance on corporate income taxes, this is treating different firms differently because of their politics. This type of government backed capitalism is a quick slide to oligarchal capitalism.
“But how can this be?” Someone might ask. “How can government protecting it’s industry be a bad thing?” To them I would say, Because the number and quality of jobs gets better with creative destruction and gets worse under “Apprehensive assistance,” that simply leads to oligarchal capitalism, it has spillover effects too.
Like making it harder to start any business, even ones that don’t actually compete with entrenched industry. Regulation is a wide brush, that when it is used, always drips where it wasn’t supposed to. That is the ever present danger of using regulation to control an economy. Regulation protecting one firm has a chilling effect on other small firms that only come under the regulation tangentially.
To me however, the most pernicious thing about oligarchal capitalism, is that it undermines the people’s faith in the market system to improve their material wants. It does this by stopping class mobility. The real danger to the Elite from an unfettered market system. Class mobility is the most hated effect of a free fair market system but without it society stagnates.
Some of the ways governments create a system of oligarchal capitalism is by, high fees for licensing, corrupt permitting, bribery by civil servants, allowing organized crime to shake down merchants, corrupt policing, holding the elite to a different standard than the people, as well as the main themes of this blog. Oligarchal capitalism is simply another way the Elite use to distribute the goods of society through political favor instead of ownership merit. All thoughtful lawmakers should beware of this evil that is an omnipresent threat to their economies…
