David Cameron pestering the chancellor, Rishi Sunak, for a bung to rescue a business he stood to make a mint from. Communities secretary Robert Jenrick redirecting cash meant for deprived towns to marginal Tory seats that didn’t qualify for the help. Companies with political connections getting priority for Covid-19-related government contracts and for money from the “levelling up” fund. Boris Johnson’s holidays, redecoration plans, gongs for cronies and cash for his ex-girlfriend’s business. His text-message exchange with James Dyson about tax and ventilators.
It would seem, as Henry Mance puts it in the Financial Times, that we are living in a “new era of sleaze” – one “built upon Johnson’s personality, the winner-takes-all politics of Brexit, the denigration of the civil service, and the emergency of coronavirus”, which has proved a handy defence for government ministers in a rush to hand contracts to their chums.
It’s not just the Tories either. Labour figures at a regional and national level have been mired in sleaze too. Joe Biden’s new administration has come under fire for its ties and financial stakes in vaccine manufacturers, which are lobbying to prevent policies that would cut into future profits. Germany’s chancellor Angela Merkel faced a grilling last week over her support for disgraced finance firm Wirecard.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
These cases represent just the most visible tip of a “fatberg” of cronyism, as Andrew Rawnsley puts it in The Observer. Politicians grease the wheels of favoured businesses, then later get jobs with them; lobbyists end up taking jobs as MPs; senior civil servants take lucrative second jobs with businesses; businessmen end up in the House of Lords. It all makes for a “very hectic revolving door”, says Rawnsley. Indeed, it’s busier than we know, according to activist lawyer Jolyon Maugham. “Virtually every day I have a conversation with a business person, with a civil servant, a think tank, even Tory MPs, in which they say: ‘Jolyon, everything you say [about cronyism] is right … and I can prove it because I’ve got the receipts’,” he told The Times. “But when I ask them if they can go public, they’re too frightened.”
The well-lubricated revolving door
Perhaps, but it’s not that Britain is exactly a stinking hotbed of corruption. Traffic offences are not settled with a wink and a roll of banknotes; judges do not rule in favour of the highest bidder; and British prime ministers do not build palaces with plundered national resources, says Rafael Behr in The Guardian. Britain ranks 11th in the world on Transparency International’s index of perceived corruption, “eight places behind Finland, 12 above France and 118 clear of Russia”.
Nor need we blame malign intent on the part of a conspiracy of evildoers. As Matthew Syed points out in The Sunday Times, it took a number of landmark studies published in prestigious scientific journals to convince medical doctors that the bungs, gifts, funding and favours granted them by pharmaceutical companies might conceivably influence their clinical judgement and decisions. (Although much earlier reports were available: “Thou shalt not respect persons, neither take a gift: for a gift doth blind the eyes of the wise, and pervert the words of the righteous”, Deuteronomy 16:19.)
Similarly, politicians, surrounded by lobbyists and business friends, might not see anything wrong in making the decisions they do. Cameron, for example, insisted that he broke no rules and claimed his lobbying on behalf of Greensill was a selfless act motivated by concern for British business in general. There is no reason to doubt he believes that. But justifications for bad behaviour that an earlier incarnation of Cameron found obnoxious – when he was prime minister and involved in drawing up rules for lobbyists – are never that hard to find. Whatever blinded participants might say, “wise observers” should be able to see “how these ‘retroactive inducements’ signal to the next generation of politicians that their route to wealth is to help market incumbents”, as Syed puts it. “Unconsciously or otherwise, the revolving door is lubricated.”
The economic roots of cronyism
It is, of course, only right and healthy that instances of cronyism and corruption such as those mentioned should come to the light in the press and action be taken. Perhaps those who see a “new age of sleaze” will be vindicated as the inquiries go on. Still, the real problem goes deeper than individual cases of malfeasance and has historic and economic roots. Adam Smith had already put his finger on it in 1776.
His The Wealth of Nations presents a model that shows that free individuals, guided only by a concern for their self-interest, are led as if by an “invisible hand” to produce for the social good. A corollary is that the need for state interference is minimal: “No regulation of commerce”, he wrote, “can increase the quantity of industry in any society beyond what its capital can maintain… [i]t can only divert a part of it into a direction into which it might not otherwise have gone: and it is by no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone by its own accord.”
Yet Smith was well aware that the real world all too often gave the impression of being only passingly acquainted with his work. Capitalist society may thrive on competition, but all good capitalists hate it: “To widen the market and to narrow the competition is always the interest of the dealers”, said Smith. “The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted, till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who generally have an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”
In other words, it is to be expected that established businessmen will seek government favours – but the opportunities for cronyism can only be all the greater when once it has been generally accepted that it is legitimate for the state to grant certain businesses special favours, whether that be in the form of favourable regulation, or the granting of monopolies, tax credits, favours, bailouts, subsidies or protective tariffs. Cronyism can be defined, as economist David Henderson points out in a 2012 paper for the Mercatus Center at George Mason University, as the “substitution of political influence for free markets”.
This is a much bigger problem that we won’t see if we limit ourselves to a moral condemnation of the wheeling and dealing of particular individuals. Cronyism does not merely enable and promote the corruption that we do see, does not merely take from some (the taxpayer) and give to others (the favoured clients and businesses of government); it also shifts power to government and away from citizens. It makes political power more important and increases the competition for that power. And it “actually destroys wealth”, says Henderson – by shifting the allocation of resources away from what consumers want to what governments want; by squandering money that might have been spent or invested elsewhere on goods and services that are more expensive than they would otherwise be; by diverting resources into lobbying itself; and by causing wealth to flow from where it might be used well to where waste and inefficiency and bureaucracy is inevitable.
Cronyism creates, in short, what Syed calls “Sovietism by proxy” – with all the effects you might predict from the real thing. Of Europe’s 100 most valuable companies, none was formed in the last 40 years, says Syed. “In the US, dominant firms are staying longer in the stock indices. Start-up rates are falling across the Organisation for Economic Co-operation and Development. These are not free markets; they are rigged markets. And during the same period, the number of lobbying firms has increased up to fiftyfold.”
What is to be done?
Identifying the problem is simple; tackling it is hard for three interrelated reasons. The first is that, even if governmental power could be reduced to the absolute minimum necessary, as advocated by Henderson and other libertarians, there can never be total separation between the state and the economy. The state has to rely on private enterprises to fulfil its minimal functions, says Neera Badhwar of Oklahoma University. The potential for cronyism will therefore always be there.
The second is human nature. Natural human sociability is built on two principles: kin selection (doing favours for your family as it’s good for your genes) and reciprocal altruism (you scratch my back and I’ll scratch yours). Modern states have created rules and incentives for overcoming this tendency to favour family and friends, but if the rules are held in abeyance or institutions decay, the default tendencies reassert themselves.
The third reason it is hard to do anything about cronyism is, as economist Luigi Zingales has emphasised, that the concentrated lobbying power of established private interests is more powerful, and has greater incentives to succeed, than the more dispersed and fragmented public that would benefit from freer markets and fairer rules. As he put it in a piece for the Financial Times, “while everybody benefits from a competitive market system, nobody benefits enough to spend resources to lobby for it”. It is, therefore, a political problem.
When it comes to policy prescriptions, most commentators reach for the obvious: stricter rules, better policing of the rules, and a realigning of incentives – by paying politicians more, for example, so that they don’t find corporate sidelines so attractive. Zingales favours using the tax system to create better incentives (property taxes rather than income taxes that penalise the efficient); open borders to put competitive pressure on market incumbents; and a strong safety net to remove political obstacles to the free functioning of markets. The current review of the post-Brexit subsidy control regime (see page 21) presents an opportunity for improvement in Britain.
But nothing can in the end substitute for our own political participation, good conduct and awareness of the issue. It is our “own belief in the power of free markets… which will keep incumbents and politicians in check”, says Zingales. So the problem of crony capitalism “is not entirely the fault of crony capitalists”, as Howard Ahmanson, a US philanthropist, has said. “We all need to look to ourselves. We need to make sure that there is some kind of powerful constituency that sees itself benefiting from anti-patrimonial, impersonal, honest government, the rule of law, and accountability.”
Stuart graduated from the University of Leeds with an honours degree in biochemistry and molecular biology, and from Bath Spa University College with a postgraduate diploma in creative writing.
He started his career in journalism working on newspapers and magazines for the medical profession before joining MoneyWeek shortly after its first issue appeared in November 2000. He has worked for the magazine ever since, and is now the comment editor.
He has long had an interest in political economy and philosophy and writes occasional think pieces on this theme for the magazine, as well as a weekly round up of the best blogs in finance.
His work has appeared in The Lancet and The Idler and in numerous other small-press and online publications.
Who is the richest person in the world?
The top five richest people in the world have a combined net worth of $825 billion. Who takes the crown for the richest person in the world?
By Vaishali Varu Published
Top 10 stocks with highest growth over past decade - from Nvidia, Microsoft to Netflix, which companies made you the most money?
We reveal the 10 global companies with the biggest returns since 2013. One firm has posted an astonishing 9,870% return, meaning a £1,000 investment would now be worth almost £82,000.
By Ruth Emery Published
Can Lidiane Jones be Bumble's perfect match?
Dating app Bumble is taking on Lidiane Jones, a well-regarded leader in tech, as its new boss. Can she work her magic in a new arena?
By Jane Lewis Published
UK millennials are worse off than previous generations
The evidence shows that millennials today are getting a raw deal. And, ultimately, that's a political choice.
By Simon Wilson Published
The rise and fall of Sam Bankman-Fried – the “boy wonder of crypto”
Why the fate of Sam Bankman-Fried reminds us to be wary of digital tokens and unregulated financial intermediaries.
By Jane Lewis Published
The jury's out on the AI summit at Bletchley Park
World governments gathered for an AI summit at Bletchley Park in November, but were they too focused on threats at the expense of economic benefits?
By Simon Wilson Published
As a market correction begins, money is on the move.
The force of a market correction is equal and opposite to the delusion that preceded it, so we can imagine that the correction will also be unparalleled.
By Bill Bonner Published
How small businesses can retain staff in a competitive job market
Small businesses are struggling to retain staff and compete against large companies with deep pockets.
By David Prosser Published
The French economy's Macron bubble is bursting
Cheap debt and a luxury boom have flattered the French economy. That streak of luck is running out.
By Matthew Lynn Published
K-pop hitman Bang Si-hyuk aims to repeat BTS phenomenon
Bang Si-hyuk created the world’s biggest boy band, BTS, making K-pop music a global sensation and himself very rich. Can he repeat the trick with a girl band?
By Jane Lewis Published