Capitalism Is Not Corporatism (2009 Jun)

by Barry A. LieblingA whale is not a fish, although both animals inhabit the ocean and have much in common. Being a mammal is essential to being a whale, which is fundamentally different from a fish. If someone insists that a whale is a fish he might mislead a listener, but it does not change reality.

Capitalism is not corporatism, although both political systems are concerned with business and have some things in common. In each there are companies, investors, the potential for profits and losses, and a role for the government.

In free market capitalism individual rights is the theme. Businesses and property are privately owned and managed. There is no guarantee that any particular business will succeed or fail. The government’s job is limited to protecting rights by prohibiting the use of force and fraud. It cannot be used as a crutch or a cudgel.

In corporatism there is an enforced fraternity between business interests and the government. The core idea is that “private” businesses and the government are in cahoots and justify themselves as working for the “common good.” The government may not be the majority owner, but it is inescapably the bigger brother. A corporatist alliance enables government officials to get what they want without fully taking over a business, and it permits business interests to harvest prizes – including their own survival – they could not obtain without government assistance.

Currently an outstanding example of corporatism is the relationship between the automobile industry and the federal government. The Big Three automobile manufacturers – Ford, General Motors, and Chrysler – having been on losing streaks for a long time, obtained government bail-outs from the Bush administration. The Obama team has picked up the baton and is running to rescue General Motors and Chrysler by injecting more government funds and reorganizing.

The government is extending its strong guiding hand and shaping what stockholders, bondholders, management, and organized labor will get from the newly structured companies. Interventions that are recognized as dreadful to free market capitalists are just what the doctor ordered to ardent corporatists who delight in attempting to “fix things” with tax dollars.

Curiously, sometimes corporatists attempt to masquerade as capitalists. They insist that their government-enforced meddling is part of the capitalist system or that it is intended to save capitalism.

Scott Sperling’s article in The Wall Street Journal (“Obama’s Auto Plan Is Capitalism at Work.” May 19, 2009 ( praises the Obama administration’s affair with the auto industry and argues that its policies are essentially sound. He asserts that Chrysler and GM need to be restructured to have a chance for long-term success – and that government intervention is the way to go. He applauds the government-controlled task force for being tough with the stakeholders – including workers, retirees, and debt holders – and for succeeding in getting them to “agree to the government’s plan” – “policies that inflict pain across the board.”

It is not remarkable that Mr Sperling supports the Obama administration’s auto industry policies. There is no shortage of interventionists, and the President’s approval ratings are outstanding. It is astonishing, however, that he labels the policies as “capitalism at work” and in no way “anticapitalist.” It could not be more clear that a public-private business partnership is a defining characteristic of corporatism – sometimes called “crony capitalism” or “state capitalism.”

Mr Sperling seems to be arguing that the restructuring counts as capitalism because there are investors who took risks, hoped to make a profit, and should have been prepared to lose money. Furthermore, he intimates that because some debt holders did as well as they would have without government intervention, capitalism is preserved. He fails to acknowledge that when government muscle determines an outcome the process does not qualify as capitalism.

Mr Sperling’s essay ends with a reference to the economist Schumpeter’s “creative destruction” – an engine of progress in capitalism where some firms go out of business while others rise to take their place – and suggests the Obama administration’s good work is enabling it. But this is the exact opposite of Schumpeter’s original concept where new firms replace those that fail as a consequence of private innovation, business improvements that occur without government interference.

It is not obvious why Mr Sperling argues that corporatist policies are equivalent to “capitalism at work”. Perhaps he intends to blur the distinction between voluntary actions and government-mandated directives to make the latter seem more palatable. By insisting that the two are the same he may mislead some people, but it does not change reality.

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