The Power of the Poor
 
Crony Capitalism Mercantilism, or “crony capitalism” is the norm for much of the world. Capitalism has evolved over the centuries. It is more highly developed in the West than in the developing and post-Soviet world. But the West, too, has a mercantilist past.

So how did Western capitalism evolve from its mercantilist origins to societies of broad-based wealth? Hernando de Soto argues that most of the Westís wealth originated not from colonialism, but from the institutions of property and lawómechanisms by which early Americans and Europeans were able to extract greater value from commodities and capital1 Still, de Soto thinks real capitalism hasnít arrived in much of the world:

The private sectors of most developing world countries are not really capitalists. They exist largely on the basis of competing for government favors, contracts, and privileges, and their economic approach is to try to exclude or marginalize competitors — not by outproducing them in quantity, quality, or prices, but through political means, from legislation to outright use of the many resources of legal coercion at the disposal of a modern state. It is these people who are giving capitalism a bad name. This is why I have characterized these official economies not as a free-market economy but as mercantilist economies.2

The private sectors of most developing world countries are not really capitalist. They exist largely on the basis of competing for government favors, contracts, and privileges, and their economic approach is to try to exclude or marginalize competitors — not by out-producing them in quantity, quality, or prices, but through political means.
Most of us in the developed world are not aware of this distinction, which can either cloud our perceptions of Western capitalism, or cause us to conflate it with mercantilist forms.

Luigi Zingales and Raguram Rajan, co-authors of Saving Capitalism from the Capitalists, argue that financial sectors in the developing world cling to their dominant positions by using government regulation to deny credit. The less financiers do to broaden access to credit, the greater their power to restrict market entrants. Paradoxically, denying credit allows them to maintain power over the financial sector, suggest Zingalis and Rajan. Financiers on one side and bureaucrats on the other each guard the gates of the temple, keeping all but the wealthy and well connected from obtaining access. This incestuous policy of closure benefits the few at the expense of the many who comprise a broader, untapped market.

If government officials and financiers opened the system, made it more transparent, and let in competitors, it would mean they would face tougher competition and limitations on profitable inside deals. Such is the essence of crony capitalism: it depends on government regulation and state bureaucracy to exist. In markets free from government influence, there is much more dynamism, competition, transparency and choice.

The world will always be full of predators who will learn to game the legal system at the expense of market competitors and the people. Yet, according to de Soto, “one cannot oppose formal property systems for this reason, any more than one should abolish computers or automobiles because people use them to commit crimes.”3

Still, people in developing nations who are shut out of the system believe capitalism is a private club, open only to a privileged few. (The same was true for apparatchiks in Communist nations, as well, and popular uprisings resulted). This exclusion angers the billions standing on the outside looking in. So what should be done?

I am convinced that what is called capitalism has lost its way in developing and former communist nations. It is not equitable. It is out of touch with those who should be its largest constituency. And instead of being a cause that promises opportunity for all, capitalism appears to be increasingly the leitmotif of a self-serving guild of businessmen and their technocracies.4

Slavery was the norm for centuries. Western colonial powers did great harm to the peoples they conquered. Englandís Enclosure Act caused the starvation of thousands of Irish peasants in the 19th Century. But those are not actions endemic to capitalism. Indeed, if Marx were alive today he might agree looting occurs under many systems, as we have come to understand with communism.

With its victory over communism, capitalismís old agenda for economic progress has been forgotten. Capitalism requires a new set of commitments. It makes no sense continuing to call for open economies without facing the fact that piecemeal economic reforms only open the doors to tiny groups of elites capable of benefiting from these new rules. Most of humanity continues to languish outside the law. So the law must be made simple and accessible to everyoneóand privilege no one.5

“I am not a die-hard capitalist,” says de Soto. “I do not view capitalism as a credo. Much more important to me are freedom, compassion for the poor, respect for the social contract, and equal opportunity. But for the moment, to achieve these goals capitalism is the only game in town. It is the only system we know that provides us with the tools to create massive surplus value.”6
References:
1 de Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs In the West and Fails Everywhere Else, New York, NY: Basic Books, 2000. p217.
2 Dario Fernandez-Morera, Reason Online “Interview with Hernando de Soto”.
3 de Soto, Hernando. op.cit. p216.
4 Ibid. pp226,227.
5 Ibid. p227.
6 Ibid. p228.
Editorís Note: Much of the content of this page is from de Sotoís book, The Mystery of Capital: Why Capitalism Triumphs In the West and Fails Everywhere Else, New York, NY: Basic Books, 2000.