Snow Job in New Jersey: Crony Capitalism Comes in Many Sizes

23 02 2015

The Wall Street Journal recently ran a piece called Regulation is Good for Goldman Sachs. It was occasioned by remarks made by the firm’s CEO in a recent conference call with investors. During the call, Lloyd Blankfein suggested that the burden of new government regulations was a net benefit to the bank, since its competitors were less able to carry the associated costs.  “More intense regulatory and technology requirements have raised the barriers to entry higher than at any other time in modern history,” said Mr. Blankfein. “This is an expensive business to be in, if you don’t have the market share in scale. Consider the numerous business exits that have been announced by our peers as they reassessed their competitive positioning and relative returns.”

This article is a reminder of the sheer importance of regulatory capture in explaining the emergence of crony capitalism and concentrations of economic power. Regulations that are often intended to protect the weak and the powerless often end up being perverted into measures that enrich particular groups of wealthy individuals at the expense of both other firms and society as a whole.

Spare a thought, though, for the impact of regulation on the degree of competition in humbler sections of the economy. Regulation can protect incumbents and reduce competition in banking, but it can also do so in the world of snow removal, a type of economic activity that is rarely if ever discussed in the financial press.  Banks and their regulators are always in the media spotlight.  Relative to their share of GDP, the zillions of obscure guys who do the vitally important work of removing snow get fewer column inches, at least most of the time.

The New York Times reports that two New Jersey teenagers have been stopped by the police from offering snow removal services to their neighbours.  Needless to say, this sort of harassment will cause future would-be entrepreneurs to think twice before handing out snow-removal flyers to their neighbours. Unfortunately, the Times story does not reveal whether the reporter investigated the possibility that the cops who stopped the teenagers are linked to any of the existing snow removal players. It may be that the cops have friends who are incumbents in this industry, although they also may simply have been on a little power trip.

For the impact of excessive occupational licensing in the United States, see this piece by Matt Yglesias. The website of the Cato Institute’s Police Misconduct project is also worth reading.

Johan Fourie on Afrikaner Entrepreneurship After Apartheid

23 05 2012

Johan Fourie

I know that some readers of this blog will be attending the World Economic History Congress in Stellenbosch in July. You and other readers may be interested in a recent post by Johan Fourie, a South African economic historian. (Fourie is a Senior lecturer at Stellenbosch University and the owner of Gabbema Books).

Fourie notes that nearly two decades after the end of apartheid and Afrikaner-dominance in South African, the Afrikaner bastion of Stellenbosch remains an important economic centre. Fourie shows that Afrikaans-speakers have done very well economically in post-apartheid South Africa and have established vast numbers of thriving new enterprises. He suggests that the prosperity of the Afrikaners is due to rather than despite the end of apartheid, a regime that clearly favoured them with various subsidies. Before 1994, Afrikaner-run companies profited from various crony-capitalist sweetheart deals with the state.


He writes:

1994 liberated not only black South Africans. Instead, I would argue, white South Africans were liberated from an incentive structure that guaranteed a ‘safe’ job in the public sector, or in white-owned, state-supported business. Whites were forced to create jobs for themselves, not simply fill jobs; entrepreneurship, not political (or Broederbond) contacts, became a way to gain power. This is true of many cultural minorities across the world that has little political power: why is it that Somalians thrive in South Africa while their own country falls apart? It is because they know that here they are on their own. There’s an attitude of “if we fail, there is no one to blame but themselves”.

Ironically, the 1994 transition may have had exactly the opposite effect for black South Africans. While a democratically elected government brought political freedom, it also created an incentive structure of entitlement. The attitude was that “we had suffered enough during those dark days and should now share in the economic spoils”. Government policy made this easier: black economic empowerment, for all its good intentions, did not create entrepreneurs, it created a class of connectors, networkers, tenderpreneurs or whatever you would like to label those with the skills not in creating something new, but in redistributing.

Read more here.

Fourie’s post reminds me of some of the arguments about the nature of crony capitalism made in Haber, Stephen H. 2002. Crony capitalism and economic growth in Latin America: theory and evidence. Stanford, Calif: Hoover Institution Press.

It also got me thinking about

Baumol, William J., Robert E. Litan, and Carl J. Schramm. 2007. Good capitalism, bad capitalism, and the economics of growth and prosperity. New Haven: Yale University Press.

It seems to me that historians of North American business have not done enough to engage with the literature on typologies of capitalism and entrepreneurship. In particular, they ought to pay more attention to Baumol’s distinction between productive, unproductive, and destructive entrepreneurship. There is a bit about this in the introduction of Canada’s entrepreneurs: from the fur trade to the 1929 stock market crash. However, vastly more work needs to be done on this subject between historians of Canadian and US business.