Length: 595 Words     Reading Time: 3 Minutes

I am reading the Winter Issue of “The Independent Review” published by The Independent Institute; the Institute is located in Oakland, California.  This Winter Issue primarily concerns itself with a “…debate about the nature of capitalism.”  The lead paper is titled “The Road to Cronyism” written by Michael C. Munger, Professor, Department of Political Science and Economics at Duke University and Mario Villareal-Diaz, Associate Professor in the Department of Political Economy and Moral Science at the University of Arizona.

Professors Munger and Villareal-Diaz pose the following question: “Suppose it’s true that capitalism has a tendency—it’s not inevitable or irreversible, but a tendency nonetheless—to devolve into crony capitalism.  Is laissez-faire simply the first step on a kind of road to serfdom, where giant corporate syndicates achieve a parallel kind of economic planning every bit as pernicious as that feared by Hayek?”

Six other papers respond to the points that Professors Munger and Villareal make in “The Road to Cronyism.” One of the six is titled “The Fall and Rise of Laissez-Faire in the United States, 1789-1900” authored by Burton W. Folsom, who is a Distinguished Fellow at Hillsdale College.  Mr. Folsom sets forth three critical points that illustrate how the free market system differs from government intervention.  I believe these three points can be used in future posts to clarify the differences between capitalism and socialism.  Here are Mr. Folsom’s three points which I will put into my own words:

1.  When the Federal Government or a State Government spends tax revenues for a capital project or program, political decisions dominate the decision-making process. Such political decision-making overrides any economic decisions based on a clear understanding of costs and benefits.  An example of this is the political cost analysis used by the Kennedy Administration to select the contractor for building the Tactical Fighter Experimental (TFX) aircraft.  The total procurement for this aircraft amounted to $6.5 billion, the largest military aircraft procurement, up until that time.

2. When the Federal Government or a State Government spends tax revenues for a capital project or program, the final cost is typically higher than if a private company or an entrepreneur pays for the project.  Why? Because a private company or an entrepreneur will spend its (his) money more wisely than a government bureaucracy that does not have an objectives measure of real fiscal accountability.

3. When the Federal Government or a State Government builds a facility, facility ownership rests with the government, and no one has any stake in ensuring the project meets quality standards.  A private company or an entrepreneur does have such an interest because future costs for maintenance and repair would affect the bottom line.  The government has no bottom line. 

These are simple points, but they are quite profound in demonstrated results because their implications are far-reaching and consequential.

I want to close with a brief amplification of Mr. Folsom’s second point.  For-profit companies or private sector companies have accounting mechanisms in place that can easily demonstrate whether a profit or loss has occurred in the current accounting period.  Revenues and net income drive the process because they are measurable, and manufacturing companies also have quality control functions that control product quality.

The government has no comparable processes available to it to demonstrate the cost-effectiveness or value of the capital project or program.  All the government can do is state whether the capital project or program was under budget and on schedule.  Issues regarding quality and actual results can only be measured in the future because incentives do not exist to drive any immediate analysis.