Solution to crony capitalism?

When I first heard about a new episode of Econtalk with Michael Munger (and the Econtalk host Russ Roberts), I didn’t pay attention to the title, I just new it has to be great as all of their conversations. I had a chance to see Michael Munger live at SREK – Seminar of Austrian economy in Slovakia that is organized by INESS.

Short summary (but go listen to the episode): An entrepreneur invests energy and parts of profits to increase the quality of the product – higher quality, improving the manufacturing process, hiring better people or lowering the prices. At some point, it is no longer profitable to invest additional money to improvement, but to invest additional dollars in buying politicians, paying think-tanks to suggest new regulation and get involved in rent seeking or raising the barriers of entry for the competition. This practice is simply a fact of economic reality in most societies.

Crony capitalism (as this practice is known) has various forms in different countries. In Europe, it might be a guy in leather jacket, driving Bentley handing of a suitcase full of cash (making it an illegal transaction because of the limited use of cash in most of Europe) to a politician or a representative of a regulatory body. In some more extreme situations, they would flatly create a political party that would be just a proxy, channeling cronies’ regulations directly to the parliament and voting for it. In some countries, these are “discussions” between “our representatives” and “members of a particular industry” in order to “improve quality” or stop global warming. You usually “improve quality” by requiring stamps, certifications, use of hard-to-acquire materials. But mainly there is a costly bureaucracy that would make it very difficult for any potential newcomer to go through the same pain. Think GDPR. Then your wanna-be competitors cannot just disrupt your business, they have to invest first and then fail.

One of the aspects is exactly this – the cost of failure is too high, so entrepreneurs want to assure success by changing the rules of the play.

Solution to crony capitalism

I’ll start by which solutions don’t work. The first one is obvious – as our culture improves, the people improve and their morality would improve. When hundreds of years ago, it was OK to enslave another humans, now it is not. It does not mean it does not happen, it means, that in a current cultural climate, almost no one would say that this is a moral thing to do. So it only happens when “outsiders” do not know it is happening, but still, it is happening much more rarely.

So the solution would be: Make sure that we all consider crony capitalism immoral and the culture changes. Note the use of words: immoral, because it often is legal.

This essentially means that we will fix cronyism by removing it from capitalism. How? By changing the people involved.

But wait, that sounds awfully similar to how the problems of communism are “solved” (rhetorically, never in practice) – we will first upgrade the human race to only take what they absolutely need and then anyone can take anything. It never worked and never will, because the non-compliant behaviour is the most rational one. It won’t fix cronyism either.

The second one is legislating it away – passing laws that would make it illegal to influence regulations.

This is the place where I should let Jennifer Lawrence talk about this solution:

The problem with this solution? It is already illegal in many forms and in many countries. Yet, it is still happening. Legislating away did not work for drugs, weapons, alcohol during prohibition. Legislating greed away did not work in North Korea. Underproduction in non-profitable scenario is “highly regulated” (to put it mildly) in Venezuela. But you cannot escape the economic reality.

To be fair, you can fix some problems, mainly repealing or liberating regulation. Nixon created war on drugs. Now it is being fixed by repealing the laws, exactly how Jennifer Lawrence puts it in the video above – state by state, reaching critical mass and fixing what Nixon broke.

This problem does not usually work for corruption. Direct bribery is illegal almost anywhere. As are a lot of other things. I live in Slovak Republic. We have one of the most transparent and liberal Freedom of information act. All contracts with government entities have to be public, or they cannot be enforced. We are transparent, yet a year ago, a journalist writing about corruption scandals was murdered in his home, with his fiancee. It seems that the lover of then prime-minister had frequent and close contact with her ex-lover, incidentally working for Italian mafia. The Italians were apparently in close contact with the chief of secret service.

Culture change is slower then politics, it works very rarely. I am not denying the fact that culture and legislation can lead to better or worse effects. I am saying that this change is slow and it does not always go in one direction. Does it really matter that much whether the bribe comes from a 90s-style dressed mafioso on an awfully expensive Bentley or by a wire transfer from a Saudi hedge fund as a donation? Or through producing thousands of pages of paper in some non-governmental regulatory body sponsored by [insert your favourite cronyist megacorporation here]?

Parallel societies

Many of you know we are experimenting with parallel societies. We started Parallel Polis – a crypto utopian house that runs on cryptocurrencies, open-source music, our own morality and justice and our common goal of growth of us as people and also as entrepreneurs. We are building a parallel society now, it is not a future-utopia project, it exists and you can start your own.

This approach combines two of the above solutions in a unique way that makes it work. First, there is a common (shared) morality, where we all agree that cronyism is not a way to go. How do we do that? Well, people have many opinions on this topic, from agorists (“let’s steal from the state, it will go bankrupt sooner”) to progressive democrats. But people that are a part of our parallel society, cannot be part of our culture, if cronyism is how they grow their business. Our values are very clear and the role models in our culture do not go to meetings with politicians, however well-intentioned they might be.

We’ve been criticised for that, because what looks like a lobbying can be just an honest attempt to make the world a better place. We have a more impactful way to make a world a better place.

The grassroots change that Jennifer Lawrence talks about has a very interesting property. The impact of change drops exponentially with the distance (distance being social distance in a network of society). You can be a huge positive influence on the 150 people around you, you can make a small change in thousands around them and your impact is negligible on a national or world scale.

Impacting our life positively does not go much further beyond our own “Polis”, the smallest unit of society larger than a family, or a “city”. Polis in ancient Greece were much smaller than today’s cities. I live close to Vienna, our impact is close to zero there. But in Vienna, there is Riat, another form of parallel society, with similar values. There’s Prague Paralelní Polis. There are new ones being created right now. Some are more like clubs, some are co-living spaces, some are virtual, some are physical. One thing should be clear though – our positive impact is for us. Meaning – we are not trying to change anything with those that don’t want to be part of our society. We are not “let’s change everyone” society we are “those that can change are welcome to join” society.

And that’s how you change the world – create something that is extremely beneficial for those that want to be part of it. If you don’t know how, start by fostering private interactions, don’t hestitate to switch among being inspired by people around you, work with them, create companies with them, grow together. These close interactions within a common freedom-based culture have an unbelievable effect. In some cases, it is an intense ride that is not for everyone. In other cases, it is just a closer group of people that like to spend time together.

Create it in a decentralized, non-hierarchical way, meaning if someone does not agree with you, or if they want things to be a bit different, they are free to turn their vision into reality by creating another parallel society. These are not competitors, they are parallel experiments. They accelerate our learning, like adding a new processor core to a computer.

Did I just invent this? No, the idea is popping back over and over again. Many people have learnt that fighting evil is not the best strategy. Building the solutions that solve the problem is.

“A lot of people don’t like the idea, because it requires effort and because they’ve been seduced by the big lie of democratic politics, which is this:

If you can complain well enough, the machinery of the state will create what you want.”

– Paul Rosenberg in Fighting Evil Is a Failed Strategy

We can become a society of small parallel societies, where the cronies won’t matter, they and the politicians would think they have a job, but most of the interactions are among the members of the parallel society. They will evaporate like Rome, without putting down the flag, just fading into irrelevance.

You cannot easily change culture, but you can choose culture.

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