“Rent-seeking” and the socialist corporation

Charges of “socialist” seem to be emerging as primary attack strategy by Republicans toward Democrats as the 2020 elections fire up. It is, in my view, all an inane “Humpty Dumpty” twisting of the terms capitalist and socialist to mean “whatever I choose them to mean” in order to raise the ire of captive television and online audiences.

In addition, the use of both of these terms, by both Republicans and Democrats, has strayed far from their original meanings. This post is about how the most Republican-supported corporations in America are, in classical terms, much more “socialist” than they would admit, especially in how they focus on actions that are described by economists by the innocuous-sounding term rent-seeking.

What is “rent-seeking”?

Rent-seeking is an individual or corporate focus on obtaining economic gain by persuading the government to provide tariff protection (key to its original usage [1]), specific tax benefits, loan subsidies, or grants preferably not available to their competitors. Rent-seeking provides no overall benefits to society, rather it results in reduced government revenue overall, needlessly-increased government spending or reduced competition in the marketplace.

Kids, can you think of any businesses today who focus on rent-seeking as a primary part of their business models? I thought so.

Who is the more “socialist”?

Even though he labels himself as “socialist,” Bernie Sanders is really better described as a social democrat if we were to use the language of any other country that has successfully embraced his proposals. Social democracy is the democratic use of “the commonweal” to benefit those in society who are disadvantaged by a primarily-capitalist economic structure. This best describes, for instance, the Scandinavian social democracies, which not only provide more “happiness” to more people, but compete well in a global economy. [2]

At the same time, corporations and their owners, mostly self-defined “capitalist” bastions, have often embraced, whether acknowledged or not, the “heavy hand of government” into their operations and bottom line when it has benefited them. Classic socialism, as defined in the early 1800s, focused on government control over primary means of production. When the government is a primary source of your corporate revenue, you are, in reality, deeply in bed with the political powers-that-be.

While “nominally” capitalist, the massive U.S. defense support industry falls far from capitalist ideals. It is “rent-seeking” to the extreme, with contracts often let based on political favoritism, guaranteed prices, government quashing of competitors (especially foreign ones), and direct or implied guarantees on debt undertaken by the manufacturers used to fund expansion and to provide cash for the owners.

A similar situation exists with “privatization,” as I wrote about in a post last year about Medicaid privatization in Iowa as well as the private prison “industry.” While usually portrayed as a move from “socialism” to “capitalism,” this is more often rent-seeking gone amok, and, like the military suppliers, woefully lacking in the foundational characteristics of a free market.

Socialized urban development

I will defy you to name one major retail shopping center or “big box store” that has not received large subsidies from state and local governments in the form of infrastructure development plus forgiveness or rebates on property taxes, sales taxes and earnings taxes. To pick on the always-pick-on-able Walmart, their wealth has been built on a small three percent net profit margin for decades, but this disguises the reality that almost every new store or expansion receives more than three cents on the sales dollar in its early years in “socialist” corporate welfare.

And they are not alone. I have been involved for a long time in economic development in a relatively poor rural community. Our efforts, too, typically involve a lot of government aid to relocating and expanding businesses, but the amounts pale by several orders of magnitude in comparison to the billions of dollars expended in comparatively-rich metropolitan areas. My point is not that this is necessarily bad, but we should admit that this “government welfare” and intrusion into the means of production for the community is nakedly “socialist.”

While the government does not “own” the “means of production” in the American form of corporate socialism, it is nonetheless inextricably entwined in an “unholy bargain” with government contractors and other rent-seekers.

Bankruptcy as the coroner’s corporate socialism

My final example of “capitalist” corporations really more beholden to government-assisted rent-seeking is in how bankruptcy law evolved over the years. In another post from last year I called this “taxpayer-financed business failure insurance.” While bankruptcy law provides a necessary legal backstop for most responsible corporations to protect them from a disastrous economy, bankruptcy has turned into “business strategy,” as a preferred “second option” for private equity and other highly-leveraged businesses.

In a con game that insurers call “classic moral hazard,” high-debt business owners know that, if they can get their invested cash out fast enough through dividends, management fees, and “carried interest,” the government and the judicial system will protect them on the downside to limit their liability, no matter how badly they screw up. The rest of us pay for these massive corporate bankruptcies, either indirectly through supplier and debt-holder losses, or directly as employees, local community institutions and, sometimes, taxpayer-funded injections of cash, as was done during the housing crisis of 2008.

You can call it “crony capitalism” if you wish, but we are all deeply invested in an often nakedly-corrupt system of government intervention in American business that perhaps better goes by the name of “corporate socialism.” And this system has ardent defenders in Congress, the courts, and the Administration more than happy to dole out taxpayer cash to favored “rent-seekers.”


Notes:

  1. The oft-idolized champion of capitalism, Adam Smith, divided income into profit, wages, and rent, the last term referring to gaining control of land or other natural resources. The modern use of the term “rent-seeking” dates to the economist Anne Krueger, writing in 1974. And by the way, the United States was not recognizably “capitalist” at its founding, contrary to widespread conservative myth-making. Smith’s The Wealth of Nations was first published in 1776, but the economy of the new United States was deeply rooted in mercantilism, which focused on the maximization of exports with high tariffs on imports as a primary way to raise government revenue. We seem to have come full circle here.
  2. The removal of healthcare insurance from dependence on corporate employment has been cited as a significant reason why entrepreneurial businesses continue to thrive in Scandinavia. One can venture into self-employment without endangering their families’ healthcare, as so often happens in the United States.

1 thought on ““Rent-seeking” and the socialist corporation

  1. Sherry Mesle-Morain

    Thanks, Rick. Another great one that gives me depth to my superficial understanding of corporate socialism.

    Reply

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