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suffers from “market failure,” to use the term that economist Francis Bator and others used. 9 The policy implication is that government can correct a “market failure” by reallocating resources as indicated by theoretical models. The implicit assumption in such analyses is that the government is an omniscient, benevolent dictator. It has sufficient information to allocate resources efficiently (omniscience), it has the desire to allocate resources efficiently (benevolence), and it has the power to do so (dictatorship). In the academic literature, this approach to policy analysis has been referred to as the planner’s problem. The planner is the omniscient, benevolent dictator who must find the solution to the optimal allocation of resources, and economists who frame a planner’s problem always conclude by showing the planner’s solution. While this approach has been criticized, 10 it remains generally accepted in academic economics. Economists routinely identify inefficiencies in resource allocation and show what the government needs to do to correct the inefficiency without analyzing whether the government has sufficient information and the right incentives to actually accomplish what the analyst recommends. An analysis of government decision-making as Mises suggests shows that the government is not omniscient, it is not benevolent, and it is not a dictator. The government is not omniscient. Often, government decision-makers do not have the necessary information to implement the recommended policy. Economists assume that policymakers know people’s preferences, that external costs can be measured, and that, in general, policymakers can identify the optimal allocation of resources in real life that economists have identified in theory. LAYING A FOUNDATION 11
However, policymakers can never obtain much of this information. As Hayek noted,the information necessary to optimally allocate resources is decentralized, and often only the person who has this information can use it effectively. 11 When they undertake policy analysis, economists tend to ignore Hayek’s insight that policymakers cannot acquire or act on this decentralized knowledge. The government is not benevolent. Policymakers consider their own interests when making decisions and formulating policies. This point has also been well established but widely ignored. For example, political economist William Niskanen developed a well-known and frequently cited model of bureaucracy that concludes that government bureaucrats attempt to maximize their budgets, 12 and as a result, political leaders inefficiently allocate excessive resources to them. Interest-group models of government illustrate how politicians and interest groups, following the incentives of the political process, inefficiently allocate resources. 13 Yet, too often policy analysts assume that those in government set aside their own interests to further the public interest. The government is not a dictator, in the sense of being omnipotent. Even dictatorships must rely on a power structure to keep the dictator in power, so people with political power must provide benefits to their supporters to maintain that power. This fact is true whether dictators support their cronies or whether elected officials provide special-interest benefits to the majority coalition that elects them. 14 One individual, even a “dictator,” cannot unilaterally make and enforce government decisions because everyone in power relies on a group of supporters to maintain that power, regardless of whether it 12 LIBERALISM AND CRONYISM
Page 1 and 2: LIBERALISM AND CRONYISM Two Rival P
Page 4 and 5: LIBERALISM AND CRONYISM: TWO RIVAL
Page 6: CONTENTS Introduction 1 Chapter 1:
Page 10 and 11: INTRODUCTION People often see polit
Page 12 and 13: who have the power to make decision
Page 14 and 15: CHAPTER 1: LAYING A FOUNDATION Befo
Page 16 and 17: hijacking of the term to describe a
Page 18 and 19: esources can be taken from some for
Page 22: is a group of cronies in a dictator
Page 25 and 26: ecause it permits voluntary exchang
Page 27 and 28: people’s economic well-being. The
Page 29 and 30: consumer demands. Examples of rent-
Page 31 and 32: the Politburo and the needs of conn
Page 33 and 34: consider the benefits and costs of
Page 35 and 36: upon state privilege and disproport
Page 37 and 38: their loyalty to the socialist stat
Page 39 and 40: cronyism from gripping every area i
Page 41 and 42: communism are well documented and w
Page 43 and 44: Accountability was embodied by refo
Page 45 and 46: despite comprising only 3 percent o
Page 48 and 49: CHAPTER 5: FASCISM Fascism, the pol
Page 50 and 51: use the sword of the Nazi state to
Page 52 and 53: planners created a back door for in
Page 54 and 55: CHAPTER 6: CORPORATISM Corporatism
Page 56 and 57: puts men and their possibilities in
Page 58: that this form of guided capitalism
Page 61 and 62: therefore provide sufficient benefi
Page 64 and 65: CHAPTER 8: PROGRESSIVISM Progressiv
Page 66 and 67: people who argue for limited govern
Page 68: Security, Medicare, and Medicaid do
Page 71 and 72:
the direct election of senators, ch
Page 73 and 74:
argue for narrow individual interes
Page 75 and 76:
their roots to diverse sources of i
Page 77 and 78:
promises to assume a company’s de
Page 79 and 80:
enefits for his former venture capi
Page 81 and 82:
prices of firms within the textile
Page 83 and 84:
ment the power to make decisions an
Page 85 and 86:
of social justice, cronyism has an
Page 87 and 88:
for women in the twentieth century,
Page 89 and 90:
ecause it advocates granting these
Page 91 and 92:
should pay the same as comparable b
Page 93 and 94:
way, the US government replaced the
Page 95 and 96:
an individual, social justice advoc
Page 98 and 99:
CHAPTER 12: CRONY CAPITALISM AND DE
Page 100 and 101:
subsidies, political connections di
Page 102 and 103:
CHAPTER 13: INDUSTRIAL POLICY The t
Page 104 and 105:
“cottage industries” that clust
Page 106 and 107:
of complex systems. He applied this
Page 108 and 109:
South Korean industrial policy gave
Page 110:
The degree to which Japan’s and S
Page 113 and 114:
to get involved in lobbying to prot
Page 116 and 117:
CHAPTER 15: LIBERALISM VERSUS CRONY
Page 118:
that power will arise with another
Page 121 and 122:
with power support each other to ma
Page 123 and 124:
an incentive to cooperate for the b
Page 125:
environmental movement often advoca
Page 129 and 130:
6. Ludwig von Mises, Human Action,
Page 131 and 132:
12. James Heinzen, “The Art of th
Page 133 and 134:
CHAPTER 5: FASCISM 1. Peter Temin,
Page 135 and 136:
CHAPTER 8: PROGRESSIVISM 1. Terry L
Page 137 and 138:
16. Bruce Yandle, “Bootleggers an
Page 139 and 140:
3. Eamonn Fingleton, “Japan’s I
Page 142 and 143:
FURTHER READING Acemoglu, Daron and
Page 144 and 145:
ABOUT THE AUTHORS Randall G. Holcom
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