Politicians Have Never Been Good Venture Capitalists

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Few seem to grasp the difference between free market capitalism and crony capitalism. But that difference is huge. One is health for an economy and the other is poison for it. Most people who denounce capitalism are really criticizing crony capitalism. We need to be clear on the difference.

Crony capitalism is not a new phenomenon. Throughout American history it has jockeyed for position alongside free market capitalism. Free market capitalism stimulated the first great boom in the American economy in the 19th century. Great capitalists like James J. Hill built and operated transcontinental railways all throughout the American continent. At the same time, crony capitalists were doing their best to promote their interests and undermine the growth of a nation. If the crony capitalists had their way, America might not have built a transcontinental railroad but rather a transcontinental canal.

Few seem to grasp the difference between free market capitalism and crony capitalism. But that difference is huge. One is health for an economy and the other is poison for it. Most people who denounce capitalism are really criticizing crony capitalism. We need to be clear on the difference.

Let’s start with free market capitalism, and let’s use the car as an example. Henry Ford is our model capitalist with his Model T. He made them so durable and so cheap that by 1927 more than 15 million Americans had each paid about $400 to drive one. Earlier, when cars were much more expensive, Americans chose to drive carriages, hop on trolleys, or just walk. Electric cars were also an option during this period but customers ultimately chose to by cars with internal combustion engines. Ford’s entrepreneurship changed American habits and added value to rich and poor alike by making it easier to get to work and go places previously out of reach. He became a billionaire by serving the needs of customers and making their lives better.

In Ford’s day, markets also determined what would be used for fuel. Ford originally thought that ethanol, made from renewable crops, would be the “fuel of the future” for his Model T’s. “There is fuel in every bit of vegetable matter that can be fermented,” Ford said. But he discovered that gasoline was cheaper than ethanol to produce, and got more miles per gallon on the road. So Ford made his cars able to run on gas as well as ethanol–and he let the free market determine which one  customers preferred.

Today, much of the car market has shifted to crony capitalism–which means that politicians, who are seeking votes, and businessmen, who are seeking federal cash, are making more of the decisions about what kinds of cars people will buy. Much of what people get is what politicians and corporate leaders working together through government say people should have, not necessarily what they want. Just look at the media attention surrounding GM’s electric Chevy Volt prior to the 2012 presidential election cycle and now. Further, current Volt sales figures are significantly lower than the spring of 2013.

Burton Folsom is professor of history at Hillsdale College and author, with his wife Anita, of Uncle Sam Can’t Count: A History of Failed Government Investments, from Beaver Pelts to Green Energy (Harper Collins, 2014). Blaine McCormick is a business professor at the Hankamer School of Business at Baylor University where he teaches the first-year business course. 

Ethanol, in the world of crony capitalism, has become the government’s fuel of choice in the last generation. Dwayne Andreas, for example, was the long-time head of Archer Daniels Midland. His company held corn, and rather than let consumers choose gasoline alone, he lobbied every president since Lyndon Johnson to give subsidies for ethanol to be blended with gasoline. Since free market capitalism would not choose ethanol, Andreas contributed millions of dollars to politicians who would vote federal aid for ethanol. He once got into trouble in 1972 for sneaking 1,000 one hundred dollar bills into the White House to give to Richard Nixon, but Andreas accomplished his purpose of enriching politicians who would cancel market choices and force the use of more expensive ethanol in gas tanks.

Not just the fuel, but the cars themselves are subject to crony capitalism. Electric battery-operated cars, although not competitive in a free market, have been made competitive by politicians and crony capitalists working together to subsidize battery-operated cars. Elon Musk, for example, is the founder of Tesla Motors, which makes electric cars. Tesla won a $465 million loan from the Department of Energy to make all electric plug-in cars. Tesla’s Model S, even with subsidies, sells for fifty thousand dollars. But buyers get a $7,500 federal tax credit if they buy a Tesla for personal use.

Political entrepreneurs like Musk must keep the subsidies coming to keep the cars selling. He must create political support. In 2012, Musk gave more than $100,000 to President Obama’s reelection campaign. Musk also had strategically placed donors working for him. Steve Westly, who has invested in Tesla and has served on its board, also raised more than $1.5 million for President Obama. Musk also hired the Podesta Group to do lobbying for him. John Podesta, its leader, was transition director for President Obama.

When people complain about expensive gas, high priced cars, and a soaring national debt, they are often denouncing crony capitalism, which puts power in the hands of politicians and complicit businessmen, not free market capitalism, which has given real “power to the people” and has made the U.S. the world’s economic giant.

Burton Folsom is professor of history at Hillsdale College and author, with his wife Anita, of Uncle Sam Can’t Count: A History of Failed Government Investments, from Beaver Pelts to Green Energy (Harper Collins, 2014). Blaine McCormick is a business professor at the Hankamer School of Business at Baylor University where he teaches the first-year business course.

By Blaine McCormick & Burton Folsom  | Real Clear Markets | March 25, 2014

http://www.realclearmarkets.com/articles/2014/03/25/politicians_have_never_been_good_venture_capitalists.html?utm_medium=referral&utm_source=pulsenews

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