HomeEconomyPeter Klein on nepotism, capitalism and the path to entrepreneurship

Peter Klein on nepotism, capitalism and the path to entrepreneurship

Nepotism is not capitalism

We often hear capitalism being criticized: in contemporary politics, journalism, popular discourse, and even in some business schools and some management scholars and their students. But after review, the criticism is not about capitalism, but about nepotism. The two are completely different systems, and cronyism and corporate political activities have not been manifested in capitalism. If we can adhere to the purest form of capitalism-entrepreneurship, it will never appear.

definition Capitalism

Capitalism is a system in which production factors are privately owned and resources are allocated through the market, that is, voluntary cooperation between individuals, and individuals and groups can freely engage in economic activities without central control or state intervention.

Capitalism includes a monetary system that enables entrepreneurs to engage in economic calculations, and a system that supports property rights and the rule of law. People have a high degree of personal freedom and can form groups and take actions without being coerced or forced by the state.

definition Cronyism

Crimsonism is a system in which the state is responsible or highly influential in the allocation of resources to enterprises. Some enterprises obtain advantages over other enterprises based on their relationship and influence with government officials, rather than their ability to meet customer needs through outstanding capabilities. The supported ideology supports the state’s high degree of intervention in the distribution of economic resources, and the system and practice support the manipulation of public policies as a strategy to increase profits.

The advantages of capitalism and the disadvantages of nepotism

The advocacy of capitalism in the paper we discussed with Professor Klein in this business economics podcast (“Capitalism, Nepotism, and Management Scholarship: Call for Clarity”): Mises.org/E4B_119_Paper) Is not a pure theory, but compared to alternative systems, capitalism brings greater benefits to everyone in society.

Current critics have expressed dissatisfaction with certain aspects of the status quo, such as problems related to the natural environment or their reactions to measures of income inequality. Believing that taking decision-making power away from individuals and companies and handing it over to the government will bring greater benefits to society. This is not only an illogical leap. It also moves the system toward nepotism, allowing unscrupulous people, whether they are executives, investors, labor unions, politicians, or government bureaucrats, to sacrifice social interests.

The nuances of cronyism and the ill effects of scale

Bribery, blackmail, blackmail and other forms of crime are widely regarded as inappropriate. The problem with cronyism lies in the legal practices encouraged by intellectuals and business school scholars as a source of commercial advantage through manipulation of the political system. These activities include lobbying, political donations or granting board seats to retired government officials.

Peter Klein pointed out that there was a time when Microsoft, as a budding high-growth technology company, did not even have an office in Washington, DC. Politicians cannot help them and do not understand their business. But politicians have passed an expensive, threatening, and protracted antitrust lawsuit to remind Microsoft, which is truly in power. Now Microsoft and other mature high-tech industries have extensive offices and very large lobbying budgets in Washington, DC. The degree of cronyism is comparable to the size of modern companies.

The price of nepotism

The costs of nepotism are direct and indirect. Direct costs are the production of goods and services that are not properly allocated and that the free market does not want but which politicians like. The skills of executives and managers are used to influence government officials, rather than seeking market returns through consumer acceptance and consumer value. The way the enterprise develops is quite different from the way it develops under capitalism.

Some resource misallocation is most obvious in the establishment of corporate bureaucracy. The bureaucracy is not a strategic decision maker, nor a producer of goods and services. They are committed to compliance, government relations, and cooperation with regulatory agencies and lawyers. Their salaries, office space and equipment are all misallocated.

The indirect cost of cronyism is the destruction of the system. A well-functioning market has a system for contract integrity, dispute resolution, and protection of private property. These institutions are neutral: they enforce general rules that apply to everyone. The influence of nepotism—in fact, its full meaning—is to overturn general rules and put those in power above those who have no power. Confidence in the organization has been eroded.

Business schools and management scholars are part of the problem

Stakeholder capitalism, ESG (environmental, social, and governance considerations for investment), and DEI (diversity, fairness, and inclusiveness requirements) and other management practices are trends in the development of cronyism, transforming business activities from voluntary satisfaction of customer needs Directional transfers Free market transactions are consistent with government directives, some are current and some are expected.

Business schools have been encouraging this non-market behavior and developing related indicators, scales and processes, all of which are vague and costly to implement. Executives welcome the ambiguities that make accountability more difficult.

In fact, business schools and universities are easily affected by the practices and measures they encourage, and their employees are now flooded with middle managers, administrators and compliance departments. All this is very expensive and wastes resources.

The company has demonstrated similar disruptive economic behavior through “wake up” advertising campaigns and company training programs. Gramsci’s long march in the organization seems to have reached the corporate human resources department, and they are the source of most of this uneconomic and anti-capitalist behavior.

Entrepreneurship is the way to lead us out of the quagmire of nepotism

The emerging entrepreneurial movement is a way out of nepotism and corporatism. Startups that focus on consumers and customers, innovation and improvement, and the production of ever-improving goods and services have no time for cronyism. They are not seeking political protection.

Newer companies, newer business models, and companies that use new technologies invest less in lobbying and corporate political activities. They do not have the time or resources to do this, and a slow and rigid government will only hinder them.

Entrepreneurship and innovation can trigger the separation of government and enterprise, reverse the process of cronyism, and encourage an open, vibrant, and dynamic economy in which enterprises of all sizes pursue innovation and new economic value full-time, without investing any resources in lobbying or government relationship.

Other resources

“Capitalism, nepotism and management scholarships: Call for clarity” (coming soon School of Management’s perspective) By Peter Klein, Michael Holmes, Nicolai Foss, Siri Terjesen and Justin Pepe (PDF): Mises.org/E4B_119_Paper

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