Cronyism and the Problem of Ill-Gotten Gains

Today, the government occupies more than half of the economy. This is probably true in every country in the world. In 2015, Austrian School economist Robert Higgs analyzed that the government accounted for 53.7% of the U.S. economy. Even judging by the ratio of fiscal spending to GDP, 36.41% of the U.S. economy belongs to the government. Although I have not been able to verify the exact data, it would be reasonable to say that in the Korean economy as well, at least one-third is occupied by the government. What these statistics imply is the uncomfortable truth that, in today’s market economy, no business can operate freely from the government. In one way or another, every firm benefits from the government.

Government support for business can be criticized in terms of economic utility, but from a liberal perspective, what matters more is its moral character. Because taxes are collected by force, they are to some extent predatory. If so, it can be said that the government acquires goods unjustly. From a liberal point of view, no one has the right to dispose of goods acquired unjustly. Such exchanges are not legitimate; they are established through force and coercion. Therefore, it is immoral for the government to support firms in various ways with goods it has acquired unjustly.

That said, it would be too simple to conclude that the liberal position is that firms must return “all” goods received from the government to taxpayers, the rightful original owners. Since the government occupies more than half of today’s market economy, arguing that “all” exchange processes involving the government must be canceled would lead to results no different from socialism. We must therefore approach this issue more carefully. The technical issues involved in addressing specific cases can likely be handled only by experts in liberal jurisprudence. It is difficult to deal with such specialized knowledge in this article, so I will only briefly examine a few principles and basic aspects.

First, cronyism is fundamentally the government’s responsibility. From a liberal perspective, it is not the bribe-giver but only the bribe-taker who is regarded as committing a crime. In the same vein, entrepreneurs and managers who engaged in cronyism and bribed government agencies and politicians should not be subject to legal punishment.

Second, we need a clearer definition of what constitutes unjust enrichment. If every form of support received from the government counts as unjust enrichment, then the foundation of today’s economic system is not a market economy but something no different from socialism. Moreover, all firms would have to disgorge every subsidy they received, which would require enormous social costs and a revolutionary, radical process. There may be various ways to approach the issue, but a criterion liberals could probably agree on is that firms whose losses from the government exceed the benefits they received from it clearly did not obtain unjust enrichment. The opposite case would apply to firms that did obtain unjust enrichment. Clearly, some firms cannot survive on their own in the market and continue to exist only through government subsidies, while other firms, though capable of growing much larger, are stuck in the unfortunate situation of being unable to realize their full potential because of taxes, regulations, and similar burdens. In such explicit cases, it would be relatively easy to reach an answer. The problem lies with firms that fall into neither category. This is a technical issue requiring advanced legal knowledge, and it is an area that calls for the wise judgment of legal scholars.

Third, we must seek ways to recover unjust enrichment. It would be difficult to regard as liberal any plan in which the government serves as the intermediary to forcibly confiscate unjust gains from firms and return them to taxpayers. One of the best alternatives that can be proposed is a class action by taxpayers.

Fourth, we must ask from the outset whether recovering unjust enrichment is itself liberally justified. A useful point of reference here is the issue of slave reparations. In the United States, the homeland of liberalism, the dark history of white people enslaving black people has often led liberals to debate whether descendants of slave owners should compensate descendants of slavery’s victims. What liberals have generally agreed on so far is as follows.

1. According to Murray Rothbard, a leading theorist of liberal rights theory, property acquired unjustly should be restored to its rightful owner whenever and wherever that is possible. Therefore, if the descendants of slave owners and the descendants of the victims of slavery can be clearly identified, then whether 100 years or 1,000 years have passed, the descendants of slave owners must compensate the descendants of slavery’s victims.

2. The problem is that when a long time has passed or evidence is lacking, it is difficult in practice to identify specific victims and specific perpetrators, as well as the relationship between them. We effectively cannot know today who the closest descendants of black slaves and white slave owners from 200 years ago are or where they live.

3. There is no responsibility for collective reparations. In other words, all white people should not compensate all black people. A white person who opposed slavery or owned no slaves should not compensate a black person with no enslaved ancestors.

4. In the case of property whose clear criminal origin cannot be identified, the current possessor of that property is “provisionally” recognized as its lawful owner.

5. For this reason, claims for reparations over slavery from 200 years ago are still possible today, but in practice it is difficult to prove the harm.

The same principle could probably be applied to the problem of unjust enrichment by firms. Fortunately, the modern economic system requires nearly all firms to organize and preserve financial records as systematically as possible, so once unjust enrichment is clearly defined, it becomes much easier to determine which firms obtained unjust gains and how they did so. However, even in such cases, if a firm’s managers or shareholders refuse requests for disclosure and verification becomes impossible, how to respond is a matter that requires deeper consideration.

Fifth, if a firm obtained substantial unjust enrichment in the past but is not obtaining unjust enrichment at present, and if it is still clear that unjust enrichment occurred and compensation to taxpayers is required, then we must also consider whether responsibility lies with the shareholders at the time or the shareholders of the present.

If we are to bring about a truly free society, the punishment of those responsible for cronyism and the recovery of unjust enrichment are issues that can never be overlooked. Since one of the foundations of a free society is the free disposition of justly formed property rights, the normalization of rights must be carried out if we are to properly establish a free society. Our society has far too many individuals, groups, and firms that gain improper benefits from the government. All liberals would probably agree that, because of the government’s socialist redistribution policies, a small number of women’s organizations and so-called social enterprises are consuming taxpayers’ hard-earned money. It is clear that their unjust enrichment should be recovered. If so, the same principle should be applied to other cases of unjust enrichment as well. This certainly presents severe technical difficulties, but it is nevertheless an unavoidable process.

We need to discuss how, without adopting a socialist or statist process, we can achieve the goal of establishing legitimate property rights through a liberal (= peaceful) process, and we need to examine reality critically. One of the greatest advantages of a free society is that it guarantees the maximum possible output and production under given conditions, but the moral superiority of a free society is also an issue that can never be overlooked.

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Original title: 정경유착과 부당이익의 문제

Author: Kyeong-hun Kim

Date: 2020-07-03

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=13&idx=22897