Crony capitalism – how big players spoil social cooperation

Again and again, I hear managers ask government for stability. You can’t make plans for capital investment and business without expectations about the future. Government sets up big players in society which not only set expectations through tax and regulation, but which can change their minds, spoiling people’s plans, often at considerable expense.

Roger Koppl’s Big Players and the Economic Theory of Expectations makes a study of that theme. Koppl demonstrates, with extensive reference to other scholars, that investment and all other economic actions depend on “subjective” expectations. He then presents a theory of expectations which assumes people interpret their situations in unpredictable ways. This theory includes a theory of “Big Players”:

Big Players are privileged actors who disrupt markets. A Big Player has three defining characteristics. He is big in the sense that his actions influence the market under study. He is insensitive to the discipline of profit and loss. He is arbitrary in the sense that his actions depend on discretion rather than any set of rules. Big Players have power and use it.

We learn that big players reduce the reliability of expectations, thereby disrupting markets. They encourage herding and produce perverse effects on entrepreneurship: traders must pay attention to the Big Player and not the fundamentals, IE, what customers actually want.

Politicians and officials may mean to help, but their status as big players incentivises businesses to behave in certain ways which would not otherwise occur in a free market. It’s another driver for crony capitalism: serving politicians and political interests instead of the public.

Once you know businessmen make plans according to expectations and that big players shift those expectations, both the pleas of businessmen and the news make more sense.

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Comments & Responses

One Response so far.

  1. Catherine in Athens says:

    And this is why the EU is so popular with Big Players; they can stitch up deals with the politicians to legislate smaller rivals out of existence.