Crony Capitalism ≠ Capitalism

One reason people don’t like capitalism is because they think it is unfair. One reason people think capitalism is unfair is because they believe that crony capitalism is the same as free-market capitalism.

It is not. In fact, crony capitalism is closer to the opposite of free-market capitalism.

What is crony capitalism?

crony capitalismCrony capitalism is a phrase that gets used quite a bit. What does it really mean?

Cronyism is when government officials give jobs, supply contracts, or other favors to friends and family. Often these ‘cronies’ receive favors not because they truly deserve them, but because they are well-connected to government officials.

Crony capitalism is when businesses lobby government officials to obtain favors such as supply contracts, tax and regulation loopholes, government grants, and trade barriers. It represents a “you scratch my back, I’ll scratch yours” relationship between business and government.

When businesses lobby government, they usually seek to increase profits or decrease competition. What do government officials get in return? Wining and dining. Contributions for their political campaigns. The promise of a well-paid job at Corporation X upon leaving their government job. Maybe even an illegal bribe or kickback.

Not the same

Again, crony capitalism is not the same as free-market capitalism. Consider the following differences:

Foundation: The foundation of free-market capitalism is voluntary transactions that are mutually beneficial for both buyer and seller. The foundation of crony capitalism is businesses lobbying government to squelch competition or obtain special favors.

Merit vs Connections: Free-market capitalism requires businesses to earn their success in a competitive marketplace. Businesses must satisfy their customers or they won’t make sales. Crony capitalism allows businesses to succeed by lobbying government.

In short, free-market success is based on merit, while crony success is based on political connections.

Freedom and Competition: Free-market capitalism leaves consumers free to choose what they buy, which companies they buy from, and when and where they buy. Businesses are left free to compete with each other to win customers, and it is easy to start up a new business. Crony capitalism uses the coercive power of government to restrict consumer choice, business competition, or new start-ups.

In short, free-market capitalism is based on freedom and competition, while crony capitalism aims to reduce freedom and competition.

Best interest of society: Free-market capitalism is implicitly in the best interest of society because all transactions are voluntary and revolve around meeting the needs and wants of consumers. Crony capitalism is less likely to be in the best interest of society because it involves coercion and is oriented toward the narrow self-interest of certain companies or industries.

As you can see, crony capitalism is not free-market capitalism. Crony capitalism is just another way to have government intervene in free-market transactions. That is not the free market.

Fairness

If the people who regard capitalism as unfair really mean that crony capitalism is unfair, I wholeheartedly agree. Crony capitalism is unfair.

When government hands out favors to friends and family, this is questionable at best and criminal at worst. When businesses (or other special interest groups) successfully lobby government for favors, this gives politically-connected organizations an unfair advantage over others.

It is indeed fundamentally unfair when people gain advantages based on their political connections rather than earning them based on economic merit.

True free-market capitalism is much fairer. What can be fairer than to have free and open competition, with companies that win usually being the most creative or efficient, and the best at satisfying customers?

We sometimes feel resentment or envy when one company or one person wins a lot, but we should at least admit that the free-market process is mostly fair. Much fairer than winning ‘competitions’ because they are rigged and biased by government favoritism.

Negative consequences

Crony capitalism creates negative consequences. Here are some of them:

  • Restricts competition and discourages the creation of new businesses.
  • That diminished competition then reduces the choices of customers and causes the prices of products and services to be higher than they should be.
  • Encourages the development of lobbying skills as opposed to economically productive skills.
  • Encourages corruption in government officials.
  • Steers government money and regulation to uses that help certain corporations but not overall society.
  • Time and money spent lobbying means less time and money spent improving products, lowering costs, or creating innovations.

Crony capitalism harms economic growth and prosperity because it squelches competition, reduces consumer choice, and steers government favors toward politically-connected groups. It is obviously not good for the economy when cronyism rewards second- or third-rate companies, workers, or products instead of first-rate.

Defensive lobbying

As you can see, I am no fan of crony capitalism. However, I will also point out that some business lobbying is defensive in nature. That is, businesses lobby to prevent government from implementing genuinely bad policy ideas. A positive interpretation would say that government is likely to do harmful things to the economy, so business lobbying helps society if it persuades government to do something less harmful.

No doubt this argument is true to some extent. Yet it’s not the complete story, because businesses and industry groups do also seek government favors for their own narrow benefit.

Core lobbying problem

Whether corporate lobbying helps society by preventing bad government policies or harms society by indulging narrow corporate self-interest, either way the core problem is the same: bigger government encourages more lobbying.

Why? Because a large and complex government makes lobbying more attractive. Large and complex government is capable of both (a) posing a greater threat, and (b) providing more valuable favors.

If we shrank the size and power of government, we would also reduce the attractiveness of lobbying. A smaller government poses less threat of capricious action and its favors are typically worth less.

In closing

Free-market capitalism means freedom. Crony capitalism means government restriction of freedom. We should want free-market capitalism, but not crony capitalism.


I encourage you to enter comments or questions below. Two rules: 1) be reasonably polite, 2) address the issue and avoid personal attacks.

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