Crony Capitalism: By-Product of Big Government

Abstract

Crony capitalism describes an economic system in which the profitability of firms in a market economy is dependent on political connections. The term has been used in the popular press but rarely appears in academic literature. However, there has been a substantial amount of academic research on various components that, when aggregated, describe crony capitalism. This literature shows that crony capitalism exists only because those in government are in a position to target benefits to their cronies, and have an incentive to do so, because they get benefits in return. The ability to target those benefits is a result of the spending and regulatory power of government, so big government causes cronyism. One remedy often suggested for cronyism is more government regulation and oversight of the economy, but this remedy misunderstands the cause of cronyism. The substantial and well-established economic literature on the components of crony capitalism shows that big government is the cause of crony capitalism, not the solution.

Introduction

Economic policy debates often divide participants along pro-business and pro-government lines. Pro-business advocates push for tax incentives, subsidies, protection from foreign competition, and regulations that often create barriers for foreign competitors. Pro-government advocates point to the abuses of capitalism and argue that big government is necessary to correct the failures of the market, regulate business so it will act in the public interest, and stand up to crony capitalism. The most charitable way to view pro-business arguments is that some government policies create an uneven playing field, and that government policies can be used to level it.[1] Sometimes pro-business arguments build from the idea that government support can create more economic prosperity than the market can if it is left to its own devices.[2] Regardless of the motivation behind those pro-business arguments, government intervention in the economy to benefit businesses lays the foundation for crony capitalism. When businesses can profit from government policies, they have an incentive to pursue benefits through government favors rather than through productive activity. The more the government is involved, the more business profitability depends on government support rather than productive activity, so the more important political connections become to business success. Crony capitalism is an economic system in which the profitability of business depends on political connections.[3]

The pro-government argument that more government involvement in the economy and greater regulatory oversight can control crony capitalism misunderstands the cause of crony capitalism. Crony capitalism is caused by government involvement in the economy, and additional government involvement makes the problem worse. Government intervention is not the solution for crony capitalism, it is the cause of crony capitalism.

Crony capitalism is a term that has been used in the popular press, but rarely in academic literature. However, when one understands crony capitalism as an economic system in which the profitability of business depends on political connections, there is a substantial body of academic literature that explains the causes and consequences of crony capitalism. This paper (1) demonstrates that the academic literature has analyzed the components of crony capitalism for decades, and those components are well understood; (2) shows that all those components point toward big government as the cause of crony capitalism; and (3) considers ways in which crony capitalism can be controlled.

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