Crony Capitalism: By-Product of Big Government

November 1, 2012

Crony capitalism describes an economic system in which the profitability of firms in a market

economy is dependent on political connections. Despite the coverage in popular press, little academic research has been devoted to researching the causes and effects of crony capitalism, says Randall G. Holcombe, professor of economics at Florida State University.

  • Crony capitalism exists when those in the government are able to use their power to give benefits to their cronies.
  • Government intervention in the economy through subsidies and regulations are a primary reason for crony capitalism.
  • As a result, businesses are more likely to devote resources to lobbying rather than becoming more productive at producing goods and services.

One expression of crony capitalism is "rent-seeking." Businesses come to the government to seek protection from domestic and foreign competition, which results in political favors being given to a select few. This creates a decline in the overall productiveness in the economy as entries to barrier are increased and fewer competitors exist.

Sometimes, regulatory agencies that are created become influenced by certain businesses that create favorable requirements for themselves. Naturally, the businesses in the regulated industry have more information about their industry than policymakers or the general public, which lends to the notion that they can use the system to their benefit.

For many politicians, giving support to their cronies comes with many benefits. First, politicians can expand their own personal wealth by giving favors to wealthy businesses that need something accomplished in Washington. Second, politicians can rely on the large support that businesses provide in election campaigns. And because the public can be largely unaware of the nuances in regulations, politicians have an incentive to cater more toward businesses in a regulated industry rather than making tough decisions for the public good.

Crony capitalism can also hurt the democratic system as a whole. Because the Constitution does not have strict restraints on spending or discretionary powers of those in government, policymakers have become more influenced by lobbyists to get certain things done.

Source: Randall G. Holcombe, "Crony Capitalism: By-Product of Big Government," Mercatus Center, October 24, 2012.

 

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