Crony Capitalism

Posted on August 23, 2013 by


This summer I asked my colleagues at Bereans at the Gate a question – How might we define “crony capitalism”? The consensus was that “rent seeking” – the explicit and direct use of time and money for economic gain without productive wealth creation – was at the root of crony capitalism. When we think of rent seeking we usually think of time and money spent to curry governmental privilege of some sort (a license, help with regulations, etc.) which will lead to a long term profitable arrangement for the person gaining the government favor. Requiring time and money to conduct business is considered pure economic waste. The time and effort required to “earn” bureaucratic privilege could have been used in productive wealth creation – men and women created in God’s image creating opportunities for human flourishing. A system dominated by rent seeking crushes the entrepreneurial spirit and reduces job creation.

I am privileged to teach a section of microeconomics at Cedarville University this fall. The text we have adopted is Microeconomics: Private and Public Choice by Gwartney, Stroup, Sobel, and MacPherson. On page 123, crony capitalism is defined as “the situation where the allocation of resources, and winners and losers in business, are determined by political favors rather than by consumer preferences translated through the market profit and loss system. Under crony capitalism, rather than providing equal treatment of individuals and businesses under the law, government uses spending, subsidies, and regulations to favor those most willing to provide political decision-makers with campaign contributions and other forms of political support.” From Cambridge Dictionaries Online: “an economic system in which family members and friends of government officials and business leaders are given unfair advantages in the form of jobs, loans, etc.” (emphasis added).

From under 10% in 1930, federal, state and local expenditure has grown to approximately 40% of US GDP. Government is becoming more and more involved in our everyday economic affairs. We like to think of our economy as free enterprise based, but the truth is that the US economy is closer to crony capitalism than to free market capitalism.

The phrase “crony capitalism” was bandied about in the 2012 elections and has been a mainstay in US vernacular since the recession of 2008, but this variant of capitalism is as old as our nation. Thomas J. DiLorenzo considers Alexander Hamilton (1755-1804) as the “founding father‘ of crony capitalism. Hamilton argued for an an intrusive government in business affairs and a strong central bank. He promoted mercantilist policies – the obverse of Adam Smith’s policies. Whether the system is called mercantilism or crony capitalism, an economic system that encourages rent seeking is anti-free-market capitalism.