Australian Way of Life

Capitalism’s Enemy: Cronyism

Written by
24 August 2013

This article from the Winter 2013 edition of the IPA Review is written by Adjunct Fellow at the IPA and Associate Professor in Economics at RMIT University, Jason Potts.

Randy Holcombe is a professor of public finance and public policy at Florida State University and a scholar in the style of the James Buchanan school of Public Choice economics. Holcombe was on Florida State Governor Jeb Bush’s Council of Economic Advisors. So you can probably guess the line on capitalism and politics that you’re going to get in this book. Andrea Castillo is a program associate at the Mercatus Centre at George Mason University, which is the crucible in this modern era of most solid thinking on economics and economic policy, so you know what you’re going to get there too.

This is a book about crony capitalism, but it is not the sort that will mollify those known as Occupy protesters. Indeed, it is the sort of book that could really ruin the day of any earnest student of democratic politics who will analytically separate political from economic systems and then argue all night the finer points of why progressivism differs from majoritarianism, how socialism and fascism are clearly opposites, and why corporatism is the enemy of environmentalism, which is of course a form of social justice. Holcombe and Castillo have bad news for anyone who believes that there really are many different political systems, or that political activism is a civic duty, or that democracy should be muscular so that it might represent the true will of the people (and fight mightily against the depredations of capitalism).

First, political and economic systems are interrelated systems of rules and those rules always have subjective discretionary aspects. These discretionary aspects mean that there is always the potential for some groups to benefit from political connections.

Second, there are ultimately just two forms of political and economic system—liberalism, where there is protection of individual rights and voluntary agreement when dealing with others; and cronyism, a system in which people (cronies) receive benefits from personal connections that are not available to others who are outside the group.

‘Capitalism is the economic embodiment of the principles of liberalism’ and all other systems of political organisation and resource allocation involve some people exploiting the subjective discretionary aspects of rules to direct the activities of others toward inside groups (cronies). Socialism, fascism, communism, environmentalism, corporatism, progressivism, despotism, majoritarianism, social justice and industry policy are not distinct political and economic systems, but different manifestations of cronyism. There is ultimately only a choice between two types of political and economic system— liberalism or cronyism.

Holcombe and Castillo argue that most political systems eventually succumb to cronyism and that the pathway is the same in every case, namely through the growth of government and with it the increased ability for some people to control the resources of others, and that those who are connected to those people will economically benefit, and in turn, that they will seek to keep those same people in political power.

The main body of the book outlines each of the various political ‘isms’ explaining how they all succumb to cronyism through this same mechanism. This is the teaching part of the book—presenting example and explanation of why communism and fascism and progressivism and environmentalism are all not so different in the core respect that each furnishes a system of political and economic rules that can be used to benefit a group of connected insiders (the cronies) at the expense of others, and that those insiders will seek to keep the political coalition that grants these benefits in power, and that outsiders will seek ways to become insiders too. All forms of cronyism are sustained by the power of government. This is of course the mainline of public choice analysis through Mancur Olsen, James Buchanan and George Stigler, among others, but the clear contribution of this book is to focus on the concept of crony capitalism.

It is only by understanding the sense in which crony capitalism is the manifest enemy of capitalism (as the economic form of liberalism) that we can clearly see how cronyism lies at the root of so many other political economic pathologies. In particular, Holcombe and Castillo make clear that ‘pro-business’ arguments that seek special treatment through tax breaks and subsidies or other protection, and ‘pro-government’ arguments from those who seek greater government intervention and regulation in the economy are essentially the same argument. This is crony capitalism, seeking to benefit business insiders through exploiting connections to the state—they cite the financial bailouts of car and insurance companies and the loan guarantees given to favoured alternative energy producers as examples. They see no substantial difference between this and other forms of seeking to use the implementation of economic and political rules to benefit favoured groups, whoever they are.

The cure to crony capitalism is not then a more muscular and powerful state, because big government is the cause of the problem in the first place. ‘Ultimately,’ they write ‘the only way to limit cronyism is to limit the government’s power so that there is little benefit to participating in cronyism rather than productive activity.’

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