What Is Cronyism?
Channel: misesmedia
Date: 2021-02-04

Activists blame “capitalism” for the world’s biggest problems, like the high costs of healthcare. Some even argue that economics itself is simply propaganda for businesses to exploit workers. Government schools often celebrate regulations, subsidies, and other interventions, because they protect consumers against “exploitative” businesses and capitalist “greed.”

The truth is precisely the reverse. The profit-and-loss economy lowers prices and increases the quality of goods through competition, which benefits society as a whole. When government intervenes in this production of goods and services, it does so by passing laws and enacting regulations that benefit and favor certain businesses over others, all in the name of “protecting” the public. This granting of privileges and favored status to people because of their political power or connections is called cronyism. The beneficiaries of cronyism serve the politicians and bureaucrats who appointed them and not the consumers who buy the products from the regulated companies.

For example, imagine you run a small business that produces vegetable soup. Your top priority is satisfying customers. A satisfied customer is a returning customer. To this end you choose your vegetables, recipes, packaging, and distribution based on your best estimates of what the consumer wants. If consumers like and value your vegetable soup, you earn profits. If consumers don’t value it, you suffer losses. Competition and business reputation ensures efficiency and happy customers. 

Now imagine that the government decides to regulate the vegetable soup industry. Bureaucrats, not knowledgeable businessmen, now decide the full process of making soups, mandating the quality of the vegetables, the type of ingredients, the techniques for making soup that can be used, and even how you can advertise your soup. To enforce these new regulations, the government requires licenses and compulsory inspections. As a soup producer, you must now spend considerable resources catering to political regulations.

Although the government justifies its intervention in the name of protecting consumers from “bad” soup makers, the new regulations create compliance costs and barriers to entry. This reduces competition by injuring the smaller soup producers and helps the larger soup makers. In this way, the law restricts the supply of soup and raises prices, to the detriment of all consumers. Since bureaucrats make and enforce the regulations, it should come as no surprise to learn that Big Soup lobbied for the new rules that benefit them, hurt rivals, and reduce competition. 

The free market succeeds because competition makes businesses accountable to consumers. Cronyism doesn’t work because it favors politically connected insiders, hurts small businesses, and gives consumers fewer choices. Unfortunately, when cronyism fails—and it always does because it is based on favoritism and paybacks—we all lose. 

Most people think the answer to any economic problem is to get the government more involved, enact more regulations, appoint more committees, etc. The truth is precisely the reverse, we need less intervention in all areas.

Questions

Can you think of a time when the government created a problem, and then gave itself more power or tax dollars to "fix" it? Do you think this is a moral hazard? 

We often hear people talk about the need to "get money out of politics" by banning lobbying in government. If you were a business owner, would you have an interest in trying to have a say in the law writing process, or would you trust politicians without experience in your industry writing the laws? Do you think the problem is lobbying, or the amount of influence the government has to decide who wins or loses in business? 

Additional Reading

"Crony Capitalism and the Transcontinental Railroads" by Ryan McMaken https://mises.org/library/crony-capitalism-and-transcontinental-railroads

"Coca-Cola, Cronyism, and the War on Drugs" by Chris Calton https://mises.org/wire/coca-cola-cronyism-and-war-drugs

"The Middle of the Road Leads to Socialism" by Ludwig von Mises https://mises.org/library/middle-road-leads-socialism

"What is Fascism" by Lew Rockwell https://mises.org/library/what-fascism-1

Book

'Crony Capitalism in America: 2008 - 2012' by Hunter Lewis https://mises.org/library/crony-capitalism-america