How Does Crony Capitalism Improve the Economy? It Doesn’t, but It Makes Cronies Richer

The most commonly offered alternative to capitalism is not socialism, but corruption, otherwise known as “crony capitalism.” That is when the government gives businesses special favors so that they get either a captive market or subsidies at taxpayer expense, or both. One brand of this economic theory was known as mercantilism. Adam Smith wrote against it.

The theory that justifies crony capitalism is that the market won’t work unless it is “stimulated” or otherwise helped by government. By subsidizing businesses or granting a cartel status, the government helps the whole economy.

It is a lie, of course, that is told by those who benefit to fool those who are being exploited.

Recently, this fact was even documented. According to,

In what may come as heartbreak for the U.S. lobbying industry, a new study suggests business success or failure has little to do with political connections.

The study, published by the Mercatus Center at George Mason University in Fairfax, Va., finds that political activity has no significant effect on the performance of most firms and industries.

Company executives, however, well, that’s a different story.

While lobbying on behalf of industry has soared amid increasing government handouts and sweetheart crony capitalism deals, the study’s authors, economists Russell Sobel and Rachel Graefe-Anderson, find little evidence that firms or their shareholders benefit.

“We do, however, find a robust and significant positive relationship between political activity and executive compensation,” the economists state. “Therefore, while industry and firm-level performance are not robustly related to ‘cronyism,’ executive compensation is — suggesting that any benefits gained from corporate political activity are largely captured by firm executives.”

I am sure this study will be written off by well-funded economics departments because George Mason University is well known for championing the free market. But why should that matter? By diverting funds to certain businesses, those who benefit are able to pay defenders to rationalize how they live off the government. These bought intellectuals pretend to be neutral scholars while they are exactly the opposite.

Think about it: John Maynard Keynes came up with a theory that claimed it was good for politicians to go into debt. Do you think politicians had never built up debts before Keynes wrote his theory? Of course they did. Keynes became a favorite because he generated a rationale for politicians to do what they already wanted to do.

So too, there are many economists who will defend a system that is basically glorified corruption. They don’t justify corruption because of their theory. Their theory was developed in order to justify the corruption.

Even people who make a name for themselves claiming to be opponents of crony capitalism change their tune when they actually have a chance to end it. Virtually everyone who favored “Occupy Wall Street,” has shown themselves to be hypocrites. When the Tea Party challenges the Federal Reserve or other tools of cronyism, these people act like civilization is being threatened.