Zadekpedia

Ask BobAsk a question of every episode, 2009–2023 — answers cite the minute

Crony Capitalism

5 min read

Part of Markets and money.

Start here

Every episode (5)

Who argued it

Robert C. Wright · Edward Conard · Sean McElwee · Luigi Zingales · Don Boudreaux

Rent Seeking · COVID-19 Lockdowns · Economic Growth · Immigration · Income Inequality · Free Markets · Government Regulation · Government Spending

Background

Crony capitalism, as discussed across The Bob Zadek Show, names a system in which businesses use government power to stifle competition and pick winners. Bob Zadek introduces the phrase by calling it “socialism on steroids”: government can run the wealth-creating machinery of the country through command and control without owning it Obama Nationalizes General Electric (2011). The recurring distinction in these episodes is between being pro-business and being pro-market, with a neutral government referee posited as the requirement of true capitalism.

Definitions and labels

Zadek argues the label itself is unfair to capitalism, since capitalism consists of individuals entering into mutually advantageous bargains while crony capitalism involves government interference in that system; he prefers “crony governmentism” Mike Munger is Taking Public Choice Seriously (2019). Mike Munger nonetheless defends the phrase “crony capitalism” on the ground that cronyism operates like a virus using capitalism’s own defense mechanisms against itself. In a separate episode, Zadek and Sean McElwee agree that governmental policies favoring the few at the expense of the many constitute an evil of the present system, which Zadek calls a perversion rather than free-market capitalism Inclusive Capitalism: Economic Savior or Socialism in Disguise? (2015).

Mechanisms

Munger sets out three levels at which cronyism operates. At the first, a corporate CEO applies for subsidies with no rational basis, taking money involuntarily from taxpayers rather than from consumers who buy voluntarily; Munger calls this legal but immoral, and notes the CEO hires more lobbyists rather than more engineers. At the second, stockholders who want higher stock prices fire a CEO who refuses and hire one who will. At the third, the acquisitions and takeovers market lets a corporate raider buy an underperforming company, impose management that seeks subsidies and protection from competition, and profit from the resulting stock price increase. Because the competitive market for managers and the mergers and acquisitions market are themselves mechanisms of capitalism, Munger argues that even a moral CEO or moral stockholders cannot survive—which is why he says capitalism is not sustainable in a capitalist system Mike Munger is Taking Public Choice Seriously (2019).

Walter Block traces a related mechanism to the Progressive Period of the 1880s and 1890s, when courts stopped upholding property rights against polluters and instead invoked the public good. He quotes the classic case Holman v. Athens Empire Laundry Company in 1919, in which the Supreme Court of Georgia declared that pollution of the air, so far as reasonably necessary to the enjoyment of life and indispensable to the progress of society, is not actionable. Minimum smokestack height regulations followed, raising stacks from roughly 20 or 30 feet to 300 feet, so that the source of pollution became hard to identify; Block’s conclusion is that government created the problem and then blamed private enterprise, necessitating the Clean Air Act How the Free Market Will Save the Planet (2014).

The counter-case

Ed Conard concedes there is a lot of crony capitalism and that it should be rooted out, but asks whether the highest-paid Americans have used it to capture an increasing share of income or have delivered value the rest of the economy pays for. He offers as evidence against increasing cronyism faster turnover in Fortune 500 companies, shorter CEO tenures, more self-made entrepreneurs and faster turnover on the Forbes 400 richest Americans, and the observation that the 15 largest tech companies in the United States in 2000 are worth about 60% of their value today and, absent Microsoft, substantially less. If resources were being misallocated, he argues, growth should slow; instead he sees acceleration relative to other high-wage economies with more equally distributed incomes Debunking Inequality Myths with Ed Conard (2017). Zadek replies that crony capitalism is indefensible and the low-hanging fruit of complaints about economic circumstances, but that the real subject is the mythology surrounding inequality.

Across episodes

The topic recurs from 2011 to 2019, and the treatment shifts in emphasis rather than in conclusion. Zingales and Zadek frame it in 2011 as pervasive and as the modus operandi of President Obama and his Democratic colleagues; Block in 2014 locates its origin in a Progressive-era judicial abandonment of property rights; McElwee and Zadek in 2015 agree on the diagnosis while disagreeing on the remedy; Conard in 2017 disputes the magnitude; and Munger in 2019 supplies the public-choice account of why moral actors are driven into rent-seeking. The episodes show no resolution of the dispute over how much of observed inequality is cronyism rather than market forces.

Backlinks