New Paper: Cronyism & Lobbyists Are By-Products of Big Government


I know we’re focused pretty intensely on the elections, which are only two weeks away, but we always need to focus as well on underlying principles and concepts that drive our economy and our government. Elections come and go; this stuff is forever. In that vein, you really need to take a look at a new paper from the Mercatus Center at George Mason University, by Randall Holcombe:

Crony capitalism describes an economic system in which the profitability of firms in a market economy is dependent on political connections. The term has been used in the popular press but rarely appears in academic literature. However, there has been a substantial amount of academic research on various components that, when aggregated, describe crony capitalism. This literature shows that crony capitalism exists only because those in government are in a position to target benefits to their cronies, and have an incentive to do so, because they get benefits in return. The ability to target those benefits is a result of the spending and regulatory power of government, so big government causes cronyism. One remedy often suggested for cronyism is more government regulation and oversight of the economy, but this remedy misunderstands the cause of cronyism. The substantial and well-established economic literature on the components of crony capitalism shows that big government is the cause of crony capitalism, not the solution.

By “crony capitalism,” of course, he refers to lobbyists, and big business using those lobbyists to get more power and take more wealth away from the public. It’s the reason we had Occupy Wall Street, and why many folks still cry out for “regulation” to “rein in” big business and the big banks.

But as Holcombe explains, more regulation will just lead to more lobbying, more cronyism, more corruption, and more disappointment. I’ve said before that libertarians need to make crony capitalism their #1 enemy. Nobody really believes in socialism anymore, and it’s crony capitalism that is the true threat. We need to hammer home as hard as possible that this isn’t the free market, and this is a great tool to explain that to folks. At least, folks who are studying economics in college and elsewhere.

The paper is available as a PDF on Mercatus’ website, and runs about 22 pages (taking out the references, notes, cover, and stuff about the author and etc.) I encourage you to read it.


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