Crony Capitalism

By , posted on David Stockman’s site.

This is kind of a tough read, but I think there are two main points:

  • Research shows that strong rule of law and institutions, with a lower level of interference and regulation (essentially a smaller government), leads to better market outcomes than governments that influence the markets more, leading to economic rents and inefficient use of capital.

”The paper shows how “institutions that constrain the discretionary authority of government incentivize productive entrepreneurship and facilitate free market capitalism, giving rise to a natural or market determined income distribution and opportunity for economic mobility.” In other words, markets do work, when markets are allowed to work. On the other hand, “institutions that do not sufficiently constrain the authority of government incentivize unproductive entrepreneurship and facilitate the development of crony capitalism, resulting in structural inequality and little opportunity for economic mobility.” In other words, markets don’t work when they are prevented from working.

  • Undergrad economics courses do not adequately teach the difference between free market capitalism, with smaller and less influential government forces, and crony capitalism, with larger government incentives and interference in the market.

The economics profession must do a better job of educating students and the public about the nuanced but vital distinction between the varieties of capitalism, and the important role of institutions in constraining the Hobbesian propensity of man to “rape, pillage, and plunder” and enabling the Smithian proclivity of man to “truck, barter, and exchange”
(Boettke, 2013).”

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