Rent-Seeking and Crony Capitalism: Here to Stay?

In an article (11 Feb 2020), we had explained about crony capitalism. Mancur Olson may have misleadingly suggested “crony capitalism” for what could have been termed “corporatism” – the success of firms being tied to government. This is not new – it existed with the Dutch or British East India Company.

Rent-seeking (a term coined by Gordon Tullock) is the process by which interest groups pursue government favours. Tariffs, subsidies, preferential regulation, concession terms do not simply fall from heaven but through concerted effort by interest groups to divert wealth to themselves. Wealth can be created or taken by force (legally or illegally) from someone else.

Rent-seeking can occur in three ways; direct, indirect or rent-extraction. Direct rent-seeking occurs when an interest group is provided with a benefit that directly benefits it. Indirect rent-seeking occurs when a seemingly neutral regulation or law is enacted to favour some people. Rent extraction by politicians is a threat to harm or take away current benefits held by a firm/industry. It may be difficult sometimes to differentiate between rent-seeking or rent-extraction.

In the U.S., crony capitalism is a full blown system of intertwined benefits to big business, big labour and big government and all three have a stake in the maintenance of the system. Modern crony capitalism is best exemplified by bailouts of General Motors and Chrysler. Bank bailouts were another. Multiple studies have shown bailouts (for banks) were positively correlated with campaign contributions. So bailout funds were for those with political clout, not those in need of liquidity. So Lehman had to go down but not Goldman Sachs.

The mantra of free markets, competition and free trade was to benefit select groups. Its dominance is from the Reagan era. Now, it is Bernie’s socialism, where everyone wins at the expense of favoured interest groups. That presumes Bernie Sanders is the next President. Otherwise, Trump and his allies will take crony capitalism to a whole new level.

This is not just an American problem but prevalent in the U.K., Europe, China, India and other parts of Asia and Africa. The degree again will defer. Corruption, level of affluence and education all play a part. So, in Scandinavian countries, the phenomena (crony capitalism) may not arise. To reduce the perception of crony capitalism, one could strengthen the processes, have independent expert estimates as a benchmark and, perhaps use reverse auction to strike the best deal for the nation.

If the so-called “cronies” can deliver within budget and timeframe as determined by an independent expert group, then what’s the real issue?

Reference:

Rent-seeking, Crony Capitalism, and the Crony Constitution, Todd Zywicki, George Mason University School of Law