Crony Capitalism Definition

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Crony capitalism is a buzzword you have probably heard on the news or in political and business circles where people of all political affiliations are concerned about fair market competition and ethical use of taxpayer money. The success of capitalism depends upon access to a free market where businesses can compete to offer the best value for goods and services, and consumers are free to choose where they spend their money, but crony capitalism gets in the way of this. Business owners are often concerned about entering the marketplace on a level playing field, and crony capitalism is one factor that could make this more difficult than necessary.

TL;DR (Too Long; Didn't Read)

Crony capitalism refers to the corruption that happens when success in business is dependent on advantageous close relationships with government officials.

Crony Capitalism Made Simple

In crony capitalism, the government spends money based on relationships and preferential treatment rather than what is best for the public's good. Instead of going with the vendor or service provider that offers the best value, the government contracts with someone based on campaign contributions, concerns about upcoming elections, lobbying, friendship or promise of future financial gain. Politicians sometimes end up looking out for their own best interests or the best interests of their friends and financial supporters rather than the taxpaying public. While individuals sometimes make financial decisions based on personal relationships, when the government does this it is on a larger scale that can lead to disruptions in the economy, higher prices for consumers, government inefficiencies and wasteful spending of taxpayer money.

To make these big ideas more relatable to your everyday life, imagine that you are in the market for a new set of headphones. Store A sells those headphones for $48 and provides friendly door-to-door customer service, while Store B sells the same headphones for $60 and requires you to visit an understaffed store and wait in line for 30 minutes to complete your purchase. As a consumer, you are likely to purchase your headphones from Store A. However, imagine that the head honcho at Store B is fishing buddies with a government official, has located his corporate headquarters in the elected official's district and also contributes large sums of money to his political campaign efforts. Because of their relationship, this government official decides to place a very large order for headphones from Store B and also figures out a tax break to benefit him, which boosts their bottom line even though Store A has the better deal and customer service.

The representative was afraid that he might lose support from the Store B head honcho if he buys from Store A, so instead he wastes $12 of taxpayer money on the purchase of every pair of headphones, plus more on the tax loophole. Even though Store A has the best value, Store B now has a better bottom line, which could impact Store A's longevity. If Store A goes out of business, you might be stuck buying your headphones from Store B next time, with no other stores from which to choose. Imagine the frustration of being the owner of Store A, providing the best possible customer value while not being able to compete with Store B.

Crony Capitalism in America

While it is a global issue, crony capitalism in the United States is a longstanding problem that has been costing taxpayers money for generations. On the crony capitalism index, the United States is not considered the worst offender, but it is consistently listed as worse than nations like France, Japan and Germany. In the early years of this nation's history, even the Boston Tea party could be interpreted as a reaction to crony capitalism since Great Britain was essentially controlling tea prices and availability.

In today's U.S. economy, examples of crony capitalism are seen in many industries. Some argue that limited access to choice among utility companies is an example of crony capitalism or that the government's program to only contract with U.S. ships in delivering food aid is an example of crony capitalism that adds expense and decreases efficiency in offering aid. Military defense contractors reduce the jobs available to our troops while increasing spending and funding a private sector that would not exist without government funding. Each year, big agriculture spends a great deal of money on lobbying in order to get large government subsidies, while smaller farms miss out. Government medical plans contract with big pharma to provide medications to patients, but then big pharma charges astronomical prices for medication to the general public. Clean energy programs, affordable housing, food stamps, banking, infrastructure spending, government-based health care and tax policy are other areas of the economy vulnerable to abuse through crony capitalism. Crony capitalism happens on a continuum, and people aligned with different political parties often disagree about which uses of taxpayer money are ethical versus which uses constitute abuse due to crony capitalism.

Problems With Crony Capitalism

There are several problems with crony capitalism, one of the biggest of which is misuse of taxpayer money. When the government uses individual and small business tax dollars to subsidize corporations, that is less money that you have to pay your employees, invest in your community or use for basic necessities. Crony capitalism takes money from your pocket and uses it to fund things in ways that are not always ethical.

Crony capitalism creates an environment where it is hard to compete. For instance, corporate farm subsidies make it harder for small family farms to compete in the marketplace by raising land prices and keeping overhead costs high. Powerful pesticides and herbicides are needed for large-scale farms and require the use of patented seeds that are resistant to these strong chemicals. Large commercial farms can afford these things due to government farm subsidies. When their seeds accidentally blow to a nearby small farm that did not purchase them, the small farmer can get into legal and financial trouble that forces them to close up shop, drastically reducing the number of food choices for consumers in the marketplace while driving up prices. The fuel industry and big pharma are other examples of industries that benefit from subsidies that push out competition, small businesses and consumer choice while pushing up prices.

Crony capitalism creates tax loopholes so that certain corporations and wealthy individuals are able to pay taxes at a lower rate than the poor, who have a greater need to hang on to their income. The capital gains tax rate, tax breaks for outsourcing jobs, home mortgage interest deductions and different taxation on capital gains are other examples of loopholes that pad the pockets of some while costing taxpayers a substantial amount of money.

Crony capitalism creates instability in the economy by subsidizing industries and corporations that would cause mass economic chaos should they fail. This causes these industries, corporations and banks to grow larger and larger, not due to authentic growth in a free market, but due to government help that comes from taxpayer dollars. The larger they get, the more dangerous it would be for them to fail, and so crony capitalism feeds a vicious cycle that requires increasing support and is extremely complicated to exit.

Crony Capitalism Debates

While people across the political spectrum agree that crony capitalism is a problem that requires reform, not everyone agrees on the causes of it. Socialists see crony capitalism as an inevitable outcome of capitalism, which they believe creates large chasms between the rich and poor by its very nature. Some believe that slavery is an end of capitalism, where people are trying to become more and more rich through exploiting the poor. Socialists argue that the only way to prevent these abuses is to create a social system where the government is in control of the marketplace and jobs in a way that more evenly distributes wealth, goods and services.

Capitalists disagree, believing that the mixture of government and business is what creates the problem rather than the system of capitalism itself. Some capitalists even believe that the outcome of crony capitalism actually ends in socialism since it occurs due to government abuse of power. They believe that capitalism without the interference of government gives the market an opportunity to function freely and empowers people to support small businesses and freely engage in community.

Many people in the general public feel confused by the varying perspectives on crony capitalism, noting that it seems that both sides are pointing fingers. It can begin to feel a bit like a question of whether the chicken or the egg came first. Whether you believe the economic system itself or the government is to blame, everyone can have a voice in creating solutions to combat crony capitalism.

Possible Crony Capitalism Solutions

A variety of approaches to tackling crony capitalism have been suggested by people of a wide variety of political beliefs. One approach to cronyism is to increase regulation of tax law, campaign laws, industries and the interaction of business and the government. This approach believes that with the right checks and balances, government and businesses can conduct business ethically without exploiting taxpayer dollars and creating unfair advantages for corporations, people, groups or industries. Those in favor of increased regulation believe that the current abuses of power are due to lack of oversight more than a government that has gotten too big for its britches.

Another approach to crony capitalism suggests that limited government is the best way to solve the problem. This belief system says that big government and government overreach will inevitably lend itself to market abuses and crony capitalism. They believe that the best solution is for government to be scaled back and stay small so the market is free to operate as it is intended. Proponents of small government argue that individuals operate more ethically than large systems and that an individual abuse of power has a smaller impact on the free market than a large system abuse of power.

Others advocate for some combination of nonpartisan regulation, smaller government in certain sectors and working together to create solutions that work from a variety of perspectives. This position operates from the assumption that all perspectives hold some validity in creating a more ethical marketplace. This perspective operates more in areas of gray than black and white, and while these solutions to crony capitalism are not as cut and dry, they hold more promise for productive conversation. These conversations could result in changes that are beneficial for consumers, taxpayers, business owners and the marketplace.

Business and Personal Ethics

In business, you may not have the single-handed ability to get rid of crony capitalism and positively impact the entire economic system overnight, but you do have the freedom to make daily choices that help contribute to a free marketplace and ethical business standards. Part of your job might be to apply for government subsidies and funds that are available to you or your industry. You can research where this money comes from and how it works to ensure it is actually the best way to conduct business. You can choose to support small businesses in your area, participate in the area chamber of commerce and get to know area representatives in order to increase accountability and share your views on the best ways to address crony capitalism.

As an individual, you can choose to shop and support small local businesses and share positive reviews about them in your community or on social media. You can educate yourself on politicians in your area, attend town hall meetings and read up on legislation that could help or hinder the marketplace. Write to your representatives with your views regarding the best ways to address crony capitalism and increase an ethical and free marketplace. Organize with others and use your vote to influence politics in the direction you believe is most ethical.

References

About the Author

Anne Kinsey is an entrepreneur and business pioneer, who has ranked in the top 1% of the direct sales industry, growing a large team and earning the title of Senior Team Manager during her time with Jamberry. She is the nonprofit founder and executive director of Love Powered Life, as well as a Certified Trauma Recovery Coach, certified HRV biofeedback practitioner and freelance writer who has written for publications like Working Mother, the San Francisco Chronicle, the Houston Chronicle and Our Everyday Life. Anne works from her home office in rural North Carolina, where she resides with her husband and three children.