Cost: What Is Crony Capitalism?

Monday’s Prager University video features The Weekly Standard‘s Jay Cost discussing the immorality of crony capitalism and the economic dislocation it creates.

Crony capitalism is defined as the government picking winners and losers in the market based off lobbyist connections, which is antithetical to the free-market values of capitalism. Cost explains that “capitalism is moral because it is premised on a voluntary exchange between independent parties who agree to the deal only because it creates value for everybody.”

“Crony capitalism is immoral because one of the parties, the government, has been bought off,” Cost said.

There are three major flaws with crony capitalism: it is unfair, wasteful and incentivizes politicians to break the law. The unfairness of crony capitalism stems from the fact that politicians typically provide taxpayer dollars to businesses that will enrich themselves, their friends and supporters at the expense of the American people. The waste in crony capitalism is that it creates what’s known as deadweight loss in the economy, since the money used by industries to buy off the government could have been used in more productive ways. In addition, crony capitalism causes economic dislocation because entire industries–such as healthcare and student loans–have essentially become clients of the government and are required to spend resources to keep their government overlords satisfied.

Crony capitalism creates an atmosphere of law-breaking by politicians because all of that taxpayer funding tempts politicians into using it to enrich themselves and/or their campaign.

The answer, according to Cost, is to limit the size and scope of government so entire industries aren’t bankrolled by the government.