The wrongness of crony capitalism

We live in an age in which it is fashionable to criticize “capitalism” — blaming it for everything from consumerism to human trafficking. Most of this criticism is misplaced as people blame the economy for problems that are not economic.

Samuel Gregg

There is, however, one form of capitalism that is both morally and economically problematic — “crony capitalism” or “crony corporatism.” Despite the economic problems and injustices resulting from crony capitalism, official Catholic teaching has not examined this issue in any significant depth.

So what is crony capitalism? On one level, it’s similar to what is often called “corporate welfare.” Crony capitalism, however, goes beyond direct handouts from government to business. At its essence, crony capitalist behavior concerns the hollowing-out of market economies and displacing the workings of free exchange within a framework of rule-of-law in favor of what might be called “political markets” where economic success depends upon your ability to harness government power to stack the economic deck in your favor.

Who are crony capitalists? Obviously it includes those who lobby governments and legislators for privileges that might include monopolies, regular subsidies, access to “no-bid” contracts, price controls, regular bailouts, tariff protection, preferential tax treatment, and special access to government-provided credit at below-market interest rates.

Invariably such privileges are premised on the claim that a particular business or a certain industry somehow merits special treatment, instead of being subject to the discipline of free competition that the rest of us accept as a spur to greater creativity, innovation and efficiency. Former Treasury Secretary William Simon once recalled watching with incredulity as businessmen ran to the government in every crisis. Always, such gentlemen proclaimed their devotion to free enterprise and their opposition to the arbitrary intervention of the state into the economy — except, of course, for their own cases, which were always justified by their immense concern for the public interest.

Speaking of those who dispense the favors — legislators and other public officials — they obviously want something in return. A common payback to politicians comes in the form of campaign donations and other forms of assistance at election time. As for regulators, the astonishing number of government employees who secure jobs in the industry they once regulated is well documented. And make no mistake. Playing the crony capitalist game can be very lucrative. In 2012, economist Luigi Zingales noted that “seven out of the 10 richest counties in the U.S. are in the suburbs of Washington, D.C., which produces little except rules and regulations.”

In many respects, crony capitalism is encouraged by the corporatist economic structures that, as Nobel Prize-winning economist Edmund Phelps noted in Mass Flourishing, provide numerous opportunities for collusion between governments, established businesses, and trade union officials — arrangements which help to account for the low entrepreneurship levels in many Western European economies and their increasingly uncompetitive character.

I’m not suggesting that business shouldn’t receive government assistance. Nor am I arguing that businesses should be prohibited from representing their interests to legislators. As citizens and communities of persons respectively, business leaders have as much right as anyone else to make representations to elected officials concerning the likely impact of legislation. This, however, is very different from asking to be given something — to be given an economic privilege — which, by definition, isn’t accorded to other people in the same industry or to people who may want to enter that industry as new competitors.

One positive step would be for Catholic social teaching actually to state that crony capitalist behavior and crony capitalist economies are in fact deeply unjust. Regrettably, at present, there are few references to this subject in official Catholic social teaching, despite the fact that crony capitalist behavior isn’t new.

If we are to combat crony capitalist behavior, we need changes in the values, beliefs and expectations that people bring to economic life. Underscoring that point in the minds of business leaders and their political counterparts is one of the greatest potential contributions that Catholic social teaching could make to combatting the economic and political cancer of crony capitalism, thereby helping restore integrity to economies desperately in need of it.

SAMUEL GREGG, D.PHIL, is the Acton Institute’s research director.