"John Broder of The New York Times has an interesting piece on Al Gore’s financial profit tied to his global warming alarmism and push for renewable energy. Gore’s venture capital firm invested in Silver Spring Networks, a company that makes hardware and software to improve efficiency in the...
Free Market Capitalism vs. Crony Capitalism
Free market capitalism can be defined as "a system wherein individuals are free to pursue their own interests, make voluntary exchanges, and hold private property rights in goods and services." Allowing consumers and producers to trade at mutually agreed upon prices, free market capitalism is a system characterized by voluntary rather than coercive exchange. In such a system, the role of government is limited: protecting individuals' basic rights to life, liberty, property, and association; providing a legal system for the enforcement of contracts; and defending individuals against internal and external threats of physical force.
By contrast, whether referred to as cronyism, corporatism, mercantilism, liberal fascism, or venture socialism, crony capitalism is simply the cooperation of government and business. While this cooperation benefits the involved business and politician(s), it generally hurts the politically and corporately unconnected. Furthermore, the power and benefits of crony capitalism can often lead to corruption, a fact which James Madison recognized when he stated, "Wherever there is an interest and power to do wrong, wrong will generally be done, and not less readily by a powerful & interested party than by a powerful and interested prince."
The mechanisms of crony capitalism are numerous: Bailouts, stimulus, special loans, too-big-to-fail, favors, mandates, barriers to entry, political appointments, tax breaks, campaign contributions, 'sole-source' procurement, connections, grants, government-union cooperation, exemptions, government sponsored enterprises, political insider trading, and legal bribery.
Unlike in a free market capitalist system, under crony capitalism it is often more profitable for businesses to spend resources lobbying legislators for handouts in the form of grants, loans, or tax advantages, and protections against competition in order to increase their profits. In turn, the government's willingness to hand out special privileges promotes the politically well-connected rather than those who seek to earn the preference of investors and consumers based on merit. The gains of such activities usually accrue to the businesses and politicians involved at the expense of consumers and taxpayers. Consumers have to pay higher prices due to decreased competition, and taxpayers have to foot the bill for loans, grants, bailouts, and tax breaks. Thus, crony capitalism creates a system of privatized gains and "socialized losses."
In recent years, the collaboration between corporations and government has increased. A major example of crony capitalism occurred late in the Bush administration with the large corporate bailouts implemented under TARP. Another more recent case is the Obama administration using part of the 2009 Recovery Act stimulus to support alternative energy companies like Solyndra, which declared bankruptcy shortly after accepting the government’s loan.
Anger over situations like these took center stage during the Occupy Wall Street protests during the Fall of 2011. These protests blamed the 2007-2009 Recession on the financial industry. According to the Occupy Wall Street protestors, large corporations simply have too much power to influence the legislative process in Congress.
The protestors favor one of the two opposing solutions that have been put forth to prevent crony capitalism. That solution is to increase government regulation of businesses. Opponents of this option however point out that large corporations and the politically well-connected have too much influence on the legislative process because, more often than not, the politicians and government bureaucrats involved in that process are not able to withstand that influence.
The second solution proposed is to diminish government power and intervention in the economy. As long as there is some favor to be had from government, business will pursue it. Thus, so the argument goes, the only way to truly stifle the mechanisms of crony capitalism is to remove the ability of the government to hand out favors and limit it to its primary responsibility of protecting individual rights.
This topic explores the differences between crony capitalism and free market capitalism. The sources gathered here shed light on some of the mechanisms of crony capitalism, provide many examples, and offer various views of the causes and remedies for it.
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