Cure for the Crony

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Is there a cure for crony capitalism, or is our society too far gone?

Is there a cure for crony capitalism, or is our society too far gone?

Jonathan R. Macey offers some hope in a piece from the Harvard Journal of Law & Public Policy.

Noting that “Crony capitalism has ebbed and flowed in our history…,” he proceeds to name a few instances from the wealth of 2012-2013 examples: a $78 million legislative tax write-off for NASCAR, tax benefits that Chris Dodd got for movie studios he represented, the political appointment of a Citibank administrator (who was promised a bonus if he would get the appointment).

What kind of atmosphere breeds this cronyism? According to Macey, it is an environment that makes it necessary to seek favors in order to get business done. For example, during the latter part of the nineteenth century, cronyism was common for those seeking incorporation. In order to get a charter to, for example, put in a bridge, the group seeking incorporation had to get a special charter directly from the state legislature. This naturally set up the playing field for paying bribes in order to do business. But once the rules started changing to offer incorporation by right rather than privilege, the states started competing. As a result, the cost of incorporation is quite cheap today, and Macey says cronyism has cleared up in this area.

He explains:

“So cronyism is like a biological growth: It will grow wherever environmental conditions enable it to do so. The only way to get rid of it is to create an environment where the payoffs from demanding or seeking special favors from politicians and bureaucrats are lower than the costs. In this environment there is no incentive for interest groups to demand such special favors.”

In other words, in order to end cronyism, it must be kept from being worthwhile. Less regulation (fewer avenues to depend on the government for favors) and more competition seem to be Macey’s prescription.

If cronyism has dried up in certain areas before, perhaps there is hope that today’s cronyism could dry up with the right treatment. Might we have access to better business and better products if we cut off the route to cronyism—where the winners or losers depend on who has an in with government—and instead let business survive on merit?

>>Source: Macey, Jonathan, R. “Crony Capitalism: Right Here, Right Now.” The Harvard Journal of Law & Public Policy. Vol. 37, No. 1 (2014).

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