The Right Opinion

Let's Take the 'Crony' Out of 'Crony Capitalism'

By John Stossel · Jan. 13, 2010

When Judge Richard Posner, the prolific conservative intellectual, released his book “A Failure of Capitalism: The Crisis of ‘08 and the Descent Into Depression” last year, you might have thought the final verdict was in: Capitalism caused the economic downturn and high unemployment.

That this verdict was pronounced by someone like Posner, who is associated with the University of Chicago and the free-market law and economics movement, gave moral support to all the politicians who were intent on exploiting the recession (as they exploit all crises) to increase government control of the economy.

But what exactly is this “capitalism” that is blamed?

The word “capitalism” is used in two contradictory ways. Sometimes it’s used to mean the free market, or laissez faire. Other times it’s used to mean today’s government-guided economy. Logically, “capitalism” can’t be both things. Either markets are free or government controls them. We can’t have it both ways.

The truth is that we don’t have a free market – government regulation and management are pervasive – so it’s misleading to say that “capitalism” caused today’s problems. The free market is innocent.

But it’s fair to say that crony capitalism created the economic mess.

Crony capitalism, by the way, will be the subject of my TV show this week on the Fox Business Network (Thursday at 8 p.m. Eastern; Friday at 10).

What is crony capitalism? It’s the economic system in which the marketplace is substantially shaped by a cozy relationship among government, big business and big labor. Under crony capitalism, government bestows a variety of privileges that are simply unattainable in the free market, including import restrictions, bailouts, subsidies and loan guarantees.

Crony capitalism is as old as the republic itself. Congress’ first act in 1789 – on July 4, no less! – was a tariff on foreign goods to protect influential domestic business interests.

We don’t have to look far to see how crony-dominated American capitalism is today. The politically connected tire and steel industries get government relief from a “surge” of imports from China. (Who cares if American consumers want to pay less for Chinese steel and tires?) Crony capitalism, better know as government bailouts, saved General Motors and Chrysler from extinction, with Barack Obama cronies the United Auto Workers getting preferential treatment over other creditors and generous stock holdings (especially outrageous considering that the union helped bankrupt the companies in the first place with fat pensions and wasteful work rules). Banks and insurance companies (like AIG) are bailed out because they are deemed too big to fail. Favored farmers get crop subsidies.

If free-market capitalism is a private profit-and-loss system, crony capitalism is a private-profit and public-loss system. Companies keep their profits when they succeed but use government to stick the taxpayer with the losses when they fail. Nice work if you can get it.

The role that regulation plays in crony capitalism is unappreciated. Critics of business assume that regulation is how government tames corporations. But historically, regulation has been how one set of businesses (usually bigger, well-connected ones) gains advantages over others. Timothy Carney’s book about this, “The Big Ripoff: How Big Business and Big Government Steal Your Money,” explains why Phillip Morris joined the “war on tobacco,” General Motors pushed for clean-air legislation and Archer Daniels Midland likes ethanol subsidies.

As economist Bruce Yandle writes, “(I)ndustry support of regulation is not rare at all; indeed, it is the norm.”

If you wonder why, ask yourself: Which are more likely to be hampered by vigorous regulatory standards: entrenched corporations with their overstaffed legal and accounting departments or small startups trying to get off the ground? Regulation can kill competition – and incumbents like it that way.

When will Michael Moore figure this out? His last movie attacked what he calls capitalism, but his own work shows that it’s not the free market that causes the ills he abhors. Had he called the movie “Crony Capitalism: A Love Story,” he would have been on firmer ground.

It’s time we acknowledged the difference between the free market, which is based on freedom and competition, and crony capitalism, which is based on privilege. Adam Smith knew the difference – and chose the free-market.

What’s taking us so long?

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6 Comments

Russ Curry said:

John,Nicely stated.

Wednesday, January 13, 2010 at 11:27 AM

MichaelSSEC said:

Good lord, Mr Stossel! America desperately needs more guys like you, Jay Richards, Thomas Sowell, and the other free market proponents who smash the lies of those who push for the dishonesty of Socialism.Crony Capitalism might be described as gaming the system. Manipulating the rules to best advantage, to hurt the other guy and help my interests. In fact, calling it Crony Capitalism is misleading because there's really little or no Capitalism involved.When big business gets in bed with big government, so that it's hard to tell where one ends and the other begins, don't we begin to see enterprise privately owned but virtually controlled by government? Isn't that what we're seeing with the Obama administration now, with the banks being told everything right down to how much to pay their employees? And GM being told which cars to build, which cars to cut back on, how much to charge and how much to pay executives?Hmm...we have a word for that form of government. It's not Democracy. We saw it before, back in the 30s and 40s. Italy and Germany had that kind of government. We called it Fascism and the American Left in those days was madly in love with it.Looks like maybe that love affair didn't die down with the start of WWII.

Wednesday, January 13, 2010 at 7:27 PM

Walter L. Brown Jr. said:

It's too bad that Obama never promised to allow the reconcilliation process to be televised under oath. Although I doubt our stuck in a left turn congress would act on it, making the same promise 10 times and then doing the opposite seams to be grounds for dismissal.

Monday, January 18, 2010 at 12:03 PM

Linda Redondo said:

Most people in this country only believe what they hear over and over again in the lame stream news. They care nothing about truth when it is presented to them, even though it can be documented. They dismiss it like it is propaganda from the right and are too lazy to do their own research. We just may end up with a country we now deserve.

Monday, January 18, 2010 at 7:07 PM

JohnMinn said:

The term crony capitalism is good but FAR too kind.How about: "Two bit whores in government who sell their tricks to the highest bidder".What is a whore?An individual who will perform according to the wishes of a customer for a price.The DC bunch sure sound like whores to me.

Tuesday, January 19, 2010 at 1:04 AM

Scotch62 said:

John does a fine job with this wonderful article and hits the nail on the head, but using the term "capitalism" in the definition still allows the demagogues an angle. The appropriate definition of this incestuous relationship between govt and business John is defining is "mercantilism".Capitalism can be defined as markets free of govt or political intervention with private control of the property (including sound money) and means of production. Anything other than this is just not capitalism. We cannot let the ignorant define reality. We cannot let these incorrect terms be perpetuated and educate those we converse with concerning "evil capitalism" vs mercantilism, socialism etc.When drawn into these types of conversations, I always ask to agree on definitions first and quickly illustrate that what we have is NOT capitalism. ("what do you do on a daily basis that is NOT taxed, licensed, and/or regulated by some level of govt?") Answer? 1 liter per flush. Then I gain agreement that govt (this is usually easy) does nothing very well. (Remember, no parties or persons, it's about ideas) Then I gain agreement that govt does NOT have its own money and must first TAKE before it can give. It's downhill after that. You can rarely change someone's paradigm in one sitting, but you can get them questioning the lies......Thanks John, and the rest of us must do our part as well."Those who expect to reap the blessings of freedom, must, like men, undergo the fatigues of supporting it." --Thomas Paine,

Tuesday, January 19, 2010 at 9:48 AM