In the Nation's Interest

Steve Odland Details Economic Harm of Crony Capitalism

by Steve Odland January 27, 2016

Throughout our history, hard work, risk-taking, and trust in our free-market capitalist system have propelled our nation and millions of people up the economic ladder. But now nearly four in ten Americans believe that hard work and determination are no guarantee of success. Even worse, millennials now view socialism more positively than capitalism.

What has undermined faith in our economic system and the very values needed to sustain it?

In a free-market, capitalist system, businesses should compete unassisted, and be rewarded only if their goods and services successfully meet consumer demands. Merit and fairness triumph over favoritism.

Much of the blame goes to crony capitalism, which is when government provides special favors to some people or businesses, and picks winners and losers in the marketplace. Cronyism certainly predates capitalism itself, as past rulers rewarded family and friends for eons. But it's unfortunate that cronyism remains alive and well in a democratic society that trumpets the values of the free market. From tax breaks to no-bid contracts, crony deals wreak havoc on markets and capitalism both ethically and economically.

Crony capitalism creates an uneven playing field and benefits the few over the many. It could be a favor in the regulatory code, or a tax exemption that gives a company or industry – almost inevitably incumbents who already are successful – a leg up. Cronyism also diminishes innovation. When a company can prosper on a subsidy rather than by winning in the marketplace, complacency sets in and breakthroughs plummet. All this places limits on our quality of life.

In a free-market, capitalist system, businesses should compete unassisted, and be rewarded only if their goods and services successfully meet consumer demands. Merit and fairness triumph over favoritism. But crony capitalism distorts this arrangement, often driven by our money-lubricated political campaigns. It erodes trust in our economic system, our government, and our businesses. A sustainable capitalism – one that fosters equal opportunity and rewards risk-taking and innovation – is what we all should seek. Fortunately, it is within reach.

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