Rent-Seeking, Crony Capitalism, and the Crony Constitution

Abstract

In the United States, the term “crony capitalism” refers to a political-economic system that resembles traditional political “corporatism.” As used here, it describes a system in which government, big business, and powerful interest groups (especially labor unions) work together to further their joint interests. Government protects and subsidizes powerful corporations and in (implicit) exchange the government uses those businesses to carry out government policies outside of the ordinary processes of government. Unlike simple models of political rent-seeking, in which businesses use government to advance their own interests in exchange for electoral support, under crony capitalism politicians and regulators use businesses to advance the interests of politicians and interest groups in a symbiotic relationship: government creates rents and then distributes them to itself and favored interests. Many of the relationships that grew up during the financial crisis and its aftermath through legislation such as the Dodd-Frank financial reform legislation illustrate the differences between crony capitalism and mere rent-seeking. Given the mutually reinforcing benefits created by this system, it is argued that prospects for reform are dim unless constitutional structures are built to restrain this system.

Keywords: Rule of Law, Hayek, cronyism, financial crisis, bailouts

JEL Classification: B25, P16