Morphosis of Capitalism into Crony Capitalism– The Crony Capitalism Index: The Choice: Cronyism or Open Markets…

Crony capitalism (as distinguished from ‘open markets’ capitalism) is an economic system in which the marketplace is substantially shaped by ‘cozy’ relationship among government, big business, big labor… Under crony capitalism, government bestows variety of privileges that are simply unattainable in open markets…

According to Neil Irwin; if there’s one thing that populists on left and right of the political spectrum both agree on; its disdain for crony capitalism. It’s a distaste for the cesspool of government influence, in which big-business lobbyists canoodle with lawmakers to get their way. It’s anger at corporate welfare enriching the biggest companies at expense of the little guy…

Crony capitalism is a pejorative term used to refer to corrupt business dealings carried out by government officials in a capitalist economy… It refers to success in business based on crony-clot relationship between businessmen, government officials… The word crony means friend... So, what do politicians, government officials… normally do when they become elected? Yes, they show favoritism, cronyism…

According to Nick Sorrentino; realities of crony capitalism and open markets capitalism, if not opposites, are fundamentally opposed to each other… Crony capitalism in the purest form is the marriage of government and private special interests for the benefits of the few… but, however its defined– crony capitalism is phony capitalism, its perverted capitalism. The rap is that many of the problems people face on day-to-day basis, such as; lack of jobs, rising prices, corruption… is a result of capitalism…

When governments and powerful private interests collude the result is a cocktail of market distortion. Crony capitalism takes many forms including; regulatory capture (regulated interests actually using government power to squelch competition), zoning, licensing, bribes, paybacks, and hundreds of other ways. The one thing all of these ‘tools’ have in common, however, is that they are used by the politically connected few to extract money and power from the unconnected many…

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The crony capitalism index is measurement designed by The Economist publication for indicating how the livelihood of people from certain country (includes 23 countries)… with capitalist economy are affected by crony capitalism… However, the index has many limitations hence it’s not recognized international… The index aims to measure increasing trends in the number of economic ‘rent seekers’ (Note: In economics, rent-seeking is the spending of wealth on political lobbying to increase one’s share of existing wealth without creating wealth…

The idea of rent seeking was developed by Gordon Tullock and the expression rent-seeking was coined by Anne Krueger. The word ‘rent’ does not refer here to payment on lease of property, but stems instead from Adam Smith’s division of incomes into profit, wage, and rent)… The assumption is that because of the favorable political policies set by the government, tycoons are increasing their wealth and interest… As a result, they get a larger part of people’s fruits of labor, instead of generating more wealth for society as whole… The index only counts the wealth of billionaires…

According to The Economist; the index is only a crude guide to the concentration of wealth in opaque industries compared with more competitive ones… Also, the index fails to reflect other important industry segments, such as; military-industrial complex… which diminishes its accuracy… According to Nick Sorrentino; to go completely down the (anti) cronyism path and examine cronyism in all of its aspects, it would inevitable exposes the insidious ties with government…

In the article Our Crony Capitalism Index; Planet Plutocrat by The Economist writes: Inventing a better widget, tastier snack or snazzier computer program is one thing. But many of today’s tycoons are accused of making fortunes by ‘rent-seeking’: grabbing a bigger slice of the pie rather than making the pie bigger. In technical terms, an economic rent is the difference between what people are paid and what they would have to be paid for their labor, capital, land (or any other inputs into production) to remain in their current use. In world of perfect competition, rent would not exist: But, to test the claim that rent seekers are on the rampage, we have created the ‘Crony Capitalist Index’…

The approach was builds on work by Ruchir Sharma of Morgan Stanley Investment Management, Aditi Gandhi and Michael Walton of New Delhi’s Centre for Policy Research, and others. We use data from Forbes to calculate total wealth of those of the world’s billionaires who are active mainly in rent-heavy industries and compare that total to the world GDP to get a sense of its scale. We show results for 23 countries, which includes; five largest developed ones, ten largest developing ones for which reliable data are available, and a selection of eight smaller ones where cronyism is thought to be a big problem.

In the survey, higher the ratio the more likely the economy suffers from a severe case of crony capitalism… Included are the industries that are vulnerable to monopoly or that involve licensing or heavy state involvement… These industries are more prone to graft, according to bribery rankings produced by ‘Transparency International’, an anti-corruption watchdog. But boundaries between legality and graft are complex, for example; a billionaire in a rent-heavy industry need not be corrupt or have broken the law… Industries that are close to the government are still essential and can be healthy and transparent, without having cronyism…

It’s interesting to note that billionaires in crony sectors are having a great century so far, for example; in the emerging world wealth doubled relative to the size of the economy, and is equivalent to over 4% GDP compared with 2%, 2000. Developing countries contribute 42% of world output but 65% of crony wealth… However, there are shortcomings, e.g.: (1) not all cronies make their wealth public, e.g., drug lords… (2) some sectors characterized as rent seeking are more open to competition in certain countries and vice versa, and some open industries may be more subject to rent-seeking… (3) only the wealth of billionaires are included, whereas, many cronies may not be billionaires but multimillionaires, but it’s still rent seeking and it’s huge…

The index is only a rough guide to the concentration of wealth in opaque industries compared with more competitive ones… Despite the boom in crony wealth there are grounds for optimism. Some countries are tightening antitrust rules and there are a few hints that cronyism may have peaked…

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In the article The Economist Misses the Point on Crony Capitalism by Peter Schweizer writes: The Economist does a fine job of defining rent-seeking, but their bizarre methodology suffers numerous limitations (three of which The Economist recognized), and misses the broader point of what the oft-used phrase ‘crony capitalism’ even means and why lovers of open markets despise its rise…

At ‘Government Accountability Institute’, they define ‘cronyism’ or ‘crony capitalism’ as the instances when government gives certain entities favorable rules, tax monies… that others don’t enjoy… The reason they investigate and expose cronyism is that when government gives an unfair advantage to a politically connected business or other groups, it ends up undermining true competition, which is the heartbeat of economic freedom…

Put simply, when government picks winners and losers it disrupts open markets, doles out taxpayers’ money in the form of corporate welfare, and sets up incentives for politicians and companies to engage in corruption, kickbacks… Unfortunately, The Economist’s index is not constructed to capture the critical moves cronies make. Indeed, a more complete cronyism index would include metrics such as; the number of government-backed loans a company or individual has received, subsidies or set-asides, and the number of concessions scored by so-called ‘offensive’ lobbying efforts…

Part of the problem lies in fact that The Economist has championed certain government causes and environment activities that are the very things that fuel cronyism and corrode true open market competition… Also, the crony capitalism index isolates business sectors like– casinos, oil and gas, and real estate as crony sectors while ignoring markets, like; high-tech, healthcare, entertainment… However, people should be clear on what crony capitalism is, and what it is not. Sadly, The Economist’s methodology misses many of the key variables that drive cronyism…

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In the article Crony Capitalism by Bruce McQuain writes: Crony capitalism has as much to do with real capitalism as praying mantises have to do with real prayer, quote by Donald J. Boudreaux… In fact crony capitalism has little to do with capitalism at all. It’s simply ‘cronyism’ and once you understand what is being described, it can exist under any system that has a government… That’s the one ingredient that is necessary for it to exist.

Under open markets capitalism, the government’s job is to play referee, that is, enforce legal contracts, prevent and punish fraud… And, that requires regulation to exercise those functions… But when it gets beyond those parameters, it has a number of effects which have little to do with capitalism or an open market. When government gives up its role as referee in favor of a reciprocal relationship with those it regulates, then that’s cronyism… But, how does cronyism develop?

According to ‘public choice theory’ the root causes is regulatory failure; when regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect, e.g.; crony capitalism ensures the special access of protected firms, industries… to capital… businesses that stumble but are doing what is politically favored are bailed out, which leads to moral hazard and more bailouts in the future…

According to Donald Beoudreaux; dispels the myth that crony capitalism is a version of free market capitalism or, in fact, has anything whatsoever to do with it… Capitalism, i.e., open markets capitalism– is infused with laws most of which are self-enforcing… The chief problem with crony capitalism is– it injects significant amounts of lawlessness into the economy, transforming capitalism into something that it’s not, entirely different and dysfunctional. 

Under crony capitalism, government excuses the politically influential from capitalism’s laws. Thus unleashed from the impartial discipline of the invisible hand, the politically influential become criminals… So don’t let the enemies of capitalism get away with calling it crony capitalism. It’s ‘cronyism’, pure and simple, and it exist with any form of government… Increasing regulation isn’t going to change that dynamic or curtail the developed system of cronyism, as we currently know it…

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Capitalism, as an economic system, has its origins in mercantilist thought in Europe during the beginning of the 15th century– decline of feudalism– and beginning of the industrial revolution in 1780… According to Vijay K. Mathur; crony capitalism has acquired some of the traits of 15th century mercantilism, in which the wealthy are now engaged in rent seeking behavior that is making them and politicians rich…

Crony capitalism undermines competition in the market, corrupts the democratic process and leads to concentration of income, wealth in the hands of the few… I hope that voters wake up to the insidious development of crony capitalism and demand changes in tax and spending priorities and laws, and rules and regulations from their elected representatives, in order to prevent rampant rent-seeking behavior and concentration of wealth…

According to Devin Foley; the mechanisms of crony capitalism are numerous, such as; bailouts, stimulus, special loans, too-big-to-fail, political appointments, tax breaks, campaign contributions, ‘sole-source’ procurement, connections, grants, government-union cooperation, exemptions, government sponsored enterprises…

Unlike under open markets capitalism, crony capitalism often make it more profitable for business to spend resources lobbying government for handouts in the form of; grants, loans, tax advantages, protections against competition…

in order to increase profits. In turn, the government’s willingness to hand out special privileges; promotes themselves and the politically well-connected rather than those who seek to earn preferences of investors, consumers based on merit… Thus, crony capitalism creates a system of privatized gains and socialized loss…