The Road to Crony Capitalism: An Introduction.

• Author: Whaples, Robert M.

This issue of The Independent Review is intended to open up a debate about the nature of capitalism. My coeditor, Michael Munger, and his coauthor, Mario Villarreal-Diaz, begin the discussion with a deeply disconcerting question: "Suppose it's true that capitalism has a tendency--it's not inevitable or irreversible, but a tendency nonetheless--to devolve into crony capitalism. Is laissez-faire simply the first step on a kind of road to serfdom, where giant corporate syndicates achieve a parallel kind of economic planning every bit as pernicious as that feared by Hayek?" They conclude by determining there's a great deal to worry about: "[I]t is at least possible that cronyism is intrinsic to and not separable from capitalism" (emphasis in the original). And they provide much evidence that it's not simply a possibility but a reality--firms (especially entrenched ones that are losing their innovative edge) and politicians have strong incentives to travel down this road.

To initiate the debate, Munger delivered the paper in a plenary session at die April 2018 meeting of the Association of Private Enterprise Education. We continue the debate with six papers that respond to Munger and Villarreal-Diaz's cronyism argument. In addition, we invite readers to respond to "The Road to Crony Capitalism"--to consider how significant and inevitable the problem of crony capitalism is and to examine whether there are any real solutions to it--with the promise of publishing the best responses online alongside this issue of The Independent Review (send your formal comments to rwhaples@independent.org).

In the first of the six responses, Geoffrey M. Hodgson, playing with another classic economics title, considers in "Capitalism, Cronyism, and Democracy" whether statistical evidence and history can help elucidate the question. Examining Munger and Villarreal-Diaz's link between democracy and cronyism, that "allowing real democracy may doom real capitalism," he finds a weak negative correlation between an international index of democracy and international indices of cronyism and corruption. However, his central argument is that "in the beginning there was cronyism." Cronyism "has had much greater longevity than markets: it extends back to our simian ancestors. Trade ... has been in existence for tens of thousands of years, but cronyism goes back millions of years. As a consequence, cronyism and corruption are not recent impositions on a market economy." How can corruption and cronyism be reduced? Hodgson reports historical evidence that the establishment of a career civil service, a relatively free press, and especially military competition have favored a reduction in the governmental selling of favors.

Burton W. Folsom Jr. sees considerable merit in Munger and Villarreal-Diaz's thesis but argues from U.S. history that the slide toward crony capitalism isn't so inevitable. He argues in "The Fall and Rise of Laissez-Faire in the United States, 1789-1900" that cronyism is as old as the republic but that there was a distinct backlash against it in the period between the Civil War and 1900. This backlash was spurred by the excesses of cronyism exemplified by the corruption behind handouts (in both directions) connected with the construction of the Union Pacific and Central Pacific transcontinental railroad. However, this relatively crony-free era didn't...