EconTalk — Michael Munger

On: Crony Capitalism.

Episode: N/A

Date: February 2019

Background: Philosophy at Duke University, article “The Road to Crony Capitalism”.

Key Subjects:

  • Is capitalism inherently unstable as it leads inevitably to crony capitalism.
  • How to prevent the descent into cronyism.
  • Hayek’s Road to Serfdom:
    • Socialism: danger of excessive collectivization and centralized planning (communism).
      • Start with central planning of one industry, and you may corrupt the whole economy.
    • Capitalism analog: danger of cronyism in one industry may corrupt the whole economy.
  • Argument for why cronyism logically emerges in capitalism:
    • System driven by self-interest.
    • Mature industries, government with power to regulate.
    • Entrepreneurs seeking profits, politicians seeking money.
    • Marginal dollar spent on lobbying may be more profitable than investing in the business.
    • Politics incentivized to sell off rent seeking opportunities for money / power.
    • Dependence on the state grows – rent seeking behavior increases .
  • Incentives and human nature align to pursue behavior that is rational, legal, but may be “immoral”.
    • Importance of morals / culture in determining desirable economic outcomes.
      • Cultural norms influence individual morals.
      • Morals impact individual material interests and incentives.
      • Not captured in economics.
    • Economics tool box limited in handling this type of issue.
      • Constitution is either insufficient or not necessary.
        • Insufficient: rules can be rewritten if they differ from what agents want.
        • Not necessary: rules not needed when principles are shared by all agents.
      • Only way to avoid this type of behavior is to have a “proper moral code”.
      • [Or (i) stop politicians from taking money and/or (ii) limit the number of regulated industries].

Key Takeaways:

  • Cronyism is logical and inevitable in a system driven by self-interest.

Worth Listening:


Leave a Reply