Crony Capitalism Vs.

Free Market CapitalismAn

Examination Of The Crucial Difference
A recent paper by Bennett, Daniel L., titled A Tale of Two Capitalisms: Perilous Misperceptions About Capitalism,
Entrepreneurship, Government, and Inequality examined two widely held perceptions about capitalism,
challenging the popular view that capitalism is a villainous perpetuator and government a saintly corrector of
cronyism and inequality.
Much of this erroneous view has been driven by the fallout from the Global Financial Crisis, the Great Recession and
the Euro Debt Crisis, although those of us who lived through it face-to-face would note the obvious error in this
paradigm when it comes to expectations about the Government role. As authors note, this characterization is largely
driven by misperceptions. Capitalism is viewed as a system that favors the elite at the expense of everyone else (crony
capitalism), rather than one that promotes economic liberty and opportunity for all (free market capitalism). The state is
meanwhile viewed as a benevolent and omniscient corrector of market failures and provider of public goods (romantic
view of politics), rather than a political system operated by agents whose actions may reflect their own self-interest and
not the welfare of the general public (public choice view). These misperceptions result in not only a distorted
understanding of the institutional structure that underlies capitalism and the mechanism in which income is distributed,
but also lead to perilous reform prescriptions that undermine free market capitalism and generate unintended
consequences that act to reduce individual and societal well-being.The paper shows how institutions that constrain the
discretionary authority of government incentivize productive entrepreneurship and facilitate free market capitalism,
giving rise to a natural or market determined income distribution and opportunity for economic mobility. In other
words, markets do work, when markets are allowed to work. On the other hand, institutions that do not sufficiently
constrain the authority of government incentivize unproductive entrepreneurship and facilitate the development of crony
capitalism, resulting in structural inequality and little opportunity for economic mobility. In other words, markets dont
work when they are prevented from working.
As per empirical evidence, the author concludes that:
This tale of two capitalisms provides insights about the connection between institutions, entrepreneurship, and the
desirability of income inequality. Empirical evidence suggests that sound monetary institutions and legal institutions that
protect private property rights and enforce the rule of law provide an environment favorable for free market capitalism
and productive entrepreneurship, as well as promote greater economic development and less income inequality. This
tends to support
Milton Friedmans (1980) famous proclamation: A society that puts equality before freedom will get neither. A society
that puts freedom before equality will get a high degree of both.
A growing body of evidence and the theory advanced here suggests that the development and preservation of
institutions supportive of free market capitalism is the best way to facilitate productive entrepreneurship, economic
development, economic mobility, and a distribution of income that, while unequal, is determined by merit rather than
political ties, and is lower than that which exists in less capitalistic economies.
As per sources of the public misconceptions about capitalism in its various forms, The scarcity of public choice and
institutional analysis in mainstream economics education has contributes to widely held misperceptions about
capitalism, entrepreneurship, government, and inequality. An analysis by FIke and Gwartney (2014) finds that only half
of the 23 most common economic principles textbooks provide any coverage of public choice topics and that the
coverage of market failure is sextuple that of government failure. The economics profession must do a better job of
educating students and the public about the nuanced but vital distinction between the varieties of capitalism, and the
important role of institutions in constraining the Hobbesian propensity of man to rape, pillage, and plunder and
enabling the Smithian proclivity of man to truck, barter, and exchange(Boettke, 2013).