Economic Opportunity

How Cronyism Harms Entrepreneurs

August 25, 2015

What motivates entrepreneurs? That’s the question being answered in a new white paper from the Mercatus Center at George Mason University. The study, conducted by economists G.P. Manish and Daniel Sutter of Troy University, examines the conflict between mastery-seeking, or the entrepreneur’s goal to produce a good product or service, and profit motive. Manish and Sutter’s research reveals that competition in the market remains a greater incentive than profit alone, and that the practice of cronyism only serves to harm the entrepreneurial spirit. To that end, the paper offers three key findings:

  • Cronyism prevents true consumer choice. Although favors from the government may temporarily increase profits for entrepreneurs, they also disrupt the consumer’s decision-making process and harm entrepreneurs who are motivated by real competition.
  • Entrepreneurs are forced to satisfy politicians, not consumers. By politicizing the economy, cronyism forces entrepreneurs to focus on the desires of politicians, rather than their customers. Manish and Sutter argue that “spending time lobbying produces nothing of value to consumers, which slows economic growth.”
  • Corporate welfare serves as a direct threat to entrepreneurship. Manish and Sutter found that the amount of cronyism in a nation determines what type of individuals become entrepreneurs. When a nation’s government engages in higher levels of cronyism, those motivated to serve the well-being of society tend to gravitate toward other careers. As a result, the economy suffers, with consumers no longer provided quality goods and services.

“Political favors and regulations actually interfere with free competition in the market, and they do not necessarily enrich businesses. Cronyism can create a system of skewed competition. Consequently, the best entrepreneurs who value mastery may have no interest in joining or continuing to participate in a rigged game. Without strong entrepreneurship in an economy, economic growth will falter.”—G.P. Manish and Daniel Sutter

For entrepreneurs, profit may be a way of keeping score, but it alone does not serve as motivation for providing goods and services to better the well-being of society—a point sorely overlooked by those who advocate for special handouts and exceptions.

The Charles Koch Institute routinely examines the harmful effects of cronyism and the negative impact of corporate welfare on the U.S. economy and the well-being of Americans. At a recent summit in California, Charles Koch called for an end to corporate welfare. Earlier this summer, the Institute brought together a panel of experts to address the threat of cronyism. Cronyism, and the fight to eliminate it, takes many forms; for example, the Institute recently explored the consequences of the Export-Import Bank, and the Charles Koch Foundation supports new research into cronyism.