Crony capitalism occurs when the success of a business is determined by relationships with politicians, as opposed to the ability of the business. Crony capitalism is not true capitalism, as crony capitalism is an interventionist economic system. Crony capitalism is based on stealing wealth from one group, typically taxpayers, and giving that wealth to corrupt businesses.
There are multiple ways that corrupt businesses can use their relationships with politicians to favor themselves:
One method through which crony capitalism occurs is subsidies. Corrupt businesses gain subsidies typically to protect themselves from foreign competition, thus diminishing free trade. Those businesses may state to the public that a subsidy is for the sake of protecting domestic jobs or providing a vital resource. Subsidies come at the expense of taxpayers, which includes businesses that do not receive the subsidy. Subsidies decrease efficiency because the subsidized businesses do not have to be efficient to be profitable.
“It is the free market advocate that represents the best interests of the masses. It is only the free market advocate who would do away with all forms of government-granted privilege and monopoly. Ironically, it is the advocate of government action that promotes the welfare of selected favored groups at the expense of the mass of people.”- Christopher Mayer
Another tool of corrupt business is bailouts. Bailouts steal from taxpayers to keep struggling corrupt businesses alive, typically in a time of recession. This enriches businesses with the closest ties to government, since those are the ones that receive bailouts. Meanwhile, businesses that do not receive bailouts collapse. Recessions naturally destroy businesses too inefficient to survive. Artificially preserving such inefficient businesses lowers the efficiency, and therefore wealth, of society, as this article states.
Corrupt companies also gain special favors from government. These can come in the form of laws that lower the competition of corrupt companies. Artificially low competition destroys the incentive for businesses to try to be the best possible.
All of the methods exploitative businesses use in crony capitalism diminish the wealth, growth, and efficiency of the economy. The only beneficiaries of crony capitalism are the avaricious firms that use political relationships to damage the rest of society. Crony capitalism is neither a sustainable nor effective economic system.