Crony capitalism, populism, and democracy

In the wake of the Cold War, liberal democracy was heralded by Francis Fukuyama as the “end of history”, the only viable form of human governance. Three decades later, that triumphalism has faded. Liberal democratic capitalism now faces mounting criticism, particularly for enabling cronyism. In response to this, Munger and Villarreal-Diaz pose one of the most important questions in contemporary political economy: “Does capitalism in a democracy always devolve into corporatist cronyism?” They answer in the affirmative. This paper revisits their question and offers a more precise thesis: it is not democracy per se but its current institutional form that fosters cronyism. Democracy is a normative commitment to viewing one another as dignified equals, but how that commitment is realized is a matter of continual debate and institutional design. We further argue that the democratic system itself generates a backlash against cronyism in the form of populist movements. However, while these movements claim to restore power to the people and dismantle elite privilege, under existing institutional constraints, they reproduce the very pathologies they oppose. Current democratic institutions, then, suffer from a double failure: they breed cronyism, and the populist response they provoke deepens it. In short, in the current institutional setting, there is no endogenous path out of cronyism. Does this mean democracy is inherently incompatible with capitalism? We argue that it is not. The problem lies in how democracy is institutionalized. Drawing mainly on the works of James Buchanan, F.A. Hayek, Vincent Ostrom, and Don Lavoie, we outline an alternative vision for democracy.