Crony Capitalism
Bashir Safi
PLCY704: Economics and Public Policy
June 2022
Contents
Abstract..........................................................................................................................................1
What’s crony capitalism.................................................................................................................1
The causes: how state engenders crony capitalism........................................................................4
Crony capitalism in housing finance and the moorage industry....................................................7
Policy option to combat crony capitalism....................................................................................10
a. Limiting the intervention of government in the U.S. economy:....................................11
b. Reforming election campaigns:.....................................................................................11
c. Reforming the lobby sector:...........................................................................................11
d. Rule of legislative process:............................................................................................12
Biblical model of statesmanship and preventing crony capitalism..............................................12
Conclusion...................................................................................................................................13
Bibliography.................................................................................................................................15
ii
1
Abstract: This paper thoroughly defines crony capitalism and differentiates it from
sustainable capitalism. Generally, there are few causes and tools that engenders crony capitalism
in the United States but only two are discussed; the lobbying efforts and financing political
campaigns that broadly influence policy space and regulatory efforts. Among other sectors
affected by the crony capitalism, the housing market and mortgage industry is specifically
examined in this paper. It also discusses how state engenders crony capitalism through its
unhealthy interventions in the economic system. Furthermore, the paper also summarizes policy
options for combating crony capitalism, and how the government-business relationship should be
balanced. Lastly, in light of biblical module of statesmanship, a brief evaluation of listed factors
concludes this paper.
What’s crony capitalism
According to Adam Smith, capitalism is an effective economic system which is founded
on private property with independent choices of investment, work, and free exchange. Smith also
believes that an effective capital economic system allocates accurate and efficient capital. As a
result of accurate and efficient allocation of capital, it will facilitate new innovations and
businesses. Subsequently, this fair distribution produces high productivity growth, high
employment and ultimately lead to the social prosperity for all. This is also called sustainable
capitalism.
By Adam Smith’s standard, capitalism has been the most successful economic system
throughout history, with unbiased government interventions. In other words, in sustainable
capitalism, the state does not side to secure private interest.
The crony capitalism is the main reason when an economic system starts suffering
performance shortcomings. Any deals between private interests and government institutions that
2
serve the interest of private businesses on the base of political influence rather than merit is
crony capitalism. These deals could be through special interest groups, political groups, lobbying
firms and other political motivations. In crony capitalism, the government picks the winners and
losers when allocating capital.
Crony capitalism serves the interest of specific businesses and bolster their growth;
however, it reduces economic growth in the country. As special treatment, the government
through its deals with the “winners” will reallocate more resources to them rather than a fair
effective and efficient distribution of capital. As a result of deals, the “losers” will stay out of the
capital distribution which ultimately leads to the economic inequality.
Deals between the private interests and government are not always monetary. Sometimes
they’re not upfront monetary at all. There are multiple examples of monetary deals such as
awarding government contracts with no bid process to a business. It also includes Tax
preferences, cash subsidies and other type of direct fund appropriations. Non-monetary deals are
mostly conducted through favorable policies, regulations, and other forms of favorable treatment.
If there is questionable interaction between the government and a private business or a group of
private interests, there is possibility of crony capitalism.
Adam Smith cautioned us on crony capitalism. He believed that all new regulations and
laws concerning commerce must be examined and carefully reviewed. He maintained that men
deceive and even oppose the public interest.1 Smith also warned that policy action touted by the
politician and businesses as being in the public interest might be in fact promoting their own
private interests. The crony capitalism is a small minority in the economic system which has
1 Adam Smith, The Wealth of Nations (Book I, Chapter XI, Conclusion of the Chapter, para. 10, 2002),
267.
3
caused great harm to the U.S. financial system over the period of time. This minority attempts to
mute and evade free market competition by influencing the policy making space.
In the big governments, the more increase in the government influence on the economic
policies increases opportunities for potential leverage in misallocation of capital. This also leads
to the bad government-private interests’ interaction. In other words, the broader interaction
between an expanded government and a particular group of businesses encourages attempts to
influence policy, which leads to the crony capitalism.2 The larger policy influence of the
government over the economy has been an incentive for private group which help some business
avoid market competition and use the same leverage to restrict specific business from the fair
share of capital.
There are some proven symptoms of bad interactions between political space and private
interest groups which engender crony capitalism. Lobbying, campaign contribution and crony
deals are the basic trends to achieve crony capitalism.
First, lobbying is a lawful and constitutionally protected activity where a business or a
group of share interest promote their argument through lobbying. At some cases politicians,
during an election campaign, along with private groups promote a specific interest in which that
deeply believe. After securing the public office, this will lead to policy and regulatory change to
reflect their ideology or drive the policy where it serves their interest.
The Lobbyists represent private businesses. Through funding the legislators, the groups
dominate legislation process and drive the efforts to serve their clients favorites. The business
through lobbies, sometime promotes a policy change, and often oppose a legislation. Lobbies
2 Matthew Mitchell, The Pathology of Privilege—The Economic Consequences of Government Favoritism
(Mercatus Center, 2012), 30.
4
could be for good reasons and legitimate purposes. However, any effort that is against free
competition leads to crony capitalism, which have unfortunate consequences for the economy.
The causes: how state engenders crony capitalism
Crony capitalism predates current day Republic. Crony deals between government and
the private sector purged back to Rome and beyond. We do not need modern day lobby shops
and technology for the crony deals to happen. Nor eliminating the technology and lobby firms
would make the public institution delink from crony capitalism. However, over the past few
decades, it was the growing role of government that sped the U.S. economy very quickly.
Growing state intervention in the economic system, and regulatory efforts allowed
elected official to influence the outcome in favor of private interests. Nobel Prize winner for his
economic science analysis, Edmund Phelps, has concluded that the link between the government
and private sector has become stronger in general, however it is far more aggressive in few
particular industries such as healthcare, defense, and education.3 Through this nexus, the
government increases demand for a particular market with less competition and would shield
them from outside force. For example, the housing boom in the 2000s was artificially created by
the government and it was dominantly restricted to the government-sponsored enterprises
(GSEs). The healthcare system in the U.S. is also one the most expansive sector for the public
with less competition.
There are numerous ways that made the crony deals possible between the public and
private sectors. The larger derivative of the government’s impact on the U.S. economy is its
substantial growth in its size. In past six decades, government spending has grown from 25
percent of GDP to 35 percent today. General growth in the federal government spending is not a
3 Arnold Kling and Nick Schulz, “The New Commanding Heights,” National Affair, no. 9 (2011), 3-19.
5
concern, but government has expanded its role in resource allocation. Government influence over
the allocation of resources in the economy is a concerning sign. This influence is often politically
nurtured, and mostly serves the interest of a particular industry.4
There are few interconnected trends that have increased opportunities for the public-
private deals to struck. National defense has been the oldest sector where government has
expanded it role in its resource allocation. Public role in public health, modern infrastructures,
and communication sectors are the leading areas where many crony deals take place. These deals
serve private interests rather than larger public interest at the expense of taxpayers. As these
sectors dominate U.S. economy, thus, private interests attempt to influence the government
regulatory and legislations.
There are two main tools for the crony capitalism: the excessive cost of elections and
lobbies. Lately, the cost of U.S. elections has increased from old days republic. Individual
running for the public offices is dependent on campaign finance by the private firms. Officials’
financial dependency on private funds allows potential influence on policymaking space.
Prominent Congress observers like Norman Ornstein and Thomas Mann have concluded that the
high cost of U.S. election has fundamentally rusted the U.S. political system and made it
vulnerable to the crony capitalism.5
In addition to election finance, lobbying is another trend that legally influence policy
making halls in local, state, and federal government. Lobbying is constitutionally protected
public petitioning, where groups argue for what they believe in a particular matter to seek
legislative change. These efforts could be independent social groups which push for reforms or
4 Committee for Economic Development, Crony Capitalism: Unhealthy Relations Between Business and
Government (Washington, D.C. 2015), 21.
5 Norman Ornstein and Thomas Mann, The Broken Branch: How Congress Is Failing America and How to
Get It Back on Track (Oxford: Oxford University Press, 2008), 45.
6
other regulatory changes. However, industries that dominate U.S. economy hire lobbing
organization to promote certain beliefs to push legislations. The ultimate result would be
financial benefits, or an ease in regulatory or non-monitory policies. Lobby groups also finance
like-minded campaigns to pursue and achieve what they wholeheartedly believe to accomplish.
Ultimately, politicians and lobby groups with shared goals simultaneously influence regulations
and policies. This organized effort can lead to crony deals that aid a small private interest and
hurt the free market and even the entire total economy.6
Between 1997 and 2006, There were 80 new significant7 regulations that were influenced
by lobby groups. Lobbyists spent $100 million on each regulatory piece to make it profitable for
prospective industry.8 According to the Center for Responsive Politics (CRP), between 1998 and
2011 the top ten businesses spent over $3.1 billion in lobbying shape regulations in Washington.
Fear of the increased state intervention in the country’s economy is legitimate. This
growing intervention has allowed special interest groups, manufacturers, labor unions, and other
trade associations to change public policies and directly benefit from the government. This nexus
ends up forming a crony capitalism.
The cost of crony capitalism to the U.S. economy is undoubtably substantial. However,
it’s difficult to measure the damage as it’s not just in a monetary form. These are few costs of
crony capitalism to the U.S. economic system: First, it severely damages the competitiveness of
the U.S. economy. It does so by preventing new investments to enter the sector by the established
businesses. The regulation made as a result of government-private sector nexus does not allow
6 Committee, Crony Capitalism, 21.
7 The word “Significant” is defined under Executive Order 12866, it is intended which streamlines a
regulatory process.
8 Edmund Phelps, Mass Flourishing How Grassroots Innovation Created Jobs, Challenge, and Change.
Course Book (Princeton, N.J: Princeton University Press, 2013), 45.
7
new entrants to get through the channel. Generally, public resources are allocated for the
established businesses with certain requirements, which the entrants will not be able to meet.9
This brutal industrial contest are more visible in technological corporations. The incumbents will
resist the new entrants by building legal and regulatory barriers to bar their growth or even
entrance to the industry.10
As a result of this practice, during the past economic downfalls, big banks have received
more benefits from the government funds and small banks have disappeared. Small businesses
have shrunk while the large businesses with closer ties to the public offices survived and
substantially grown. 11 Second, crony capitalism results as subsidies for particular industry at the
expense of others. Lastly, crony capitalism impedes non-partisan economic reforms. Crony
capitalism is widely influenced in three sectors: housing, defense, and agriculture. However, this
paper only examines the housing sector.
Crony capitalism in housing finance and the moorage industry
Massive harm was done to the U.S. economy during the housing boom and bust that led
to the 2008 financial crisis. There is acknowledgment of multiple instances of wrongdoing and
failures by the public institution. This harm was done by either who caused or who failed to
prevent.
Just like other sectors, crony capitalism also influenced the mortgage industry and
housing market. Government-sponsored entities (GSEs) in the market were established as a
9 Crony Capitalism, 29.
10 Daniel A. Crane. “Tesla, Dealer Franchise Laws, and the Politics of Crony Capitalism." Iowa Law
Review 101, no. 2 (2016): 607.
11 John Foster, Robert McChesney, and Jamil Jona, “Monopoly and Competition in Twenty First Century
Capitalism,” Monthly Review 62, no 11 (2011), 1-39.
8
result of crony deals. Among other regulatory influences, the Fannie Mae and Freddie Mae are
two example of crony entities which was funded by the government.
Fannie Mac and Freddie Mae was created to increase the flow of credit and reduce the
risk for investors. These GSEs benefited from various government funds, and tax exceptions
which gave them a significant advantage in the market among competitors. Fannie Mae and
Freddie Mae, with such privileges, has established monopoly over the housing market. Granting
special treatment to a business in the free market is against the Sherman Act,12 an antitrust law
the prevents monopolies and promote fairness and competition in the sector.
As a result of crony capitalism in the mortgage industry, the Fannies and Freddie not
only established monopoly over the market but violated the Sherman Act as well. While only a
nexus of government-private interest benefited from the GSEs. Eventually, such crony deals, in
part, led to the 2009 crash of housing market and mortgage industry.13
The Fannies and Freddie are governed by a board which were partially appointed by the
government and partially elected by the stockholders.14 As a result of this combination,
government has allowed both enterprises to obtain lowest federal rate with upper hand in the
market which was very susceptible to crony capitalism. The Fannies and Freddie were also
excepted from the Securities and Exchange Commission (SEC) oversight.15 The government also
pressured both GSEs, through its appointed board members, to allow a lower loan standard
which guarantees housing loans to low-credit and risky borrowers, even they could not pay their
12 Office of the clerk U.S. House of Representatives, Lobbying Disclosure Act Guidance. Antitrust Laws,
http://www.antitrustlaws.org accessed June 9, 2022 (2013).
13 Carley Herrick, "Crony Capitalism and Its Effects on GSE’s within the US Housing Industry," Brigham
Young University Prelaw Review, no. 29 (2015): 2.
14 Peter J. Wallison. “The Dead Shall Be Raised: The Future of Fannie and Freddie,” American Enterprise
Institute, Feb 12, 2010. https://policycommons.net/artifacts/1298066/the-dead-shall-be-raised/1901339/
15 Securities and Exchange Commission, Prudential Core Bond Fund (2014).
9
mortgage payment.16 These conditions of crony capitalism in a form of flawed executive polices,
and government mandates created environment that led to the bust of housing market and
economic downfall of 2008.17
The Fannie and Freddie was established to increase the homeownership with easy
requirements. The housing boom poured huge money into the industry. To protect the money
flow, the mortgage industry influenced political space for favoring. There were some attempts to
curb Fannie and Freddie from further damage, but they were hit back very hard. From 2000 to
2008, Fannie and Freddie, with their alliance, contributed $176 million to political campaigns
and lobbying. Purpose of this political influence was intended to block legislative efforts against
both entities.18 In 2006, Federal Election Commission (FEC) investigated the Fannies’ and
Freddie’s matter of funding political campaigns. Later that year, the Freddie Mac was ordered to
pay $3.8 million in fines.19 There were numerous attempts to expose crony deals or regulatory
changes to short GSE’s influence in Congress, but all of them were met with strong resistance
and political retribution.
There are few examples of such efforts, when Representative Jim Leach proposed a bill
to cut federal subsidies to the GSE, his effort was thrown out within 12 hours from further
consideration.20 Representative Paul Ryan, attempted to regulate GSEs, has received thousands
of letters from local mortgage holders, claiming that Ryan wanted to increase mortgage
16 The Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report (2011), 39-40.
17 Herrick, "Crony Capitalism,” 4.
18 Darrel Issa, “Unaffordable and Political Kickbacks Rocked the American Economy,” Harvard Journal
of Law and Public Policy, no. 33 (2010): 407
19 Federal Election Commission, Federal Home Loan Mortgage Corporation (“Freddie Mac”) pays largest
fine in FEC history (2006), http://www.fec.gov/press/press2006/20060418mur.html
20 Romina Boccia, “Revealing Fannie Mae’s and Freddie Mac’s Budget Costs: A Step Toward GSE
Elimination,” The Heritage Foundation, no 2892 (2014): 4.
10
payment.21 Furthermore, when Congressman Christopher Shays introduced a bill to remove
GSEs’ Securities Exchange Commission (SEC) oversight exemption privilege, Fannie and
Freddie canceled all homebuying opportunities in Shays’ district.
There were numerous actions that showed both Fannie and Freddie resisted every effort
that was intended to regulate GSEs or exposed their monopoly within the housing market. The
Fannie and Freddie, with their political influence and crony deals, have violated Sherman Act.22
Policy option to combat crony capitalism
The crony capitalism is deeply rooted in the U.S. political system. The ultimate result of
the crony capitalism, with many other, is a creating an anticompetitive business environment.
Although, a small minority of businesses are involved in making crony deals, but the business
community can help resolve the problem. Businesses have special responsibility to educate
public and work with policy makers to prevent crony deals. Public opinion polls show that
almost all businesses are complicit in crony capitalism.23 The first line of defense is awareness in
the police making space. There are four policy options for combating crony capitalism: Bulky
election contribution and lobby, the two tools for the crony capitalism, and two legislative
processes. If regulated, the four policy options will make it difficult to struck crony deals. These
policy recommendations include:
a. Limiting the intervention of government in the U.S. economy: The government
extended role in regulation is the main leverage to make crony deals. The less it is involved, the
less leverage it will have on the functioning of country’s economic system. if the government is
21 Ibid., 5.
22 Herrick, "Crony Capitalism,” 9.
23 Andrew Ross Sorkin and Megan Thee-Brenan, “Many Feel American Dream Is Out of Reach,” Poll,
Dec 10, 2014, New York Times. https://dealbook.nytimes.com/2014/12/10/many-feel-the-american-dream-is-out-of-
reach-poll-shows/
11
not involved in the free market, the private interest will not finance elections or invest money
into lobbying. If government is not involved, the businesses don’t need to maneuver the policy
space.24 Yet, state intervention in the regulatory process is inevitable, thus, the business-
government relationship needs to be reformed. Healthcare sector, tax system and defense
spending are the areas susceptible to the crony deals. They need reform and fixing the relations
between the state and business community.
b. Reforming election campaigns: If public officials are dependent on private
contribution, they are more likely to make crony deals once elected. As Stockman said, the
business community dominates political space with money. It distorts free market and endanger
democracy. He claims, the U.S. economy has become crony capitalism. According to Stockman,
the state machinery is heavy influenced by the various Keynesian doctrines of tax cut, excessive
money, and demand stimulus which promotes crony capitalism.25
c. Reforming the lobby sector: In addition to funding election campaign, business
community invest money in lobbying to twist legislations in their favor. Many staffers leaving
the Hill work for businesses as lobbyists. There are some recommendations to restrict the
lobbying firms from hiring the Hill staffers. The government can extend the cooling off period
for former Hill staffers to join the lobby industry, if not placing a permanent restriction. Congress
also can ban lobbyists from financing elections or providing monetary or non-monetary support
to the candidate or member of Congress. Such as using private interests’ aircraft or other travel
related expenses.26
24 Herrick, "Crony Capitalism,” 32.
25 David Stockman, The great deformation: the corruption of capitalism in America. (New York: Public
Affairs, 2013), 598.
26 Herrick, "Crony Capitalism,” 35.
12
d. Rule of legislative process: Many deals are created as a result of legislations. The
legislative sector must be free of outside influenced, to be specific, the business community.
Many bills in the Congress or state legislative halls are politically motivated and heavily
partisan. Mostly, the crony deals are struck between likeminded politician and businesses.
To prevent crony deals, legislators need to follow the regular order. An adequate time for
review and consideration must be followed for laws. A must-pass bills are often orchestrated as a
result of bad government-business relation. Congress largely ignored its legislative priority, the
oversight. If any legislation, in any way possible, flourishing the crony capitalism, they should be
reformed. The problem of crony capitalism is thrived under any political spectrum in the United
States.27 However, bipartisan legislation largely restricts lobbying influence when making laws.
A compromise is inevitable, but a bipartisan legislative product is most likely on merit.
Biblical model of statesmanship and preventing crony capitalism
The crony capitalism is the unholy alliance between big business and big government.
Big businesses seek to limit competition, and do not allow new business to enter the field. This
alliance mostly, in a most unbiblical way, seek the favor of government to keep their profit and
limit competition.28 In light of biblical principles, the crony capitalism benefits the politically
powerful while exploiting the businesses. This meets the same standard of condemnation for
injustice. The bible also condemns people who exploit the poor (in this case taxpayers).29
In crony capitalism as discussed in this paper, the businesses make a nexus with the
government in regulatory or policy making space to benefit private interest at the expense of
27 David R. Henderson. “The Economics and History of Cronyism,” Mercatus Center (George Mason
University, 2012): 5.
28 Fischer Kahlib, “Crony Capitalism at the Intersection of Main Street and Wall Street” (video lecture in
PLCY704, Liberty University, Lynchburg, VA, June 10, 2022)
29 Jeffrey E. Haymond., “Biblical Critique of Crony Capitalism" Business Administration Faculty
Presentations, (2016), 66.
13
taxpayers. According to bible, “Woe to him who builds his house without righteousness and his
upper rooms without justice, who uses his neighbor’s services without pay and does not give him
his wages,”30 this practice leads to unrighteousness. As defined above, in crony capitalism those
with political power are able to use their influence on direct public policy in ways that favor their
interests, at the expense of those without such political power.31
Conclusion
While the roots of crony capitalism go back the old republic days, but it grew gradually
after the New Deal that led to the government expansions. Almost every financial crisis in the
country was created as a result of speculative finance, a byproduct of crony deals. Historically,
after every financial downfall, the government has extended its regulatory reach in the U.S.
economy.32 State intervention in the economic regulation has caused to create an appealing
environment for the crony capitalism. Business community through election campaign funds and
lobbying efforts influence government legislative process. These relations create crony deals,
which shape regulations in favor of private interest. As discussed, reforms in the election
campaigns, lobbying and legislative oversight are the main policy areas that could prevent crony
deals. These efforts will make U.S. economy sustainable.
While the roots of crony capitalism go back the old republic days, but it grew gradually
after the New Deal that led to the government expansions. Almost every financial crisis in the
country was created as a result of speculative finance, a byproduct of crony deals. Historically,
after every financial downfall, the government has extended its regulatory reach in the U.S.
30 Jeremiah 22:13 NIV.
31 Haymond, “Biblical Critique of Crony Capitalism," 66.
32 Marshal Lux and Robert Greene, “The State and Fate of Community Banking,” M-RCBG Associate
Working Paper, no 37 (Harvard, 2015): 5.
14
economy.33 State intervention in the economic regulation has caused to create an appealing
environment for the crony capitalism. Business community through election campaign funds and
lobbying efforts influence government legislative process. These relations create crony deals,
which shape regulations in favor of private interest. As discussed, reforms in the election
campaigns, lobbying and legislative oversight are the main policy areas that could prevent crony
deals. These efforts will make U.S. economy sustainable.
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