“Crony capitalism” is not capitalism, but political cronyism: the granting of political favors by the government to one’s friends (“cronies”) at the expense of the rights of others.
Under laissez-faire capitalism , outside the protection of individual rights, government’s job is “hand’s off.” Under capitalism, cronyism is outlawed in the political sphere
“Crony capitalism” is not capitalism, but political cronyism
Cronyism, in a political context, is the government granting political favors and privileges to one party at the expense of the rights of others. Examples include:
- a politician subsidizing a private business with taxpayer funds;
- the government granting a monopoly (exclusive license) to some company;
- a government official creating a law to benefit some friend (crony) at the expense of the rights of another;
- the government granting a state contract to a crony for personal reasons, or a bribe.
The proper term for such a policy is not “crony capitalism” but political cronyism.
Political cronyism is a crucial feature, not of capitalism, but of all anti-capitalist societies, where individuals must operate by permission of the state, as opposed to by right.
“Crony capitalism” is a contradiction in terms
Capitalism is a political-economic system based on the principle of individual rights, which means the separation of state and economics (just like the separation of church and state). Under capitalism, the government’s sole purpose is to protect each individual’s rights equally. It is a system of justice.
Cronyism is the practice of giving rewards based on considerations other than merit: it is a form of injustice.
Given the two concepts — the political cronyism of statism vs. the political freedom of capitalism — are incommensurable, what does the invalid lumping of the two as “crony capitalism” seek to accomplish?
“Crony capitalism” is an anti-concept — a contradiction in terms to undermine thinking, in order to blame capitalism, for what is in fact, the fault of anti-capitalist politicians and their “capitalist” cronies.
Writes Ayn Rand on the nature of the “trick”:
Observe the technique involved . . . . It consists of creating an artificial, unnecessary, and (rationally) unusable term, designed to replace and obliterate some legitimate concepts—a term which sounds like a concept, but stands for a “package-deal” of disparate, incongruous, contradictory elements taken out of any logical conceptual order or context, a “package-deal” whose (approximately) defining characteristic is always a non-essential. This last is the essence of the trick.
Let me remind you that the purpose of a definition is to distinguish the things subsumed under a single concept from all other things in existence; and, therefore, their defining characteristic must always be that essential characteristic which distinguishes them from everything else.
So long as men use language, that is the way they will use it. There is no other way to communicate. And if a man accepts a term with a definition by non-essentials, his mind will substitute for it the essential characteristic of the objects he is trying to designate . . . . Thus the real meaning of the term will automatically replace the alleged meaning. 
What those who wish to disparage capitalism by “package-dealing” it to cronyism is to hide the fact that under capitalism, all political cronyism is forbidden.
The free-market is the solution to cronyism in the private sphere
Examples of cronyism in the private sphere are the awarding of a job to a less qualified candidate because of their sex (sexism), family relation (nepotism), or race (racism).
Under capitalism, a private business is free to hire and award employees as they wish so long as they do not violate the rights of others.
However, under a free-market, a business that selects and rewards employees on considerations other than ability and merit (i.e., the owner of a company who puts his incompetent son in a position of power over the more qualified non-family member) will lose to competitors who are more concerned with hiring and awarding employees based on ability and merit. This is the meaning behind the once-famous saying, “From shirtsleeves to shirtsleeves in three generations.”
 Ayn Rand “Extremism,’ or The Art of Smearing” Capitalism: The Unknown Ideal 176.