Monday, November 10, 2008

Root causes of crises & bailout under capitalism

1. An economy is an information network.

2. Capitalism is the system that maximizes free flow of information (capital) through this network.

3. Networks built by the free action of humans always result in heavy-head, long-tail distributions. (I'd say power law but C. Shalizi would smack me.)

4. Thus it is inevitable that massive economic power ends up concentrated in the hands of centralized actors who lack the capacity to manage this power efficiently.

5. When these entities inevitably fail, their centrality to the network generates irresistible political pressure to bail them out using the instruments of coercion (i.e. the government).

6. Thus capitalism contains within its nature the very seeds of its undoing.


(Composed on Muni 38 from downtown to J-town using my G1.)

1 comment:

  1. I'm not sure you can make the leap from (2) to (4). The fact that a lot of wealth accumulates in a few hands doesn't necessarily make those nodes indispensable to the functioning of the overall system. What we've seen on the 'net is both a bigger head and a longer, fatter tail. The head is bigger, but I'm not sure it's more essential to the functioning of the overall network than it was a decade ago because the tail is longer and fatter as well.

    The same is at least arguably true in the financial system. The largest banks have a ton of money and influence, but there are also lots of banks outside of Wall Street that could step in and pick up much of the slack if the Wall Street firms fell. It's not at all clear to me that an orderly liquidation of insolvent Wall Street firms would be a good way to deal with the financial crisis.

    Of course, it may be that those firms have too much political power to let that happen. But in that case the problem isn't their "centrality to the network" so much as their raw political power.