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.

Discuss.

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

Judgment Day for Capitalism draws ever-closer

A little less than four years ago, I wrote:

The industrial Communist nations fell, so everyone assumes that Capitalism proved its merit and won. It seems more accurate to say: Communism fell, and Capitalism is still awaiting judgment.

The particulars of my observations at the time were only tangentially related to the current financial crisis, but the larger point about capitalism's fate seems to be proving correct. It's becoming reasonably clear that (a) the United States is nationalizing a significant chunk of the financial engine that makes it the center of the world economy, and (b) if we didn't do this, then our economy would come apart at the seams, taking down a significant chunk of the world economy as well.

It seems possible that the 21st century's dominant species of economy could be the weird technocratic cousin of crony capitalism that's being improvisationally invented before our eyes this week. It's a form of central planning which leaves the details to markets, but periodically stages massive interventions whose ripple effects dwarf the entire economies of most socialist nations.

But then again, maybe it's not so new after all.

(& now I'm off to a friend's birthday dinner)