Socialization of Losses — A crisis of capitalism
When capitalism in its modern version fails, bailouts kick in. Losses are socialized whilst profits and gains are privatized. This is a crisis of capitalism. It cannot sustain itself without resorting back to socialism.
Under true capitalism, both profits and losses should be privatized. There would be no bailouts whatsoever. All bailouts are socialist, regardless of who benefits. The covid stimulus checks are socialist. The Wall Street bailouts are socialist as well. Quantitative Easing is a subtly socialist program.
Agreeing to fix the system by intervening at the central bank or government level with a view of rescuing the system is agreeing to socialism. The biggest beneficiaries of these socialist interventions happen to be some of the biggest capitalists. So, what type of a capitalistic system are we living in? It's a capitalistic system that quickly resorts to socialism as soon as it encounters any problem along the way.
Capitalism is not trusted to fix its own problems. The magic of free markets and the Invisible Hand suddenly disappear, and Big Brother has to step in. The frequency of situations where the Socialist Big Brother intervenes is alarming.
Pick a side and stay on it
There is nothing inherently wrong with socialism. It is okay to have a humanist and social approach to issues in life, including economic issues. It is okay for a central planner to direct resources for the greater good. It is okay to help out the biggest businesses (and the smallest businesses as well) in order to see them through a rough patch.
What is wrong, however, is to pretend to be capitalistic all the way, whilst in reality, you are not. You have to pick a side and stay on it. Don’t be a Capitalist by day and a Socialist by night. If capitalism fails, let it fail. If socialism fails, let it fail. Bailing out one class of capitalists using taxpayers' funds produces huge inequality gaps that destabilize society.
Privatization of gains and socialization of losses are key factors in widening wealth gaps. It is wrong. It's a short-term solution to market failures but it's a long-term systemic problem. Proponents of extreme capitalism have to pick a side and stay on it. You cannot cry for government intervention via bailouts whilst you loathe a socialist state. Bail-outs are as socialist as any program can ever get.
The Free Markets are not working well, are they?
This explains the need for occasional intervention by central planners in the form of central banks and central government treasurers. If the free markets were working so well, there would be no need for intervention.
Central planners intervene because they have to prevent a small crisis in the markets from burgeoning into a large crisis of capitalism. A large crisis of capitalism can reverse the growth trajectory leaving the economy on a prolonged de-growth path. Prolonged recessions and depressions can de-civilize the world.
In the absence of central planners’ intervention, firms that make mistakes in the market will die and be replaced by new entrants that learn from the mistakes of the deceased ones. This process can take years in some sectors of the economy such as banking, insurance, and large-scale manufacturing. How many years does it take to rebuild a banking system that has collapsed? You have to rebuild the plumbing, rebuild credit markets, and restore lost confidence. This could take a decade or more. How long does it take to recover from an economic depression? Longer than it takes to recover from a personal (mental health) depression.
If markets are completely free and proper capitalism is in place, these are events that ought to take place. They are a key feature of capitalism. Capitalism is a system that is inherently unstable. It cyclically swings from periods of hyper-growth to periods of hyper de-growth. These are the ills of the free markets. It's the disadvantages that come along with free markets.
When the capitalistic pendulum swings in the opposite direction, we are quick to say the free markets are not working, but whatever we observe as not working is actually a key feature of capitalism. We have to accept it as a feature of capitalism. If we don't like that feature and want to term it as a failure, then we have to recognize it as a failure of capitalism rather than just a failure of the markets. Claiming that “its only market failure” is trying to be clever with words. Free markets are a central tenet of capitalism. If a free market fails, it is capitalism itself that has failed.
Capitalism is Dead, It's all Lemon Socialism Now
Can we agree that the global system we have is not real capitalism anymore? Under Lemon Socialism, private companies keep ‘dem’ profits whilst losses are carried by the taxpayers. Profits are privatized and losses are socialized. Lemons here refer to weak and failing firms.
If we can agree that capitalism is dead, and for a good reason, why can we not simply introduce proper socialism from the word go, where both profits and losses are socialized. Isn't it fair to do so? If taxpayers bear the burden of carrying the losses, then the same ones should enjoy the profits.
We have been told that taxpayers cannot successfully own companies that generate profit. We have never bothered to ask if that claim is universally true across time and space. Taxpayers can never be good shareholders, that's what they say. They say when taxpayers are shareholders, there is no accountability and there is reckless trading. We are witnessing exactly the same outcomes for big companies where taxpayers are not the shareholders.
Lemon socialism is bad because it is not real socialism. It is socialism for the rich and capitalism for the poor.
Modern-day capitalism has not been allowed to completely fail and die. Socialism comes to the rescue each time capitalism is about to fail. It is a wonderful dynamic, isn’t it? When capitalism reaches extremes and fails, socialism quickly sets in to reconfigure a balance, and capitalism is allowed to flourish again, and we move away from socialism.
For a beautiful moment in time, capitalism created so much wealth for the human race. It improved lives and made the world a better place. You can put this in stark contrast to other economic systems such as the Old Socialism and the Old Communism or even the Old Feudalism that created only a tiny wealth, and some systems that actually destroyed wealth.
The beautiful moment in time is running into its own limit as the increasing role of debt capital as opposed to equity capital makes the system so fragile. Huge inequality gaps threaten the social order. The financialization of everything adds to the systems’ fragility. Frequent market failures trigger frequent government interventions. The beautiful system is running into its own limits.
Socialization of losses as part of government intervention exhibits a glaring failure of capitalism. The more frequent the socialization is, the more endemic the crisis of capitalism is.
It's not food for thought. It's a simple observation. There is nothing to digest here.