We want to preserve capitalism, not socialize risk. Politics should desist from bailing out other sectors. The financial system is the exception, it should not become the rule. Destruction is a inevitable and necessary part of the creative destruction of a capitalist economy

Capitalism is a wonderful system because adaptation occurs at such a decentralized level, with a minimum of information that needs to be exchanged. Price signals are often enough to enlist the sharpest minds steering them into the right direction.

If that sounds a bit abstract, here is a simple example. Energy prices went through the roof until recently (and will do so again when the world economy will get out of its present funk, probably even more so). Here is how market signals trigger the right reaction:

• The incentives to conserve energy become much more important (driver miles went down in the US, the demand for gas guzzlers went down as well, etc.)
• The incentives to explore untapped resources (the deep ocean in front of Brazil comes to mind), or the use of new technologies to get to previously uneconomical resources (Canada’s tar sands, America’s shale gas, Australia’s coal seam gas), or to develop new technologies to develop them increase, as do concrete efforts
• Incentives to develop and implement alternative energy sources is buzzing around the world in a myriad of labs, with many new approaches to solar, tidal, wind, algae, ethanol, batteries, capacitors, etc. on drawing boards, prototypes and early stages of implementation. The market provides the incentives, and sorts out the best approaches.

This all happens more or less automatically. In some cases (like the use of alternative energy), the state has to help a little, preferably by tilting the market based incentives a little bit more in its favour (and with good justification as one can argue that the market doesn’t value all the benefits of alternative energy at present, like less pollution and climate change, energy independence).

This is why we’re not dogmatics but, as former students of the political process, we’re all too aware of the possibility of abuse. Once sectors get a taste of the state’s help, the incentives of this so called ‘rent seeking behaviour’ compound.

More ugly is the possibility that special interest invade the political process itself. There is absolutely no market based reason why conventional energy should receive so many tax brakes and subsidies, or why hedge funds are almost completely unregulated.

The danger, in short, is that a political logic usurps an economic one, that winning votes and campaign money become to dominate any economic rationale. Therefore, state mingling into the resource allocation of the market itself should be kept to a minimum.

That’s a tall order today, now that the economy is in such a mess and there is a historic precedent in terms of the unfathomable sums spend to prop up the financial sector, even more so because the latter is largely to blame for the mess in the first place.

Still, it should be resisted. We don’t think it is the time to start bailing out other sectors. Capitalism has always been characterized by periodic crisis. These also have a cleansing effect, removing an the least productive production capacity where there is overcapacity frees the way for more productive endeavours.

Yes, rust belt industries (the US car manufacturers seem to join these) will suffer, but a bail-out is the wrong answer, and, more importantly, it would be counter-productive. Often, companies only really fundamentally change when all other alternatives are exhausted and reality sets in.

Bailing companies out will often lead to a postponement of that process. In fact, if if we would like to highlight the most important single economic quality of the US system, it’s this, in crisis, adjustment is often more rapid than elsewhere, the allocative efficiency of US style capitalism is one of it’s main strengths.

This is no time to tinker with that. Destruction is a necessary part of the creative destruction of capitalism. It can be done in a more humane way (enabling the victims to start anew), but it shouldn’t be resisted.

The exception is the financial sector, at present time, there is simply no alternative but to bail it out. But there should be a keen eye on the conditions:

• It should be made costly for the financial institutions, not (mainly) for purposes of justice (or retribution), but as an incentive for healthy institutions to profit from a government infuse
• Regulation should make anything remotely like a recurrence of this not possible. In fact, regulation should, and very well could have prevented this mess in the first place, but it’s too late for that.