Network bailouts

The corporate bailout debate hinges on divergent views of what shapes an economy. If seen as a collection of independent units competing in a reasonably efficient market, replaceable and interchangeable to the point of commoditization, then a bailout is untrue to a system that should reward the unit’s success and punish its failure. A bailout, in this case, is an inefficiency and a distortion.

If, on the other hand, the economy is seen as a multi-sided market, which is to say, a complex network mesh with links and clusters and bigger or littler nodes, some of which are directly connected while some indirectly so – in some cases maybe very distantly and through a chain of bodies and influences that collectively shape the rich topology – then a corporate bailout should be judged on the basis of its network profile.

If the capitalist objective is to guard and optimize the flow of traffic in the multi-sided market that is the economy, then maybe there’s a fine line between centralization and preservation of the network’s critical components. So, the correct question, I think, in the corporate bailout debate is whether that line is being crossed.

The bailout of banks a decade ago could thus be seen as crony capitalism, cynically, or it could be seen as a necessary measure to keep network capital flowing. On one hand, a distortion of efficient market incentives, and on the other hand the economic disruption that bank runs and related financial breakdowns can cause. The former is perhaps a blemish on the integrity of certain nodes and clusters, which may indirectly be a blemish on the nature of the network overall, but the latter is a potential network collapse. The first case is arguably more philosophical in nature, and the second more immediately pragmatic.

The present-day bailout arguments are about airlines and others that, in better times, failed to build capital cushions and instead distributed excess funds for the direct or indirect enrichment of shareholders. Forgetting about the market purist case that shareholders ought to be enriched, forgetting about the issue that unlike the banking crisis of 2008 (to a significant extent self-inflicted) the current crisis is dictated and necessary, forgetting about all these things, the bigger question in the economic context – a complex network context, as mentioned – is what place and what influence these bailed out entities hold in the dense and interconnected mesh.

The flow of traffic is important to a functioning economy, physical activity is necessary as long as the network community can’t be absolutely self-reliant and isolated, and jobs are a feature, not a bug, of the big network offering that benefits its participants through network effects.

Wikipedia – Network effect

Note, these can also be negative [arrows in the image added].