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The Selective Sovietization of American Capitalism

Lax lending standards, cheap credit, and massive injections of liquidity from the central bank have created a toxic level of financial flexibility in the US economy. As financial conditions become increasingly unmoored from the real economy, comparing the US to the countries on the losing side of the Cold War does not seem far-fetched.

MEDFORD, MASSACHUSETTS – Likening today’s capitalist economies to the communist bloc of yesteryear may seem far-fetched. What could the free market possibly have in common with Soviet-style central planning? In fact, the comparison increasingly offers useful insights into what has become of the winning side since the end of the Cold War.

Consider the “soft budget constraints” that socialist state-owned enterprises (SOEs) used to enjoy and that turned out to be one of the main reasons why Soviet-bloc economies failed. Similar financial conditions are becoming pervasive in capitalist America.

As the Hungarian Marxist apostate János Kornai famously argued, SOEs could ignore losses and consumer preferences because they could always count on the state to keep them afloat. Kornai’s thesis was popular with the Chinese reformers of the 1980s: seeking to make SOEs more responsive to the market, they “hardened” companies’ budget constraints. By contrast, capitalist America seems to be on the same misbegotten path as the Soviet economies. Though it is starting from a different place, the result is the same. Budget constraints are softening, and capital is increasingly being funneled toward the fashionable and the well-connected fantasists and schemers.

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