In pure capitalist economic theory, there is no mystery about how we should deal with the crisis in the auto industry. If the companies can't make cars at prices people are willing to pay, then let them go under. In due course they will be replaced by new companies, or new workers, that produce cars more cheaply, by cutting costs -- including wages and quality. At some point the cost curve will intersect with what people are willing to pay, and the auto industry will be back in business.
The trouble is, of course, that we don't live in a purely capitalist economy, but in a democracy. People with jobs in the auto industry can't be tossed aside like so much flotsam and jetsam, nor should they be. They have plenty of spokesmen in government to insist that their interests must be protected -- their job security, first of all, and then its terms: reasonable working conditions, the health care they require, provisions for retirement, etc. The auto companies must find some way, therefore, to cover these essential costs.
In blunt terms, that means subsidizing them, and that's where the concept of a "bailout" comes in. When the government (or anybody else) is asked to "bail out" the auto industry, what it is really being asked to do is put up money to subsidize part of the cost of doing business.
And, of course, the current proposals to pay billions (or whatever) to "bail out" the industry bumps immediately into the question: who, precisely, is going to put up the money?
Logically, the first answer ought to be the car buyers. But that, as we have seen, is precisely the problem. At higher prices, the prospective buyers simply won't buy. So we have the various alternative proposals, the most popular of which is currently the "bailout." Let someone simply give the auto industry what it needs to get by. And "someone," inevitably, turns out, sooner or later, to be the government.
But the government, famously, doesn't have a nickel to call its own. Every cent it has, it exacts from the American people -- usually in the form of one tax or another. So a "bailout" of the auto industry simply means hitting up the American people for the dough.
And therein lies the fundamental question. Should it be our national policy to take money from the American people to give the auto industry what it needs to stay afloat? And if the answer is "yes," should that also be our policy toward every other industry -- or to none, or to a favored few?
We must be very careful how we answer that question. The auto industry is a critical part of the nation's economy. But it is by no means the only critical part. If we undertake to guarantee its survival, must we (or should we) guarantee the survival of other major industries as well? And how shall we choose which to subsidize, and which to let go to the wall?
Pure capitalistic theory, as noted above, is very unsentimental about the answer. Let any unsuccessful economic enterprise go under. But we won't, and we shouldn't, enforce that draconian principle without exceptions. Economic hardships should be eased where possible, with due recognition that uneconomic practices must ultimately be eliminated.
In short, a democratic society isn't, and probably can't be, a strictly and uncompromisingly capitalist one. Pure capitalism is based on a correct analysis of economics, but its prescriptions must be modified by an understanding of human nature that takes other necessities into account. To make such modifications is not to betray capitalism, but simply to understand that its rules must recognize other, and equally imperative, human needs.