In a market economy, business deaths are like death itself -- an unfortunate but inevitable fact of life. However, recent government bailouts have tried to stop the inevitable by intervening in the market, at least temporarily saving failed firms from the economic grim reaper. Before putting the next failed business on life support, it's worth remembering why it makes sense to let struggling producers expire.Agreed.
• When failing businesses are allowed to fail, resources are released from employments where they don't add value and made available for employments where they do.
Resources used for one purpose can't be used for another. Thus, it's important that they find their way to the purposes we value most. Enter the profit-and-loss system. Under this system, when producers use resources in ways that are consistent with our wants, they earn profits. When they don't, they earn losses. If losses are severe enough or accumulate over time, the producers who earn them go under.
Far from cause for concern, this failure is cause for celebration. When ineffective producers fail, resources committed to producing goods we value less are freed for producing goods we value more. Polaroid's failure released resources for the production of digital cameras; Commodore Computers' failure released resources for the production of IBM computers; and Chi Chi's restaurant's failure released resources for, well, the production of food that tastes good. Who better to sacrifice the resources required to expand production of the things we want than producers of the things we don't?
If government prevents failing producers from going out of business, resources get "stuck" in employments where they're less productive. We can't have as many of the products we care more about because the means needed to make them remain locked in the manufacture of products we care less about. Society suffers as a result.
Tuesday, April 14, 2009
In view of the rumor that "[t]he Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline," it's worth quoting the first part of Peter Leeson's explanation of "Why we should let some firms go belly up," in the April 3rd Washington Times: