Sunday, April 05, 2009

Why Business Failure Is A Cause For Celebration

The profit-and-loss system works because successful producers reap rewards when they combine resources effectively and unsuccessful producers incur costs when they don't. The prospect of profits from making good decisions and losses from making bad ones encourages producers to make choices that improve our lives.

But if government shields ineffective producers from the consequences of their bad decisions, producers' incentives become skewed. For instance, when policy permits producers to enjoy the benefits of successful risk-taking but subsidizes the losses of unsuccessful gambles, producers have an incentive to take on more risk than they should. Since they're no longer responsible to consumers when they make poor choices, the link connecting producers' and consumers' interests is weakened and, with it, the economy's ability to advance.

At a time when failure is the new dirty word and government seems willing to prop up floundering firms at any cost, we would do well to remember the benefits of letting failing businesses go belly up.

~George Mason economist Pete Leeson in the Washington Times (via Cafe Hayek).


At 4/05/2009 4:38 PM, Anonymous PotatoChef said...

Could not have said it better myself.

It is outrageous that the government is bailing out idiot business people, head in the sand homeowners, and banks that were closer to gambling houses then financial institutions.

Obama and all of Washinton are dillusional from inhaling the ink from the treasury departments printing machines.

At 4/11/2009 1:56 PM, Blogger Networking said...

This comment has been removed by the author.

At 4/11/2009 1:57 PM, Blogger Networking said...

While recession and failure of business is a phenomenon of capitalism, it is also a correction process. Thus I am always bothered by people who support capitalism but are out to find non-recessionary capitalism. It is an oxymoron.

Downturns in business whether forced or otherwise is an indication for a company to reinvent or refocus itself. This is a message from the market to the company or industry. This should not treated as a ominous sign of the apocalypse.

I contend that the US is healthy because it goes through these gyrations which has resulted in its becoming very flexible to accommodate fairly serious market changes. Examples of reinventions include IBM, HP, AT&T and examples of reinvention at the Industry level is Aerospace and Film/Movie.



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