Pete Leeson: Why Failure is Valuable

Lynne Kiesling

Along the same theme from yesterday that other people are writing very sensible things about the folly of our current federal government policies, I draw your attention to Pete Leeson’s excellent op-ed in Friday’s Washington Times. His theme: business failures are a valuable and important part of economic processes, and when we stifle those failures we do ourselves harm because we distort and truncate the reallocation of resources from less-valuable uses to more-valuable uses:

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.

We are living with the distortionary incentives of the “too big to fail” and “too important to fail” arguments that we’ve heard daily for the past eight months, and we’ll be paying the costs of these flawed policies for years to come.

Relatedly, Shika Dalmia’s article in Reason today reminds us that “by avoiding bankruptcy, GM only risks trading union demands for federal tyranny”.

3 thoughts on “Pete Leeson: Why Failure is Valuable

  1. I had almost forgotten about Chi-Chi’s. IIRC, management took their focus off of the restaurants to expand their presence on the grocery shelves. Locally run Mexican-style restaurants were able to undercut them, and the competition on the grocery shelves was too much for them.

    GM is going to be a special case, in that they are the primary suppliers for the military’s “rolling stock” of vehicles. What happens when the government fails and goes into trillions of dollars in debt? Do we keep voting the rascals back in?

  2. “The Hitchiker’s Guide to the Galaxy” described the Vogons as the product of 7000 generations of evolution without benefit of natural selection.

    Business failure is economic natural selection. If we don’t let it do its gruesome work, we’ll end up with an economy that’s even more gruesome. As gruesome as a pack of Vogons, to be precise.

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