Montreal, January 15, 2009 • No 263


Bradley Doucet is QL's English Editor. A writer living in Montreal, he has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness.






by Bradley Doucet


          Liberty is won and preserved not primarily with guns, but with ideas. Spreading freedom requires that we spread an understanding of the benefits freedom brings, that we explain to whoever will listen how freedom is really in everyone's best interest. In making the case for a truly free society, however, we will inevitably come up against a wide array of illiberal beliefs that keep others from embracing our vision of a better world. The more we seek to understand those beliefs, the better we will be able to counter them and address the concerns that underlie them. In this ongoing series, I address some of the issues we can expect to face, along with brief outlines of the kinds of responses I think can be helpful.


BELIEF # 21: Bankruptcies are bad for the economy

January 15, 2009

          Is it bad for the economy if inefficient, badly run businesses go under? That seems to be the thinking behind fears that the Big Three American automakers, GM, Ford, and Chrysler, might go bankrupt if governments do not bail them out. Millions of jobs would be lost, it is argued, including some half a million here in Canada. The effects would ripple through the economy and depress spending all around. Like the major financial institutions before them, interested parties argue that the Big Three are simply "too big to fail." It would be closer to the truth to say that these dinosaurs are too big and clumsy to survive.

          In a free market, if a business goes bankrupt, it is because it was badly run, and competitors were able to be more efficient―that is to say, those competitors were able to produce the same product or service and offer it at a lower price by keeping their costs in check. Alternately, they were able to offer a better product or service for the same price, or again, some combination of a better product or service and a lower price. When in the worst case scenario, a poorly run business is allowed to go bankrupt and liquidate, the capital and labour that were trapped in the inefficient enterprise are freed up to be reallocated to more efficient uses. More successful competitors can expand, purchasing plants and equipment and also hiring laid off workers.

          The transition is never painless, of course. Stockholders take a hit as assets are sold off at a discount. Some assets may be of no real use, representing excess capacity or being out of date or run down, leading to further loss. Not all employees will be able to find work in the same fields, as they may have been superfluous; or they will have to take a pay cut, as their wages may have been inflated by decades of legally-sanctioned union extortion. The thing to notice is that, painful as it is, bankruptcy is just the market's way of correcting itself. Economic players have been acting in disregard of reality, and this has consequences. Bankruptcy is a serious form of market correction, but like all market corrections, when it is necessary, it is necessary.

          Bailing out an enterprise that should by all rights be allowed to fail is just an attempt to deny reality. It punishes hardworking taxpayers and efficiently-run businesses for the sins of overpaid union members and inefficiently-run businesses. It also sets up an unhealthy spiral, in which those who act recklessly are not held to account, encouraging them to continue to act recklessly in the future. It is corporate welfare at its worst, even though some of the benefits redound to privileged union members at the expense of all other workers.

          What about foreign competitors who bail out and subsidize their industries? Wouldn't a free society need to subsidize too, just to compete? Absolutely not. If we cannot compete in a particular, heavily subsidized industry, like the automotive one, we should be happy to allow foreign governments to subsidize our car purchases. We'll just make something else, and pocket the difference, thank you very much.

          In most cases, when modern companies declare bankruptcy, they are not even liquidated, but merely get the opportunity to restructure their businesses in more drastic ways than they are normally able to do so. For instance, they can renegotiate their debt repayments and labour contracts, and effect layoffs of superfluous workers and incompetent managers. Creditors get to have some input into how this is accomplished. There is still some pain all around, but not as much as with outright liquidation.

          All indications are that the Big Three will be back at the taxpayer trough within months, but this does not mean they should be accommodated. If any companies ever deserved to go into bankruptcy restructuring, it is these three, and one or more of them may even need to be liquidated. Does anyone doubt that a Toyota or a Honda could do a better job of running Chrysler than Chrysler does? One thing is clear: if we keep saving economic actors from the consequences of their actions, we can count on them to continue their profligate, imprudent practices indefinitely.





20. War is good for the economy
19. We don't care enough
18. Capitalism caused the Great Depression
17. Democracy is a cure-all
16. Self-sacrifice is good
15. Everyone is selfish—and that's bad
14. Free markets are utopian

13. Change is bad
12. You're either with us or against us
11. The environment is steadily deteriorating
10. Resources are limited
09. It's a small world
08. Morality must be enforced
07. The truth is obvious

06. Good intentions are enough
05. Charity must be enforced
04. We are our brothers' keepers
03. Theft can be justified
02. Order comes from above
01. Government is good