Monday, April 06, 2009

The Benefits of Failure

Pete Leeson:
When failing businesses are allowed to fail, producers learn how to combine resources in ways that create wealth.

We take it for granted that producers know what we want. But this information doesn't appear magically. It has to be produced. The profit-and-loss system produces this information - but only when government lets failing businesses fail.

Profits and losses do for producers what traffic signals do for drivers. They tell them when to “go,” “slow down” and “stop” their productive activities. By communicating which resource combinations consumers value most and which they don't, profits and losses direct “economic traffic,” informing producers how to produce.

If government prevents ineffective producers from failing, the red light on the “economic traffic signal” stops working. Production continues and resources flow when they should halt, destroying wealth instead of creating it.
(HT Don Boudreaux)

1 comment:

thinking said...

Totally true.

But a bubble = breakdown of information. So markets can create a situation where information is either distorted or ignored.

Govt is not trying to destroy the market system, only save it from itself.

Sometimes the economy needs govt intervention, just like the body sometimes needs a doctor and medicine.

Ordinarily the body self regulates and one welcomes the information the body receives in the form of both pain and pleasure. However, sometimes the body develops a serious enough problem that the medical community must intervene. Now some might view that as interfering with the flow of information but most view that as necessary.

For instace, a fever = information. But bringing down a very high fever may save someone's life.