When failing businesses are allowed to fail, producers learn how to combine resources in ways that create wealth.(HT Don Boudreaux)
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.
Monday, April 06, 2009
The Benefits of Failure