Wednesday, January 11, 2012

The Importance of Bankruptcy

I'm back in Montana after a successful conference.

Mitt Romney is under attack by Newt Gingrich, Jon Huntsman, and Rick Perry because as an investment banker and entrepreneur, he downsized and closed firms. His republican opponents are now demonizing him for "destroying jobs." Romney responds "President Obama wants to put free enterprise on trial. In the last few days, we have seen some desperate Republicans join forces with him. This is such a mistake for our party and for our nation."

Ron Paul is an exception among the opponents, and observed that closing unproductive firms ultimately creates wealth and jobs on net. Apparently Rick Santorum (my least favorite among the GOP candidates) has also refused to attack Romney on this. Romney and Paul (and even Santorum!)are right. The only rationale for a business enterprise to exist is that it creates value, it systematically allocates resources in such a way as to maximize their value to the ultimate consumers. Otherwise it should be shut down.

This is not a principle of capitalism or of the free market, it is fundamental to all human societies -- don't do anything that isn't worth doing. The difference between free market capitalism and, say, Soviet socialism, is that capitalism has mechanisms for evaluating value -- prices, profit, and loss -- and for closing down or changing failing enterprises. Joseph Schumpeter called it "creative destruction," and without it no economic system can work well at all. The USSR did not have this -- there was no such thing as a Soviet firm closing because it was unproductive and destroying net value. That's why their system collapsed. One of the worst things about TARP and similar bailouts is that they shielded TBTF banks, such as Goldman Sachs, from the consequences of their bad decisions and instead "socialized the losses" while keeping profits private. Blocking creative destruction is a guaranteed way to ruin an economy.

That Gingrich, Huntsman, and Perry are endorsing socialist principles in their desperate attempts to take down Romney shows how utterly unprincipled, despicable, and unfit for office they are.

Update: There are quite a number of op-eds on this issue now, most of them seem to be defending Gingrich et al. and mocking the idea this position is at all "socialist." This drivel from E.J. Dionne is typical ("the critique can't be socialist because, after all, Rick Perry is a 'conservative.' QED") But here's an excellent one that actually gets the economics right, a WaPo op-ed from Kathleen Parker. Right on target! If the government is going to get involved in deciding who may and may not be fired, when a business may and may not be closed, etc. it is central planning -- which is what socialism really is. So yes, E.J., Gingrich, Perry, and Huntsman are endorsing socialist principles.

I appreciate the clarity and simplicity that you use in dissecting the debate topics. Well done. Great blog--an enjoyable read.
Many thanks for your comment and kind words, WhyIt™.
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