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Bailouts are bad because failure is good

Montparnasse Train Wreck_fail
Posted: November 8, 2011 at 2:00 pm   /   by

Okay, so that title sounds a bit paradoxical. And really, failure isn’t so much good as it is a necessary part of life.

From the digest:

Failure, though stigmatized by modern society as something to avoid at all cost, plays an irreplaceable role in the functioning of effective and efficient markets.  When we refuse to allow failure to happen, or we cushion its blow, we ultimately harm not only the person who failed but also all of society by denying ourselves a key way to learn how best to allocate resources.  Without failure there’s no economic growth or improved human wellbeing, say Steven Horwitz and Jack Knych, of St. Lawrence University.

[ . . .]

The modern Keynesian state, however, has greatly disrupted the process of information sharing by limiting the ability to fail.  Contemporary economists and politicians institute policies with the ultimate goal of failure prevention.  For example, farm subsidies allow American agriculture to stay afloat artificially, preventing its failure and limiting market access of new actors who might be able to identify farming methods that would not require government support.  The bailouts of Chrysler and General Motors had a similar effect, locking workers into jobs that are not efficient.  Through these policies and many others, the federal government undermines the social value of failure, say Horwitz and Knych.

Read the full paper here.