The profit-and-loss system works because successful producers reap rewards when they combine resources effectively and unsuccessful producers incur costs when they don't. The prospect of profits from making good decisions and losses from making bad ones encourages producers to make choices that improve our lives.
But if government shields ineffective producers from the consequences of their bad decisions, producers' incentives become skewed. For instance, when policy permits producers to enjoy the benefits of successful risk-taking but subsidizes the losses of unsuccessful gambles, producers have an incentive to take on more risk than they should. Since they're no longer responsible to consumers when they make poor choices, the link connecting producers' and consumers' interests is weakened and, with it, the economy's ability to advance.
At a time when failure is the new dirty word and government seems willing to prop up floundering firms at any cost, we would do well to remember the benefits of letting failing businesses go belly up.
~George Mason economist Pete Leeson in the Washington Times (via Cafe Hayek).
But if government shields ineffective producers from the consequences of their bad decisions, producers' incentives become skewed. For instance, when policy permits producers to enjoy the benefits of successful risk-taking but subsidizes the losses of unsuccessful gambles, producers have an incentive to take on more risk than they should. Since they're no longer responsible to consumers when they make poor choices, the link connecting producers' and consumers' interests is weakened and, with it, the economy's ability to advance.
At a time when failure is the new dirty word and government seems willing to prop up floundering firms at any cost, we would do well to remember the benefits of letting failing businesses go belly up.
~George Mason economist Pete Leeson in the Washington Times (via Cafe Hayek).
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