Bailouts attempt to erase the effects of losses, or economic failure. But, writes Tyler Watts, such efforts inevitably undermine the loss aspect of “profit and loss.” Profit and loss go together — like up and down, left and right, good and bad. If we try to do away with losses, we’ll wind up diluting the meaning of profits. FULL ARTICLE
Source link: http://archive.mises.org/9411/the-importance-of-failure/
The Importance of Failure
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we should make a plan of what areas are losing jobs most eg limerick 1900dell jobs + banta supplier of dell
about 400 jobs we should hold such companies in this country by dell paying same wage as poland and the government top wages to starndard wage why would we pay people to do nothing we should try to hold companies by offering low cost plans
waterford crystal idea it might work we produce glass
and sell more here at reduced costs have new outlets
e.g supermarkets shops etc and if we buy now we things improve our value should improve for the consumer The more they produce at a cheap rate now it should be all about output this is an investment for anyone who buys now for later this should encourage sales at a high rate A waterglass set of 6 glasses sell now a half prices state what cutt on box
they should give this a good 6 weeks of production
and all should be encouraged to buy irish
this is worth giving a try what do you think?
we should make a plan of what areas are losing jobs most eg limerick 1900dell jobs + banta supplier of dell
about 400 jobs we should hold such companies in this country by dell paying same wage as poland and the government top wages to starndard wage why would we pay people to do nothing we should try to hold companies by offering low cost plans
waterford crystal idea it might work we produce glass
and sell more here at reduced costs have new outlets
e.g supermarkets shops etc and if we buy now we things improve our value should improve for the consumer The more they produce at a cheap rate now it should be all about output this is an investment for anyone who buys now for later this should encourage sales at a high rate A waterglass set of 6 glasses sell now a half prices state what cutt on box
they should give this a good 6 weeks of production
and all should be encouraged to buy irish
this is worth giving a try what do you think?
In the ancient tribal society, if Ug no killem deer, Ug votem for new chief who givem deer from other hunter.
In the modern tribal society, if Doug losem job, Doug votem for new president that taxem wampum from other worker.
Me thinkem Ug and Doug rhyme with thug.
Tyler
“Instead of trying to abolish failure via bailouts, we should let markets work, let failure run its course, and be so much the wiser for it.â€
You’ve got to be kidding. Politicians, altruists and world-improvers will never go for any solution that simple and logical. They see market failure every which way they turn. Of course, if they looked in the mirror they would discover where true failure resides.
You say that bailouts serve to protect people against their bad decisions. I would agree that if what you say is true, then let people take the consequences of their bad decisions. However, I do not think that what you say is true. Protecting some people against their bad decisions is only an incidental consequence of the proposed bailout. The purpose of the bailout is to protect millions of innocent victims who did not make bad decisions but were harmed by the bad decisions of others. To me the question is whether the bailout will indeed have the effect of ameliorating the plight of the innocent victims in such a way as not to cause worse consequences in the future. It seems to me that the only good argument against the bailout is the its most likely consequences are much worse than its intended benefit. I have not seen a detailed presentation of such an argument on this forum that is convincing.
Is it not fear of failure (or, to put it in a positive light, the hope of success) that drives the entrepreneur. Certainly, the entrepreneur may quantify their success in terms of targets and goals but failure is not such a bad thing. Inventors are no strangers to failure. It is failure that defines what does not work. Indeed, success can not exist without failure. Also, there are varying degrees of success and failure…one man’s failure is another man’s success. We see this in all areas of the economy. Consider short selling, downside investing strategies, and, yes, LBOs. Yet, in the lexicon of the socialist, success and failure have no meaning as they are the tools of the capitalist.
Charles Landesman,
You completely contradict yourself in the first four sentences of your post. It doesn’t matter or whether the protection provided by the bailouts is intentional or unintentional. All that matters is that it happens. The advertised “purpose” of the bailouts is not relevant. You are rightfully concerned with the innocent people who did not make bad decsions. Yet you fail to see that the borrowing and creation of money (inflation) needed to finance the bailouts will destroy the dollar, and as a result, impoverish the innocent people you wish to protect. The bailouts will bring about the exact opposite of what you and the politicians hope they will achieve.
The road to Hell is indeed paved with the best of intentions.
So, it’s ok to subsidize and encourage profligacy, then to fleece millions of billions, to protect the victims of said profligacy? Gee this must make sense to the likes of madmen. Not to me, though. If you haven’t seen a “convincing” exposition on this “forum”, all I can say is you’re wilfully ignorant, Charlie dearest.
Nate Y.
The road to Hell is indeed paved with the best of intentions.
It is obvious that the road to Hell is far better paved than any government owned road–unless good intentions are deeper and more dangerous than the all-pervasive potholes that mar publically owned roads.
Why should my children, grandchildren and their children be responsible for these bailouts? Which are just placed on top of the already TRILLIONS of debt!
“It’s NOT my Debt”: http://www.youtube.com/watch?v=5GoZ6ve3zv8
Mr. Landesman,
The argument is simply the immorality of theft.
Should a misfortune befall me that is not my fault, you are not morally or legally obliged to pay my bill. If you choose to do so as an act of charity, of course I will be grateful–provided that the money is either yours, or money that was collected without resort to force or fraud (e.g. your church took up a collection for me).
You do not have the moral right to steal money from innocent people at gunpoint or con people out of their money via fraud. If you give such stolen money to me to ease my misfortune, it does not change the moral equation: it is still immoral theft. Doing “good works” with stolen money does not transform the theft into an act of compassion.
Likewise, getting somebody else (e.g. the government) to commit the theft on your behalf does not transform the theft into a moral act.
It’s not just the theft of the taxpayers to cover the bailouts, but the theft that the Federal Reserve has perpetrated on all who use American dollars over the decades, the theft of the value of that money, the theft of any savings one might have (and thus provided little reason for prudent saving), the theft of long term planning by well-run businesses in favor of poorly run businesses, and the theft of capital from worthwhile projects that consumers would desire to flighty, high-risk projects that fewer consumers would desire.
And, of course, the moral hazard caused by all of this theft: why engage in prudent, long-range planning, concern for consumers, and struggle to make good decisions if it’s going to be ruined or derailed by Fed policy and poor political administration? Better to go along with the flow and hire good lobbyists to influence public policy in your favor against your prudent competitors.
Millions of innocents are not being protected by the bailouts, but are being victimized even more on top of the previous victimizations that have already occurred. The insanity is how many of the victims are asking to be victimized, apparenlty out of economic ignorance, or possibly out of masochism. What politician is going to refuse such an offer?
I know i’m not reinventing the wheel by stating this. For the greater part of the last century, the people have been conditioned to believe that they are not responsible for the consequences of their actions. This is the basis of many of the problems we now face. We have others to look out for our well-being. Government regulators, attorneys and the corporate media are helping to make sure we sleep easier. If that doesn’t work we can turn to pharmaceuticals. Social Security is a good example. It is telling you that you cannot be trusted with the fruits of your own labors. The government will save and invest your money for you. You cannot possibly understand the alchemical processes that the economy goes through on a daily basis. Reading your pay-stub and getting slapped in the face are not mutually exclusive.
@ Michael A. Clem–
Very well put.
Suppose, to take a hypothetical case, that the bailout legislation allows the state to transfer one million dollars to North Dakota to pay the salaries of 20 elementary school teachers who are about to be fired because the state or locality no longer has the funds to pay them. Here is a case in which the bailout ameliorates the condition of 20 innocent victims. What do I hear in reply? Namely that the funds represent theft. Now such allegations are based on a controversial theory about the state, about taxation, and the role of democratic government, and so forth. Such a theory may be right or wrong; Rothbard’s case for anarchism may be correct. But it is not obviously so. I cannot see that a controversial philosophical theory of property should stand in the way of helping real people who are in trouble through no fault of their own. The only argument against the bailout that is persuasive is one not based on a dubious theory of property rights but one that shows that the real, actual consequences are so bad that they outweigh the help given to innocent victims. For example, one might claim that run away inflation will necessarily follow. But is that true? I do not think that has been shown. In short, the argument for the bailout is that it provably helps many innocent victims. The argument against it consists of waving about an abstract ideology which is not self-evidentally true.
It is unlikely that Ug the caveman and his family would starve if he did not kill a deer. Most hunter/gatherer societies seem to have depended far more heavily on the gathering than on the humting. Further, it is true that without refrigeration, meat spoils quickly. Because of this any humter who did make a kill was very likely to share whatever he could not eat immediately in return for improved status. The punishment that a habitually failed hunter would suffer would be a low status and all that that would entail
Charles Landesman,
Where does the million dollars come from? Also, your hypothetical falls victim to a common error. You focus on the short term consequences for one group of people (20 elementary school teachers) at the expense of the longer term consequences for everyone else. Who would deny that the 20 teachers who get to keep their jobs benefit from the government action in your hypothetical? No one. But it is a classic case of “not seeing the forest for the trees”. I suggest reading Hazlitt’s “Economics in One Lesson” so you can grasp that “the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
Overall good article…
While author correctly notes the necessity of failure as the ultimate natural selection tool in determining of what is “right”, he fails to also note that in the truly free market only the strongest and conniving will survive, and others will gradually die off as the necessity for their labor gradually diminishes due to increased productivity…
While his “Ug’s tribe” example tries to depict the dynamics in the primitive society where failure equals extinction, the author forgets to point out that Ug and Mug can get together in cahoots with their chieftain and “privatize” or monopolize the control over the tribe’s hunting tools and dwelling land (i.e. strategic resources), and then label as “failures” anyone who has much lesser chance at catching a prey due to lack of better strategic resources…
While I am against any significant intervention into the market’s affairs, such as the present-day bailouts and their kind, I fail to see how the free market system by itself will protect the relatively unskilled members of the tribe from gradually becoming the slaves of the more conniving and better positioned members…
This is an existential dilemma for me… I see no clean solution to the problem of upholding the natural justice so far, as long as human nature of greed and strife for power is a factor…
If price – property – profit and loss are the three intrinsics of Capitalism.. then a self-sustaining/reliant capitalistic venture should ‘pay for its losses’ – if that should be beyond any adjustment in lessening its price-factor then it should do so by relinquishing a part of its property.
By no logic is its ‘bailout’ through the taxpayers’s money is justifiable.
It is quite an intellectual degradation that the Isms Capitalism – Socialism which are logically complementary to one another and are pure economic configurations have become Political Policies per se. Politically speaking they are only economic ‘lobbys’ so to say.
The famous old Indian Political economist Kautilya has categorically stated::
Wealth is the Source of the State
And, the Source of Wealth is Principles.
["Raajyasya moolam Dhanam
Dhnasya moolam Dharmaha"]
vedapushpa
social anthropologist
Bangalore -India
As far as I can tell, bailouts for the sake of the “innocent victim” do not obviously benefit anyone beyond the short term.
The purpose of a bailout is to enable a company to continue operations despite suffering great losses. Firms, however, incur losses by converting higher-valued resources into lower-valued goods and services. Bailouts allow poorly managed companies to continue this process of waste.
Bailouts may guarantee that workers may keep their jobs and their paychecks, but they also reduce the quantity and quality of goods and services which can be bought with their earnings. A recession may put one out of work or cut into his current income, but bailouts cut into your earnings forever!
Add to that the fact that governments fund bailouts with debt, i.e. a promise to increase taxes on everybody’s reduced future wealth. The scheme grows even more nonsensical.
“Suppose, to take a hypothetical case, that the bailout legislation allows the state to transfer one million dollars to North Dakota to pay the salaries of 20 elementary school teachers who are about to be fired because the state or locality no longer has the funds to pay them. Here is a case in which the bailout ameliorates the condition of 20 innocent victims.”
They aren’t innocent victims. They are actors in their own lives. They made an enterpreneurial decision to work for the North Dakota schools and accept the counter-party risk associated with so doing. The fact they might have inappropriately assessed the counter-party risk doesn’t mean they are innocent.
It is unfortunate that your central metaphor in your piece “The Importance of Failure†was so erroneous. For many ten of thousands of years humankind lived in tribal groups. The survival of the group was the most important concern, as individual family units could not survive outside of the tribal group.
You should have know, as all of us who study native peoples and societies do, that “If he wants his tribe to stick around†then communal hunting and communal sharing that have traditionally been the norm in tribal societies should be maintained. This is the common theme in the economics of tribal societies going back many thousands of years. This is what has contributed to the survival of our species down through history.
The very recent arising of the individual nuclear family and market economics is a very recent social invention. It remains to be seen if it will be the most adaptive to human survival.
Charles, the problem with your hypothetical is that it doesn’t go far enough. Yes, let’s suppose one million dollars is transferred to the state of North Dakota with the intention to keep 20 teachers on the payroll, but let’s suppose that they only use the money to keep 5 of those teachers on the payroll, and blow the rest of the money on bonuses, kickbacks, new teacher’s lounge furniture, etc. Then you would have a more realistic scenario, and more accurately display what is happening now.
So, one argument is the ineffectiveness of government to achieve stated goals, because it’s free money, they lack the incentive to handle it properly (Public Choice theory). Another argument is the theft argument, and how you can see that having part of your income forcibly taken from you isn’t self-evidently theft is a miracle of tortured logic and a re-definition of the term “theft”. And a third argument, as already pointed out, is the seen and the unseen. What benefits would have accrued from that one million dollars, where would it have been spent, if it had not been given to North Dakota instead? You can’t argue that the benefit for the teachers is worhwhile unless you can show that it is a net benefit, a benefit greater than what would have occurred, and thus worth the loss of one million dollars to other people.
There may be others, but that should be enough to get started on.
…in the truly free market only the strongest and conniving will survive, and others will gradually die off as the necessity for their labor gradually diminishes due to increased productivity…
I see two problems with this. Division of labor is one way of increasing productivity, so it isn’t self-evident to me that some people will prosper while others die off, because the market generally works better with more people involved, not less. Some types of labor will necessarily diminish, but the need for people (and more people) to engage in labor of some kind won’t diminish–it’ll just be different kinds of labor.
The other point is about what a “true free market” is. To me, a true free market is one where all exchanges are voluntary. Given a voluntary exchange, I fail to see how the strongest and the conniving can get the better of other people. They can only do so by violating voluntary exchanges, by engaging in some form of coercion or fraud in their exchanges.
How will people be protected from involuntary exchanges? This concern is indeed a valid concern, but the best argument for a free market in protection services is to look at the alternative, i.e. government-monopolized protection services, and how poorly they do the job. If competition is good for other services, why would competition be bad in this area?
TO: Michael A. Clem
Michael,
Thanks for you comments. I understand what you are saying… My point is, if the competition is fair, and you loose it, then it’s fine… But when a relatively small number of members of the tribe control incommensurate amount of resources, there is still competition, but it becomes “unfair”…
My dilemma here is how to determine what is fair and what is not. For example, in the Ug’s tribe case the small number of best hunters and farmers may form a professional elite league, that conspires to manipulate the meat and produce prices so that to bankrupt all the others, and then force the other members of the tribe to “sell” their original property in exchange for the right to borrow or work as waged workers…
As you can see, what can start as a perfectly fair and free market competition can quickly deteriorate into oligarchy through perfectly “legal” maneuvering in line to business practices driven to generate more profits…
Now, if the other members of the tribe start objecting to the seemingly “legitimate” gains made by more successful members of the tribe, they will be undoubtedly labeled as leftists or unionists…
It’s like in a team sports, when one team starts buying out all the best players and bribing the referees as part of their winning strategy…
How would this situation be preventable if anyone complaining against such malpractices will be labeled as a “leftist” or the “crying weak” ?!
You see my dilemma here? It’s like instead of laying a blame on a corrupt or incompetent referee or a bad orchestra conductor, we are blaming their very existence for the bad performance in the sports competition, or in the latter case, for the bad performance of the orchestra…
And conversely, if the referees and conductors or other brokers between various competing groups and their kind are honest, just and competent – we would NEVER have any problems at all!
It’s not the fact that there EXISTS a broker (e.g. government, leaders, chieftains, primary players, alpha males, etc.) with the delegated fiduciary rights, it’s the problem of how to keep that broker “honest”!
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