Mises Wire

In our present dire economic situation, lots of businesses are expected to go bankrupt. The question nobody seems to ask is, why do they fail? There are two issues at play here that are very different, have different causes, and should require different solutions.

The first is failure because businesses are prohibited from continuing operations, their customers are curfewed, etc. This is not an entrepreneurial failure, but one that has been imposed on these businesses. For these failures, the government is to blame. These businesses go bankrupt because they are simply not allowed to do business. But the goods are wanted and there are (presumably) customers willing and able to buy them.

For example, restaurants are not allowed to serve guests but can only offer curbside or home delivery. This lowers the value of their offering and potential customers are therefore less likely to buy. This is simple economics: a lower value might not be high enough to warrant paying the previous price. Restaurant owners would be smart to lower their prices and update their menus for this new situation. But whether they do or do not, blaming entrepreneurs for this fall in demand and their inability to cover costs is like blaming a chained dog for not roaming free.

This is not primarily an entrepreneurial error.

Regardless of the reason, this is a cost imposed on these business, and they should demand that government compensate them for the damage caused.

The other type is an entrepreneurial failure to foresee and thus inability to satisfy consumer wants. When consumers change their minds, which entrepreneurs are painfully aware that do often and without warning, a business that is not positioned for the new situation or is too slow to adapt to it *should* go out of business. It matters not what the reason for this change is—a sudden change in tastes, a new fashion trend, a pandemic, war, etc. To the degree that consumers no longer want what a firm offers, that firm should either adapt or go out of business.

Why?

Because they do not serve consumers if they keep doing what they're doing. This is not me being crass; it is the name of the game. Entrepreneurs, and thus businesses, make money because and do so to the degree that they are able to satisfy consumers' wants. If they do not, they should stop doing what they are doing. The resources that they are using in production can be used in better ways (from consumers' point of view) elsewhere. The sooner this correction takes place, the better.

This seems straightforward, but it is not.

First, we should see many businesses suffer or go bankrupt, because the pandemic has changed consumer behavior. This is expected and, in fact, beneficial. But also: much of the production undertaken in our economy lately has been structurally out of sync with consumers' wants. This is what happens when the central bank and the banking system increase the supply of money. This money must always enter the economy in specific place(s), where it artificially boosts demand and therefore increases prices for those specific goods before prices elsewhere have adjusted.

In other words, whoever gets their hands on the new money first, which is always banks and often "Wall Street," are enriched at the expense of those getting the new money last (whose incomes increase later than the prices they pay for goods). The Federal Reserve system has increased the money supply enormously since the financial crisis in an attempt to hide the needed correction (readjustment of production to what consumers are most eager to buy) with an artificial bubble.

As a result, many businesses were already not serving consumers' actual wants but rather the new-money economy. Whether they knew it or not (likely not), they were making money on the ongoing redistribution through money's uneven flow through the economy (so-called Cantillon effects).

On top of this structurally unsound production economy (from the perspective of consumers), there is the pandemic, radically changing consumer behavior. Both of these are actually entrepreneurial errors, and these businesses should fail because they do not properly serve consumers. These failures are tragic for the owners, managers, workers, and other stakeholders. But these businesses are in fact inefficient and wasteful—the resources that they are/were using would serve us (consumers) better elsewhere. Thus, the sooner they go under the better: it means that those resources are freed up and made available for investments more in line with consumers' wants.

Now, imagine the outcomes of large-scale loan programs by the government to "save" business.

There is no way that the government can tell the reason a business is struggling. Should this one be saved or should it not? Or, put differently, is this business struggling because the government made its value creation for consumers impossible—or because it is not producing what consumers truly want?

Add to this the fact that some businesses have been focused on serving the consumer while others have been focused on government favors, cronyism, and using the system. The former group includes both businesses that "should" fail and businesses that were penalized by government. (The latter group scarcely serves consumers.)

In this situation, the question to ask is: which firms would be more likely to quickly and masterfully jump through the hoops and cut through the red tape to secure loans? And, further, what does this mean for the economy?

Formatted from Twitter @PerBylund.