Successful Explanation of the Importance of Failure

by Don Boudreaux on April 3, 2009

in Complexity & Emergence

One of my brilliant young colleagues, Pete Leeson, splendidly explains the folly of government efforts to prevent firms from failing.  Here are critical passages:

When failing businesses are allowed to fail, producers learn how to combine resources in ways that create wealth.

We take it for granted that producers know what we want. But this
information doesn't appear magically. It has to be produced. The
profit-and-loss system produces this information – but only when
government lets failing businesses fail.

Profits and losses do for producers what traffic signals do for
drivers. They tell them when to “go,” “slow down” and “stop” their
productive activities. By communicating which resource combinations
consumers value most and which they don't, profits and losses direct
“economic traffic,” informing producers how to produce.

If government prevents ineffective producers from failing, the red
light on the “economic traffic signal” stops working. Production
continues and resources flow when they should halt, destroying wealth
instead of creating it.


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