NEWSROOM
Commentary Articles
In The News
News Releases
Experts



Media Inquiries

Kim Cloidt
Director of Marketing & Communications
(510) 632-1366 x116
(202) 725-7722 (cell)
Send Email

Robert Ade
Communications Manager
(510) 632-1366 x114
Send Email


Subscribe



Commentary
Facebook Facebook Facebook Facebook

Contribute
Your participation will advance liberty. Join us as an Independent Institute member.



Contact Us
The Independent Institute
100 Swan Way
Oakland, CA 94621-1428

510-632-1366 Phone
510-568-6040 Fax
Send us email


Interested in working with us?  Click here for more information.

Commentary

Bailout Baloney


     
 Print 

As even Karl Marx once reluctantly admitted, the capitalist system has created more wealth more quickly than any other economic system in history. Yet, despite its obvious success, the system is poorly understood and almost never loved. And this ignorance and lack of affection for self-interest and profit and competition always makes capitalism vulnerable—especially during recessions—to crack-pot schemes and reforms that strike at the root of its economic performance.

In the current economic downturn, “bailouts” to financial firms and industrial corporations are the nuttiest of the current crop of government policies and they promise to inflict the most lasting damage on taxpayers, consumers, and on the economy as a whole. Regardless of their intent, they are a serious economic mistake because they cut to the very heart of the capitalist process.

The search for profit and the avoidance of loss is the essence of the capitalist process. In a market economy, individuals and firms have incentives to discover products and services that consumers want and then produce them at the lowest cost. Profits become a signal of success and a reward for serving consumers efficiently. Contrariwise, when losses appear, they signal failure and inflict a penalty on firms for producing poor products or having bloated costs of production.

Firms that make profits can command additional resources and expand production. Investors who took the risks of production are rewarded. On the other hand, firms that make losses must release resources and ought to curtail production; their investors are penalized. This, then, is the capitalistic process whereby consumers get the products and services they want produced efficiently.

Since market information is never perfect and since production is always future oriented, the capitalistic process is “messy” and is never in any equilibrium; this reality must be accepted. What cannot be accepted is market fraud and deceptive practices; these serve to undermine the integrity of the entire process and must be carefully policed. (Think Bernie Madoff.) Nonetheless, the capitalistic process of profit and loss—with fraud protection—just described has led to more personal freedom and more beneficial results than any other economic system in history.

The recent and on-going government bailouts are antithetical to the capitalistic process. First, they weaken both the information and incentives necessary for efficient production. Second, they delay tough decisions by management in a whole variety of areas such as product design, employment, dealer and store closings, future investments, and even bankruptcy. Finally, profitable firms in an industry are put at a competitive disadvantage because of the subsidies to the losers; this is both unfair and inefficient. All of these perverse incentives work to prolong and deepen recessions, not shorten them.

In addition, what governments fund they naturally wish to control. So bailouts often come with strings and conditions concerning future business operations. The assumption here is that the Treasury or the Congress can craft a better plan for any future corporate recovery than can the market or a bankruptcy court. But this assumption is unwarranted and has no support in either theory or empirical evidence.

The huge credit bubble spawned by the Federal Reserve created expectations about future production and consumption that could not be sustained. That it all came crashing down was inevitable. Recessions (actually economic corrections) end when consumers and business finally readjust their respective “balance sheets” to the new price and profit reality. Bailouts delay and distort this adjustment process and thus make the recovery longer and more difficult.
Dominick T. Armentano is a Research Fellow at the Independent Institute, professor emeritus in economics at the University of Hartford (Connecticut), and author of Antitrust and Monopoly: Anatomy of a Policy Failure.

© Dominick T. Armentano retains the copyright for this article.

  From Dominick T. Armentano
ANTITRUST AND MONOPOLY: Anatomy of a Policy Failure
Is antitrust law a necessary defense against the predatory business practices of wealthy, entrenched corporations that dominate a market? Or does antitrust law actually work to restrain and restrict the competitive process, injuring the public it is supposed to protect? In this breakthrough study, Professor Armentano thoroughly researches the classic cases in antitrust law and demonstrates a surprising gap between the stated aims of antitrust law and what it actually accomplishes in the real world. Instead of protecting competition, Professor Armentano finds, antitrust law actually protects certain politically-favored competitors. This is an essential work for anyone wishing to understand the limitations and problems of contemporary antitrust actions.






Home | About Us | Blogs | Issues | Newsroom | Multimedia | Events | Publications | Centers | Students | Store | Donate

Product Catalog | RSS | Jobs | Course Adoption | Links | Privacy Policy | Site Map
Facebook Facebook Facebook Facebook
Copyright 2014 The Independent Institute