Any economic system needs a method of cleaning up mistakes. For mistakes are undoubtedly going to be made. It’s also true that activities age, technology changes, it is necessary to clear out the old for the new. Not so much to make room for them, as that’s already happened by the consumer changing their desires. Rather, to allow the assets employed to make the old be available to make that new.
Planned economic systems don’t do this. Anything that’s extant has a political support group, things that aren’t yet evident don’t. Yet the replacement of that current by that new is what makes us richer over time. Thus the importance of bankruptcy to the economic system:
Much thinking is being done over what to do with the loan defaulters, those simply not paying back those non-performing loans (NPL) that so beset the banking system. The correct answer is to crush them so that we can hear the lamentation of their women.
OK, Conan the Barbarian is perhaps a little bloodthirsty as a way to run a banking system, but the basic point still stands. People can’t pay back the loans they took out? OK, that’s fine, bankrupt them. This is not, it is necessary to note, because it is just and or righteous that they be punished in any manner.
Rather, this is the very heart of what makes free market capitalism work. Work in the sense that it makes all of us out here richer, year by year, and decade by decade. This, of course, being rather the point of having an economy in the first place, that the people become richer.
People can’t add value to economic assets? Great, there’s no shame in that. But while there’s no shame nor punishment that should accrue, we don’t want people to be using economic assets that they cannot add value to. We want those resources instead to be used by other people who may actually be able to do something useful with them.
We need to kill what doesn’t, or no longer, works. Which is what bankruptcy is.