Wednesday, December 24, 2008

The Austrian Economists: Why Bankruptcy Isn't the End of the World

Steve Horwitz writes:


The key point is that going into bankruptcy does not destroy the firm's capital, both physical and human. As a result, that capital can become available for a new firm, perhaps even a competitor, to purchase at a discount and use more profitably than the bankrupt firm did. In the case of the Big Three auto companies, doing things at lower cost and producing a better product would not be hard.

If they declare bankruptcy and need to liquidate assets to pay off creditors, it's quite likely that other car manufacturers (and let's remember that "The Big Three" are not all of the "US auto industry" as many other firms have plants here) would be interested in buying up their factories and perhaps even rehiring their labor, though certainly with contracts less generous than the UAW's current ones...

Well-functioning markets require that misallocated resources have opportunities to get reallocated to more valuable uses when those mistakes are revealed...

Supporters of the auto bailout could use a refresher course on all of this.


The Austrian Economists: Why Bankruptcy Isn't the End of the World

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