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Tuesday, May 31, 2016

The Economically Illiterate Fear Successful Companies, Pine for Failures

It Fundamentally Confuses the Meaning of Profit and Loss

My 19-year-old son, Thomas — of whom I’m as proud as any parent can possibly be of a child — is a budding astrophysicist. His professional interests reside purely in the hard sciences and in mathematics. Yet his understanding of economics runs deeply. (Yes, I’m bragging. Or is it bragging if it’s true?)

Thomas naturally understands the inevitability of trade-offs; he understands that there is no such thing as a free lunch (or a free anything); he understands spontaneous order; he is realistic enough to realize that for every one perverse incentive at work in the private sector there are 1,001 perverse incentives at work in the “public” sector; and Thomas understands that firms that profit in the private sector serve the public — and that the greater the service, the higher the profit.

Thomas is also naturally a libertarian: he has no wish to butt into the affairs of others and he is appalled at the prospect of anyone butting into his affairs. He is, indeed, a civilized and decent man.

This afternoon Thomas and I were driving back from lunch and our conversation turned to McDonald’s. Thomas correctly noted that McDonald’s has suffered some difficult times in recent years. My son and I agreed that he — and possibly even I — will live to see the day when McDonald’s either declares Chapter 7 bankruptcy, is ignominiously absorbed into some other thriving firm (possibly a firm that doesn’t now even exist), or is transformed into an enterprise very different from what it is today. Thomas and I agreed also that the same fate awaits Wal-Mart and, likely further down the road of time,, Apple, Google, and almost all of the other of today’s thriving commercial successes.

Thomas knows enough history to know that today’s commercial behemoths — the firms that today seem destined to survive forever, unbeatable, blessed with the touch of Midas — are tomorrow’s pathetic also-rans. That’s the nature of market competition. Think Pullman, Western Electric, Woolworth’s, K-Mart, Sears, Kodak, PanAm, RCA, and General Foods — to name only a few, and only national American, once-giants. (Investors in these firms somehow missed out on the miraculous “capital-grows-automatically-and-all-by-itself” formula that features so prominently in Thomas Piketty’s work.)

Anyway, Thomas and I predict that the day will come when leftists rise up to lament the demise of McDonald’s and of Wal-Mart. My son and I expressed to each other our bemusement at the fact that leftists are as predictably nostalgic for dying firms as they are apoplectic with hostility to whatever firms are today thriving and most profitable.

Then, simultaneously, it struck both Thomas and me that leftists — by applauding and praising only firms that are currently in decline while despising and criticizing firms that are currently at their peak — applaud and praise only firms that use resources inefficiently (which is what accounts for these firms’ current decline) and despise and criticize only firms that use resources efficiently (which is what accounts for these firms’ current success).

To criticize the success of private firms in competitive markets is to display a failure to understand that these firms’ high profits reflect their unusual success at improving the lives of countless input suppliers (including workers) and consumers. And to seek to use government force to prevent the demise of firms being driven into bankruptcy by market forces is to seek to use government force to enable firms to continue to use resources inefficiently — that is, to use resources in ways that worsen the lives of many input suppliers (including workers) and consumers.

This article first appeared at Cafe Hayek.

  • Donald J. Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, and a professor of economics and former economics-department chair at George Mason University.