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Friday, February 16, 2024

Why Business Failures Are Good for the Economy

Many people believe business failure is bad for the economy. But that's not really true.

Image Credit: Tim Mossholder - Unsplash

Many believe that a company going out of business is bad for the economy. But business failure is actually a good thing.

Let’s say there are two pizza places across the street from each other. One is way more popular than the other, and eventually, the less busy restaurant has to close.

Obviously this is bad for the failed pizza place’s owners and workers (and possibly the rats!).

However, the closed restaurant was providing a service people valued less (evidenced by the lack of customers). Because of the closure, the unsuccessful entrepreneurs and unemployed workers will have to look for different business ventures and jobs that people value more. The building can then be rented by businesses that serve customers better. The ovens and other equipment can be repurposed, sold, or turned into scrap. The poor pizza producers will be worse off for the time being, but the rest of society will be better off.

And in the long run, even those who “lost” might be better off as a result. Maybe they just weren’t cut out for the restaurant industry, and this setback is exactly what they needed to push them to find a line of work they can thrive in.

The real winners in the economic game aren’t the companies themselves but the customers they cater to. Competition among businesses is what drives innovation and the better satisfaction of human wants, and business failure is a necessary part of that healthy process.

“Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second.” — Henry Hazlitt

Additional Reading:

Competition and the Limits of Sports Analogies by Steven Horwitz

Economics in One Lesson by Henry Hazlitt