The Cancer Of the Economy


The nature of economics

Above Photo: Original here Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0)

In nature it’s all about survival of the fittest, animals die and only the most adaptable ones survive when the environment changes. This is how the market is supposed to work; businesses with bad practices or a lack of flexibility quickly die out, purged from the market.

This is meant to help keep the economy strong, quickly pruning the dead branches to help the tree grow strong, thus growth is sustainable and the consumer doesn’t lose out. Every time a company dies out, another should take its place, learning from the mistakes and having a fresh start, improving the overall health of the economy.

But what happens when companies refuse to die? When governments bail out inept firms and their bad management, in the short term it works, keeping the current system afloat, but in the long term it can only become a dangerous tool.

Take the 2008 financial crisis; the U.S. government passed $700bn in loans to banks in order to restore ‘confidence’. This was clearly a short-term measure, breaking the economic freedom of the free market. The long-term implications are myriad. 

What kind of signal does this send when businesses are told that they are so vital to the economy that no matter what mistakes they make, and although no-one should have confidence in the way they operate, they will be rescued? In its simplest form, the market lets good companies succeed and bad ones fail, but the massive intervention of governments has changed this underlying truth.

Government have intervened in markets for a long time, but never before 2008, to bail out big businesses in such a far reaching manner. Choosing to stimulate demand through expenditure is far different to propping up a system more complex and far reaching than any one government.

In order to restore a clearly misplaced confidence in the same practices that created sub-prime mortgage lending and a culture of reckless risk taking, governments saved businesses that should have died. This is an unnatural phenomenon in free-market economics; suddenly businesses are free to take risks and succeed but not to fail or take responsibility. 

Allowing businesses to fail not only follows the laws of nature and free-market economics, it also clears out and provides an example for businesses tempted to engage in similar practices, which in vitally important industries like finance, can bring the whole economy crashing down.
Herein lies the problem, years of being a mixed economy have persuaded governments that they can intervene and it will always work out, that they can bail out failed banks and it will not have a knock-on effect. This raises expectations of further government support for business.

This is dubious at best and dangerous at worst. Looking into the future, the government needs to make up its mind; will it try to intervene and do so with the correct information and understanding of the market and the effects of its own actions, or will it accept it cannot control the market and put an end to the myth that governments can always save the day? The lesson to be learnt should not just be that ‘The whole economy was in a hot, dense state, and it all started with a Big Bank’.