January 1, 1999 (Ira Pilgrim)

Hooray For Bankruptcy

Capitalism without bankruptcy is like Christianity without hell.

Frank Borman(Chairman of Eastern Airlines, 1976-86)

Everyone thinks of death as bad. We rarely look at death as the other side of the coin from life. Without death, life as we know it would be impossible. While death at an early age is a tragedy, death in old age is something to be celebrated. Among the Yoruba in Nigeria, when an old man dies, all of the relatives get together and celebrate. It is viewed as a wonderful thing; the culmination of a complete and fruitful life.

Institutions also tend to have a sort-of life cycle. They usually start with much enthusiasm and not much know-how. They develop that know-how and may become successful. Eventually they go downhill. Their best people go out on their own and those who are left become less inclined to work and more inclined to drawing their paycheck. The enthusiastic people who started the enterprise retire and control is turned over to others who are usually nowhere near as competent or committed.

In government.... I don't really have to tell you about that. The only hope for a government is the retirement or death of the incumbents.

Bankruptcy is natures way of getting rid of an obsolete industry. Failing that, hostile take overs may occur and the company may be gutted. In either case, the result is the death of the company. That is the way it has to be in a capitalist system. It is one great advantage that capitalism has over socialism. It allows for both birth and death. The one without the other cannot exist.

However, the death of an enterprise is not neat. To people who are thrown out of work, the fact that the company had to die seems irrelevant. All that they can see is hardship for themselves and their family.

The advantage of socialism over capitalism is the absence of business failures with its attendant unemployment. The price paid for that is stagnation and the ultimate failure of the whole system, as occurred recently in the communist world.

That both socialism and capitalism have both failed, and may continue to fail, is no reason for either side to gloat. It represents a failure of the people in power to act intelligently.

During the Roosevelt era, visionaries had hopes that it would be possible to combine the two systems. When businesses crashed, governmental enterprise would pick up the slack with public works programs until demand for goods once again put business on its feet. While this was a good idea in theory, it didn't work. The tendency for the government to spend and create enterprises didn't diminish when the private sector recovered. Government continued to spend. Our country has essentially had a wartime economy since World War II, with massive military and government spending.

Both parties spend money like proverbial drunken sailors. The Republicans spent on the military and the Democrats on social programs. There isn't a smidgeon of economy in either party. The result has been a few successes such as the space program, and many dismal failures. The most spectacular failures were the War on Cancer and the War On Poverty. Of course they did what every war does: consume wealth and people.

Will there be a day of reckoning? It is not hard to see that, as the national debt increases and the burden of paying the interest on it increases, something has to give. What will happen is not something that I am privy to, but for sure something will happen. It always does.

Our country has operated with the same philosophy as the drug addict: if it feels good, do it! Tomorrow may never come.

And it may never come.

Next column

Return to the Economics Home Page

Return to Ira's Home Page