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Friday, June 15, 2012

Bankruptcy is good

I often refer to capitalism as "economic evolution".  I think its a very fitting and descriptive label that gets the point across about how it works.  Like biological evolution, death is as important as life.  To illustrate my point, imagine what the world was like shortly after the meteorite hit the earth and wiped out the dinosaurs.  The earth was covered with the corpses of these gigantic beasts that once looked so indestructible. From underneath the earth appear these small creatures (rats) which are warm blooded and because of their ability to hide and breath cooler air that was close to the ground they were able to live and though much had been destroyed, they were able to live off the dead corpses of the dinosaurs.  Thus the death of one creature became the building blocks of a new creature and because of this process, WE later arrived.   We would not be here if the dinosaurs had lived on.

Capitalism is much the same way.  Old companies that once were indestructible are destroyed by downturns in the economy.  Unable to move fast enough and adapt, they are often the first to go.  But from out of the shadows come NEW companies, hungry to try their ideas.  They are able to cannibalize the left overs from the now bankrupt companies, thus obtaining needed equipment and employees who are fully trained.   These new companies are stronger than the the old giants.  Mostly because these companies are not plagued by old methods and strategies that don't work anymore.  Having worked in the tech industry I can tell you that companies internally do not "evolve" but instead they grow appendages and develop into amorphous blobs because no one wants to clean up and remove old systems.  Instead they just keep adding on more and more overtime and later resemble the "Winchester Mystery House" with its many unnecessary rooms and doors that go no where.

But bankruptcy cleans all of this up if we let it.  Gone are the old ideas and systems.  Left behind are the building blocks for a new company.

To illustrate this, think of Southwest Airlines. This new upstart in the 80's needed to expand but hiring and buying aircraft can take time, so instead they purchased a dying airline called Muse Air (bet you never heard of them either).  The death of this airline became new parts of Southwest and in the end BOTH were served.  The investors of Muse Air were rewarded when Southwest bought their stock.  The employees of Muse Air benefited with new employment and of course the people of America were given more and less expensive options to move around the country.  Without bankruptcy, none of this would have happened and Southwest may have been relegated to the business-bone-heap.

Today, however, bankruptcy is a dirty word.  Often synonymous with words like failure, our government thinking that its doing us a favor is preventing this from occurring.  They claim they "saved GM", but instead they just delayed their demise for a few more years and made us a weaker economy in the process because GM never had  the chance to clean shop and sell off its parts to other entrepreneurs with better ideas.

Now just imagine if we had a time-machine that allowed us to go back and "Save the Dinosaurs!".  We could go back and save a select few dinosaurs such as the Brachiosaurus or the Tyrannosaurus.  What would have happened??  Most likely, we would not be here today.  Instead, the planet would most likely still be inhabited by large dangerous creatures with brains the size of a walnut.

Bankruptcy, like death, is difficult to watch.  We see people weep at funerals and also at company closings. But we must understand that just as life is impossible without death, for we all eat decayed matter (plants and animals) that is the byproduct of death.  So also, a good economy and good businesses are all the product of failed economies and businesses as well.  You cannot have one without the other.

 

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