Failing businesses are an essential part of a healthy economy.
It’s a counterintuitive insight, but the Review-Journal’s Wade Tyler Millward’s recent report on the businesses that replaced unsuccessful local grocery stores shows why. When businesses fail, the resources they used — including facilities, employees and natural resources — become available for new entrepreneurs to use more productively.
“Where a Fresh &Easy supermarket once stood near the intersection of Vegas and Buffalo drives, (Bakary) Coulibaly and his neighbors received a new location of the Family Dollar variety and discount store chain,” Mr. Millward reported.
“It is a huge convenience for my wife and family,” Mr. Coulibaly said. “Our closest 99 cent store was miles away.”
The 2008 recession and the rise of millennials in the marketplace are two factors that have changed the customer landscape, Mr. Millward wrote. Consumers care more about saving money than they did before, and the younger generation has a strong interest in personal fitness. No surprise, then, that discount retailers and gyms are the two types of businesses that have most frequently replaced the space vacated by large grocers and clothing stores.
With more shopping done online, expect more store closings. That will be a real loss for their investors and employees. But those losses carry some positives for the overall economy. Would consumers have been better off if government subsidized the horse-carriage manufacturers put out of business by the rise of the automobile? Of course not.
This turnover is exactly what economist Joseph Schumpeter described with his term “creative destruction.” Mr. Schumpeter rightly saw capitalism as a series of continuous economic revolutions, where new, innovative businesses upend established companies. The process is chaotic, but, ultimately, businesses are competing to best serve customers. Absent government meddling, a business makes money only by providing a good or service at an agreeable price.
In general, the richest people are those who have figured out how best to serve others. Their motive — whether greed or altruism — is irrelevant. It’s their ability to improve the lives of others that produces their wealth.
This is why it’s important that government not pick winners in the economy, whether by direct subsidies or regulations that hamper competition. Under crony capitalism, people get rich through their political influence rather than succeeding in the marketplace. With government backing, businesses are less responsive to changing consumer demand. This can trap resources in unproductive endeavors. That hurts consumers, employees and economic growth.
This is the paradox of capitalism. No one cheers for a business to go bankrupt. But if there are no failing businesses, the economy is in a state of dysfunction.