I have recently seen some economists offer the following explanation of the role of bankruptcy in the market economy: "Capitalism without bankruptcy is like catholicism without a concept of hell".
That is a fallacious view at best, and a dangerous basis for policy formation to boot.
It is fallacious for a number of reasons, relating to both philosophy and economics.
Firstly: Capitalism, unlike religion is an ethical, but not a moralist (imperative) system. Hence, a concept of eternal damnation simply does not apply, nor should apply, to capitalism. Nothing eternal (imperative) is relevant to capitalism, including the principle of permanently enshrined law. In fact, capitalism is a system that is based on change, including change applying to its core principles. Example: transition in property rights definition as it evolved under capitalism. Change is something that is impossible in a moral imperative systems: the Hell is the Hell and it will always be the Hell. In contrast, even the most basic foundations of capitalism evolve over time. Humanity used to have markets for slaves. We no longer do, for a good of the system. Capitalism used to define capital as physical 'stuff', it now includes 'intangibles'. And so on. This ability of capitalism to change - both continuously (evolutionary) and discontinuously (revolutionary) - preempts any possibility of an 'eternal' value concept, such as 'Hell', applying to it.
Secondly: Capitalism is based on utilitarian ethics. It is ok to alter private property rights (even with partial only compensation) under certain circumstances. It is ok to restrict some markets and transactions, when Pareto efficiency allows us. And so on... There can be no Pareto efficiency justification for a fundamental sin. Hence, bankruptcy in capitalism is not a form of punishment (damnation) a priori, but a system for resolving dilemma of un-recoverable liabilities. It is instrumental - a resolution system and a restart system. Hell is a permanent state, inescapable once entered into. And Hell exists solely for the purpose of punishment. It is not instrumental - it is absolute.
Thirdly: Bankruptcy is a manifestation of the process of creative destruction. Which is a dynamic process and also value-additive process. Hell is a system of a final state of being. There is neither a desirability for finality, nor transformative imperative to alter a being through bankruptcy.
In short, a statement of "Bankruptcy ~ Hell", while sounding remotely plausible, commits a basic fallacy of moralism: over-extending an imperative moral consideration to something that requires none.
So why do I take this statement to task?
Precisely because our system of bankruptcy is erroneously designed to follow that fallacious principle. We use bankruptcy not to resolve the problem of un-repayable liabilities in the first action, but to punish the person / entity that caused the problem. We make bankruptcy painful beyond the reason of simply maximising the recovery of losses in order to 'teach others a lesson' in a way that the threat of Hell is supposed to do.
As long as we keep following such a moralist view of bankruptcy, we will continue to unncessarily penalise entrepreneurship and risk-taking; we will continue to force unnecessarily high costs of failure on enterprises and people that undertake enterprise. In other words, we will continue to subsidise returns and rewards to statism to a life of secured complacency.
Capitalism without bankruptcy is a prison without an exit. It imprisons, wrongly, the innocents to rescue bankrupt enterprises (as in the case of banks rescues), or it imprisons too harshly those who take a risk and experience a failure (as in the case of some entrepreneurs trapped in, say, Nama). In both cases, absence of a utilitarian (not absolutist or moralist) bankruptcy destroys value - economic, social and personal.
Hell is the concept of an ultimate judgement and eternal punishment for moral sins, best left to God to apply, than economists.
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