Bailouts Don’t “Save” Capitalism

In this short essay, Mises reminds us that the defenders of the current bailout-mania who claim such action is necessary to "save" capitalism couldn't be more wrong:

"The entrepreneurial function, the striving of entrepreneurs after profits, is the driving power in the market economy. Profit and loss are the devices by means of which the consumers exercise their supremacy on the market. The behavior of the consumers makes profits and losses appear and thereby shifts ownership of the means of production from the hands of the less efficient into those of the more efficient."

In other words, when the government subsidizes unprofitable companies (ie. failing banks and auto industry) they are propping up organizations that failed to serve society (consumers) in an efficient manner. This serves to shift power over the market out of the hands of the consumers and into the hands of the political elite. Moreover, these "zombie" corporations tie up scarce resources that could be employed in a more productive manner elsewhere.

Bailing out failing companies – even in the short run – doesn't "save" capitalism, it destroys the foundation upon which it is built (consumers and producers freely engaging in transactions with minimal interference in their decisions by the state). Entrepreneurial decision-making is further distorted by the government's tacit guarantee that if your company fails on a grand enough scale you too will be bailed out by taxpayers.