Bankruptcies, Bruises, Fevers and Extinctions

Humans have very powerful cognitive tools at their disposal. Among the most powerful is the ability to understand words not just in terms of their definitions, or their denotation, but to attach to a given concept additional information, the connotation. This allows us not only to convey a lot of information with the use of a few , well chosen words, but also allows us to make intuitive leaps, associating seemingly unrelated words and concept in new and interesting ways.

On the other hand, powerful tools are also dangerous. For example, antibiotics are essentially poisons. Silver, for example, can be used as a powerful antibiotic, because it destroys organic matter, but if taken in large quantities, it is toxic to the recipient as well as microbes. Similarly, hydrogen peroxide can kill microbes in new wounds, but applied to wounds which are starting to heal, it can also destroy the new tissue.

And connotation has a similar double edged nature. While connotations, used properly, can convey extra information, and can allow words to be connected in novel ways, improper connotations can lead to all manner of problems. In the extreme, many of the traits ascribed to mental illness can be caused by placing too much emphasis on idiosyncratic connotations¹. For example, much of medieval scholarship, which centered on seeking for religious allegory in the aspects of nature² would today be called schizophrenia, as such connotations are considered improper, but in their time were considered quite normal. Similarly, many of the "disordered thoughts" of schizophrenia can be understood by attaching unusual connotations to words. Similarly, much of the "shallow" thinking of insanity comes form nothing more than emphasizing connotation over denotation.

But that is not my topic here. Instead I want to look at something less dramatic, and that is our tendency to classify every event as "good" or "bad", to see events in terms of black and white, and fail to see that many "misfortunes" are beneficial when viewed in other contexts. I have discussed this before in terms of the, then new, housing crisis, in my post "Two Perspectives", "Michelle Malkin Imitates Me" and "Thomas Sowell Imitates Me". I later made similar arguments about "outsourcing" jobs in "Jobs, Jobs, Jobs, and More Jobs", "Cheap Lighters, Overseas Dumping and Monopolies", "Has No One Heard Of Lord Say?" and "Clarfiying My Argument", and finally discussing bankruptcies in "An Analogy From Past Inflation", "Environmentalism For The Economy?" and "Why"Negative" Economic Indicators Are A Good Thing". In each I argued that we have a tendency to call events "good" or "bad" and thus turn a blind eye to any possible good effects from bad events, or negative effects from good ones.

In some ways, it also resembles my argument in  "Evil and Greed", "The Nature of Evil", "Life Without Villains", "Enemies Into Villains" and "Rethinking My Earlier Position". In those, I argued that we have a tendency to look at questions of politics and seek villains, to turn those with whom we disagree into villains. And that really follows from this thought process. Since there are events which are wholly bad or wholly good, it makes sense that those proposing policies which bring bad events must themselves be bad, and vice versa. And so our simplistic view of events as wholly good or bad makes us see individuals as also wholly good or bad³.

Actually, let us go back and look at something even more basic. If we ignore even such weighted terms as "good" and "bad" there are even more simple terms which tend to blind us to the true nature of things. For example, "functional" or "purposeful" versus "accidental". We often try to conceive of things in these terms, but in many cases it is hard to even think of things accurately as one or the other.

For example, let us look at bruises, or scar tissue. Looked at one way, this is the outcome of an injury, the result of an unanticipated injury. But we can look at them another way. The body, being injured, creates a buffer of blood or additional tissue in anticipation of future injury. And so we can view the bruise or scar tissue as either an accidental outcome or the purposeful means to protect against future injury.

Or let us look at illnesses. When we get infected with a bacteria or virus, it may generate toxins which then trigger body defenses, causing us to run a fever and vomit. However, is this the virus accidentally triggering such defenses, or is it the body purposefully responding to assault and trying to eject the invader and toxins? It is possible to look at it either way, as the body purposefully using its defenses, or as the invader accidentally triggering such defenses.

Similarly, looking at larger pictures, is the extinction of  a species the failure of that species or the success of evolution? In this case, it seems the answer largely has to do with when it occurred. Thanks to the largely anti-man bias of many scientific theories, it seems if a species went extinct before man developed any significant technology, then its demise shows that evolution works. After man began developing technology, then the extinction shows that man did something to wipe it out. However, looked at honestly, extinction can be seen as either the failure of the individual species, or as the successful working of the evolutionary process, removing a less efficient species.

Which brings me to my economic point.

We have a tendency to assume that the present economic situation is some sort of beneficial baseline. Though we never explicitly say so, our unspoken assumption is that we are in good shape at present, so only growth can be beneficial, any business failures are a sign of decay.

However, the truth is closures, bankruptcies and other retrenching can be positive. Unless we are at the absolute optimal position, growth is not the only way the economy can be improved. Growth is usually beneficial, but bankruptcies can be beneficial as well. So can other restructurings we usually take as negative. If our economy contains poor allocations, such bankruptcies can be positively necessary.

In addition, we assume that a growth in the number of bankruptcies is a sign of economic problems, but the opposite may be true. If an economy is growing, there will be an increase in the number of new ventures. But if there are more new ventures, that would also mean there are more bad ideas as well as good, so there should be a growth in bankruptcies, as well as start ups. In fact, with more money, the number of marginal ventures which can be funded should be higher, so bankruptcies should increase faster, resulting in a growth in the percentage of bankruptcies as well as the absolute number⁴.

However, the government, and economists don't want to accept that, being used to the bizarre inflationary environment where all companies seem to expand and prosper thanks to cheap money (at least until the eventual bust), they imagine bankruptcies are bad things. And that leads us to some bizarre economic theories. Where we should be embracing bankruptcies, but also writing laws to ensure that 100% of monies owed are returned to creditors, we instead pass laws and tailor monetary policy, to minimize bankruptcies, to keep failed firms afloat, and to try to ensure that money owed is repaid slowly if at all.

That is the wrong approach. Bankruptcy is not bad, it is simply a fact of life, and one we should accept willingly as an essential part of the economy.

But, as I have said before, we have a tendency to stake out specific positions, be it on bankruptcy, house prices, or employment, and stand by them whether they make sense or not. Having established a political, rhetorical stand, we are loath to let it go. And so we "fight bankruptcy", we struggle to "save jobs" and so on. Yet no one notices that we might as we struggle against defecation or sneezing. Yet, those too are sometimes unpleasant, and things no one wants to discuss, but just like bankruptcy, the loss of jobs, the reassignment of workers, and the changing value of property, they are essential truths which we must accept.

And the sooner we accept that change, even change we find unpleasant, is a necessary part of the economy, the sooner we can stop putting needless burdens on businesses, stop impeding economic growth, and allow those changes to run their natural course, making us all wealthier in the long run.

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1. I do not mean to make assertions as sweeping as General Semantics. I do not contend that all mental illness can be explained by linguistics. In fact, General Semantics troubles me a bit, if only because of its (unrecognized) role in the formation of Dianetics. Still, I have had enough experience with the mentally ill to recognize that erroneous connotations can lead to all sorts of problems. If you have ever met anyone who is "set off" by the wrong choice of words, you have seen a small example of this. (For a little more on this topic see "Mental Illness".)

2. It is interesting to look at how much of mental illness is contextual. For example, believing in the literal truth of voodoo is madness in modern US, but fine in Haiti. Likewise, finding hidden messages from G-d in the behavior of animals is considered mad in modern contexts, but was considered scholarship at various times. This is one of many reasons I find it hard to believe mental illness is an illness, rather than a simple inability to abide by cultural norms. But that is a topic for another post, not something to be debated here.

3. Amusingly, the liberals who claim to have great "nuance" are just as guilty of black and white thought as conservatives they caricature as thinking "in black and white". They too see events as good or bad, and individuals as heroes and villains. They may be more prone to negotiate than fight, but that does not stop them from casting people into two clear roles, they just differ on who is a hero and who a villain.

4. The only conditions under which growth can take place without an increase in bankruptcies is our present inflationary model. Thanks to the cheap money and economic misallocations, our present system tends to allow bad ideas to remain in business for a long time. Of course this means more assets will be badly allocated, and for a longer time, but that does not matter to politicians, who find it easier to accept economic inefficiency and all the other ills of inflation, than to tell workers the truth, that no one is guaranteed a job for life. (For more on inflation see  "Inflation and Uncertainty", "Why Gold?", "Explaining Past Crashes", "The Inflation Engine", "Bad Economics Part 7" and "Bad Economics Part 8", and the articles linked in those posts.)

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POSTSCRIPT

The earlier Bad Economics posts were:

Bad Economics Part 1 - A discussion of how prices disprove theories of resource depletion
Bad Economics Part 2 - A debunking of the many theories based on "defective" or "damaging" competition
Bad Economics Part 3 - An examination of the many absurd claims about deregulation
Bad Economics Part 4 - An examination of problems with economic studies and empirical evidence
Bad Economics Part 5 - An examination of consumer protection and the harm it does to consumers and others
Bad Economics Part 6 - A rebuttal of claims offered in support of various types of farm price supports and other aid
Bad Economics Part 7 - A discussion of what inflation is and is not
Bad Economics Part 8 - A discussion what our money really is and is not
Bad Economics Part 9 - A refutation of the common belief that "thinking outside the box" is inherently valuable
Bad Economics Part 10 - A refutation of the theory that there is "waste" which can be eliminated from the free market

You can also read them in reverse order, starting with part 10, as each post contains links to the previous chapters.

POSTSCRIPT II

I last listed my planned posts in "Upcoming Posts".  As I have not updated this list since, I figure I should finally revise it. So, here is a list of the upcoming installments of the "Bad Economics series I presently have planned, in no specific order:

1. What are the causes of unemployment and how valid are the popular theories of how to handle employment questions
2. The Truth About Monopolies - How are monopolies created, what allows them to exist, and what effect do they have?
3. Based on the footnote of "Be of Good Cheer", an examination of why we continue to give congress and the Fed control over money when they have failed repeatedly to meet their promises
4. An examination of the many predictions of doom should government programs be repealed, and the likelihood they are accurate
5. A comparison of discretionary versus mechanistic laws, and a determination of whether flexibility is beneficial or harmful
6. A full discussion of why it is dangerous to confuse "economic power" and political power, as well as to create analogies between the private and public sectors

Doubtless more will be added before I finish writing every item on this list, so there may be additional posts before the items on this list are completed.

POSTSCRIPT III

Clearly this post has many more applications than the ones I have given. The need to look at things from multiple angles is something everyone admits and very rarely practices. But in economics and politics it is an issue so very often ignored that I feel the need to mention it repeatedly. All too often economists and politicians adopt simplistic positions which they then expound despite all evidence tot he contrary, and, worse than that, the public is far too frequently taken in by the easy understanding these simple slogans provide. And so we have far too many people who think there is a benefit to "saving jobs" which need not be balanced against any other economic considerations, or that "growth" is good in all situations, regardless of how it is produced. Which is why I found I could hardly cover all the implications of this essay, as there are simply far, far too many topics to which it could be applied.

So expect me to return to this subject again and again in weeks to come. It is one which will definitely repay repeated examination.