Should companies be allowed to fail?

For over 50,000 years, Australia’s Indigenous Aboriginal community have managed the land through burning. Using fire has many benefits:

  1. Encourages native grasses to regenerate and produce new feed
  2. Reduces scrub and fuel to prevent intense bushfires
  3. Promotes biodiversity

The same can be said of companies. Over their lifetime, companies can become bloated and inefficient. Once profitable departments are maintained in the hope of coming back into profit. Too many staff doing too little work. Executives being overpaid for not making money for the company.

Markets usually took care of these companies, allowing them to fail. New investors would then pick at the carcass, taking profitable areas and leaving the unprofitable areas behind. You now have a new lean, efficient company rising from of the ashes. One that will provide real shareholder value.

When Covid 19 shut down the global economy, Central Banks acted quickly to flood the market with cheap credit. This was much need to keep plenty of good businesses alive, especially those who need constant cashflows. The Central Banks aid was almost indiscriminate, helping bad businesses as well as good.

Did their quick actions prolong the life of bad businesses instead of letting natural selection take its course?


Steven Barrett

20 August 2021