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If you only look at the immediate effects then this is to some extent true. While some economic models assuming “perfect markets” with completely flexible prices (including completely flexible wages) and homogenous and therefore also interchangeable capital goods and workers, would predict no economic hardship at all from such an event. More realistic models that assume sticky prices and wages and heterogeneous and therefore partially specific capital goods and workers would see that such an event would indeed result in increased unemployment and a slump in output in the short-term. If the companies are large enough, that slump in output and increase in unemployment could indeed be very substantial in the short-term.

But as Frederic Bastiat and Henry Hazlitt pointed out, the job of a good economist is to look beyond the immediate consequences of a certain policy. As Hazlitt puts it in his classic book “Economics in One Lesson”14:

“The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.”

In this case, we must look beyond the immediate effects for the workers, suppliers, owners and creditors for a particular company, and even the aggregate short-term effect on the overall economy.

While even the aggregate effect on the economy would probably be negative in the short-term, obviously some would be hurt even in the short-term. More well-run competitors both in the particular industry and others would lose as the badly run company’s products would be sold instead of theirs. Moreover, some workers and some capital equipment could relatively quickly be taken over by more efficient companies, but since the badly run companies were bailed out,

14 Hazlitt (1996) pages 1-2. Also available online here http://jim.com/econ/chap01p1.html


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