Suppose a company finds that at the end of a given year of production its revenues are $21 million, but its costs are $25 million. It has made negative profits. Maybe we feel bad for the owners who lost all this money (probably not). However, we shouldn't lose sight of the important story here. The important story concerns what has happened to society's happiness. This firm has taken resources that would have produced $25 million of happiness elsewhere in the economy, and misdirected them to the production of goods and services that generated only $21 million in happiness. Negative profits are the economy's way of telling the company to be sure and not make that mistake again ("Nothing personal, but we're going to have to penalize you $4 million for making this world a little less happy. Please don't do that again.") Suppose this company stubbornly continues to rack up losses. From the perspective of maximizing society's happiness, what do we want to see happen?

Let's be blunt. We've got to stop this company before it hurts any more people. ("Alright you guys, put your hands up in the air and give up those resources...and no funny stuff!"). In a free-market, capitalistic economy, this is accomplished by having the firm go bankrupt. And this is good, because we want the firm to shut down and quit producing. Actually, that's an awful way of saying it. What we really want the company to do is shut down and start releasing. Having firms go belly up is just the economy's way of getting resources released. IN ORDER TO MAXIMIZE SOCIETY'S HAPPINESS, WE MUST FREE UP RESOURCES WHICH ARE IN LOWER VALUED USES AND ALLOW THEM TO GO TO HIGHER VALUED USES.

This is such an obvious point, and yet failure to see it leads to one of the most common of economic fallacies. Consider the case of plant closings. Generally, plant closings are covered in the news media in much the same way as earthquakes, floods, tornadoes, and other horrible disasters. We don't mean to belittle the pain and suffering that communities and workers go through every time a major employer closes down. But let's consider this carefully. The plant is closing down because costs exceed revenue. If the plant is earning low revenues, then the firm must be producing something that consumers don't value very much. On the other hand, the high costs mean that other firms are anxious to get their hands on these inputs (after all, if no other firms were willing to buy those inputs, then why are they so expensive?). And the reason other firms are anxious to get their hands on them is because these inputs can be used to produce goods and services that consumers are willing to pay high prices for. Thus, plant closings are a desirable thing. They are good. They are good because they result in an increase in society's happiness. The last thing we want to do is create impediments that will discourage plants from closing down.

In fact, if consumer groups and labor unions were really serious about wanting to improve public welfare, they wouldn't picket firms that were closing plants. On the contrary. They would demonstrate in front of firms that were trying to stay open despite all indications that they weren't going to turn profitable. They would carry placards which said things like "LET OUR RESOURCES GO" and shout slogans like "REVENUES LOW, COSTS ARE HIGH, GUESS ITS TIME TO SAY GOODBYE." In fact, if the media were really doing their jobs, they would cover the human tragedy of firms that were continuing to stay open despite losing money ("Hi, this is Dan Rather and we are going live to the XYZ Corporation where executives continue to hold valuable inputs hostage"..."And now to Connie Chung, who will tell us of one American family's continuing struggle to survive without the other goods and services these resources could have produced.")

Consider the hypothetical example of a movie company that made only really bad movies. Let's call this company Adud, Unlimited. Let's suppose that Adud negotiates with Dustin Hoffman to make three new movies: "Ishtar II," "Ishtar III," and "Ishtar IV: This Time It's Personal." Movie fans will remember that the first Ishtar, in which Hoffman starred, was widely regarded as one of the worst movies of all time. It lost tens of millions of dollars. Few would dispute that Ishtar significantly decreased the happiness of moviegoers. Nevertheless, armed with three new scripts, Adud plunges forward--and downward. Three movies--and thousands of blistering movie reviews--later, Adud goes out of business. Prop men, cameramen, make-up artists, and Dustin Hoffman are all thrown out of work.

We bet you'll agree that movie companies that only make movies no one wants to see--like Adud--should close their doors and release their resources. After all, Dustin Hoffman has alternative uses, such as Rain Man. An actor of his prodigious talents should not be stuck in dumb movies, and neither should the other people who work for the company. When people lose jobs in unprofitable industries, they are released to work for industries which produce more highly valued goods and services. They proceed to their alternative uses, and thank heavens they do.

If you're still feeling uncomfortable with the idea that the destruction of jobs in unprofitable industries can be good for the economy, think about this. In 1900, there were 11,680,000 workers employed in agriculture (approximately 40 percent of the entire labor force). In 1993, there were only 3,074,000 workers employed in agriculture (less than 3 percent of the labor force). What caused this massive exodus from agriculture? Increases in agricultural productivity caused huge increases in agricultural output. This, in turn, dramatically lowered prices and made farming unprofitable. Most of the people who left farms did so because they could no longer make a living at it.

It was the release of these valuable resources (labor) which allowed the manufacturing sector to grow and stimulated America's transition to an industrial economy.² Now think of what would have happened if we had imposed "plant closing laws" (pardon the pun) in 1900? What if the government had tried to stem this exodus out of agriculture by passing "bankruptcy forgiveness laws" that encouraged bankrupt farmers to continue tilling their fields? Very simply, America would not have grown. While it was painful for the farmers at the time, these economic forces worked to shift resources out of a lower valued use (agriculture) into a higher valued use (manufacturing). As a result of this massive resource transfer, the living standards of the American worker rose dramatically. While we admit it goes contrary to conventional wisdom, it is an indisputable fact that job destruction plays a vital role in economic growth.