In a complex world, things fail – a lot. According to the economist Paul Ormerod, 10 percent of U.S. firms go bankrupt every year.... A more rigorous attempt to look at this question, a study by Kathy Fogel, Randall Morck, and Bernard Yeung, found statistical evidence that economies with more churn in the corporate sector also had faster economic growth. The relationship even seems causal: churn today is correlated with fast economic growth tomorrow. The real benefit of this creative destruction, say Fogel and her colleagues, is not the appearance of “rising stars” but the disappearance of old, inefficient companies. Failure is not only common and unpredictable, it’s healthy.
(I'm tempted to compare this with the fall of a mature tree in a forest. The tree dies. But there is a gap in the canopy and light pours down to the forest floor. Saplings rise into the new space. The death of the tree rejunivates the forest. We need only be concerned if the entire forest is wiped out in one go.)
The collapse of a business can mean that individual investors lose money. But a wise investor will spread their investments out so that they won't lose everything by the fall of just one firm. Individual employees have to look for work, which is awful for them but their presence on the market may help other companies who need fresh labour. The tree falls but the forest continues.
But the collapse of a country is a disaster indeed. There, no wise investments make any difference, every taxpayer is stuck paying back debt that can last generations. The only escape is emigration.
The difficulties in Greece now perhaps show what happens when a government fails. There is no opportunity for Greeks to switch their investment from one high-risk company to another low-risk company: the only way to escape Greek debt is to abandon Greece. The panicked efforts by EU to negotiate a 'bailout' loan along with austerity budgets show that the bankruptcy of a state is much more difficult to handle than the bankruptcy of a private company.
In recent times there have been debates about those private firms so massive and significant that governments subsidise or nationalise them when they risk failure. Can private companies be 'too big to fail'? I don't know, but its seems countries can be.
One of the complaints about governments bailing out big business is that it creates moral hazard: by insulating businesses from the consequences of risky behaviour they encourage risky behaviour.
If states cannot be allowed to collapse, does this encouage risky behaviour by governments? I'm not sure if I'm understanding this properly. The implications also puzzle me. Should we keep governments small, on the grounds that any organisation too big to fail will become corrupt, complacent and will take risky behaviour? Do we empower governments to cut up huge companies to prevent them becoming 'too big to fail'? Any thoughts are welcome!