O&M has an interesting view on bankruptcy. Klein quotes an article from the Harvard Business Review-
I like this 2003 HBR piece from Joe Bower and Stuart Gilson on bankruptcy. Substitute “Chrysler” and “foreign auto makers” for “WorldCom” and “competing telecom firms” and you’ll get the idea:
WorldCom’s bankruptcy, however, highlights an important, potentially very large social cost of the U.S. bankruptcy system. Competing telecom firms, which have played by the accounting rules and have used more prudent financing, now find themselves — once again — at a competitive disadvantage relative to the company. Unlike WorldCom, these firms had to stay current on their debt and service their lease obligations. They did not get to write down their assets and debt, nor have they been able to reduce taxes by claiming that their profits never existed.
Is this fair? Do the benefits of the system outweigh its costs? The system works well to protect assets and employees, to be sure. But are WorldCom’s assets and employees really the ones that should be protected? What about those of more efficient firms? In capital-intensive industries like petrochemicals, steel, telecoms, and airlines, doesn’t bankruptcy law make it harder for efficient companies to drive inefficient assets out of business? In the majority of bankruptcy cases in these industries, the top managers are gone, but old capacity returns to the market with an improved balance sheet. This can easily prolong a period of industrywide overcapacity as well as unfairly disadvantage competitors.
I agree with the sentiment, but for a different reason – individual and contractual, not social. In a comment on a short post I wrote a few months back, I said-
Debtors’ prison is a strange concept, but how do we really see to it that contracts are met? In the end, one way or the other, attachment of property and imprisonment (at least the threat of this happening) is the only way people can be forced to meet their contractual obligations. In modern times, declaring bankruptcy is the way to go, but I am not too pleased with the idea that people can use to law to fleece their creditors.
I believe that the government’s role is limited to enforcement of contracts, not provide laws that enable people to wriggle out of their obligations. Some people might say that the bankruptcy laws are common knowledge and creditors should know what they are getting into. But I could just as easily have a law that says that the creditor will be beaten with a stick every Monday, and therefore he should know what he is getting into.
The issue is simple, whether it is bankruptcy, or limited liability (this explains how liability can be limited through contracts), the provisions can be easily built into regular contracts between interested parties. One of the ways is by extracting a guarantee from, say, the shareholder-directors, of a company (banks already follow this in most cases).
Also read what Rothbard has to say, not about these two topics, but about the basis of contracts. Legal positivism has played a lot of mischief when it comes to rights. The existence of arbitrary laws might “help” because of their central and mandatory nature, but they weaken the whole system of contracts, and therefore “natural law.”
Its a matter of ethics, not ease.