Liberalism and bankruptcy

I get simultaneously amused and frustrated by the anarcho-capitalists with whom I interact when the discussion comes to economics. Most of them have enough economics learning to parrot back choice segments from The Wealth of Nations and to discuss the Tragedy of the Commons. Of course, they will immediately tag any sort of collective ownership and use scheme  as a potential Tragedy of the Commons, even when the potential for such misuse is vanishingly small, but so it goes. What is frustrating, though, are their ideological assumptions about incentives and the free market.

A recent article in The Atlantic served as an excellent illustration of this point. In the article, Megan McArdle points out that the most selfish (i.e. most libertarian) bankruptcy laws serve to make everyone worse off and that having society defray the cost of failed entrepreneurship serves as an incentive to more entrepreneurialism, which makes everyone better off –  including non-entrepreneurs. Further, she lays out simply and elegantly why the current regime of tightening bankruptcy laws to “stick it to irresponsible” do little to prevent people from running up too much debt and a lot to disincentivize people from taking rational risks.

I think this is particularly timely as we see a rise in more socially networked entrepreneurs – a sign that we are growing to understand that collaboration is as much a part of capitalism as competition. As this transition occurs, I suspect that a distinction will grow between folks who run up tens of kilodollars in consumer debt and folks who run up tens of kilodollars in debt trying to start a business.

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