Short-circuiting capitalism's self-correcting mechanisms

John Hinderaker of Power Line makes the essential point about the AIG bonus imbroglio: allowing AIG to go bankrupt would abrogate the bonus obligations the firm contractually entered into. Keeping the company alive and 80% owned by taxpayers merely short-circuits the highly effective cleansing mechanisms capitalism provides for "creative destruction" (Joseph Schumpeter's term) of firms that waste resources.

Instead, the federal government is attempting to interfere with private contracts because it doesn't like them. Making private contracts subject to the whim of the ruler (the king, president, or führer - it doesn't matter) weakens the private economy. If contracts are not enforced, we do not have the possibility of a private economy any more. Nobody will trust in the ability to gain from the private arrangements they make.

Capitalism is undergoing the death of a thousand cuts.

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