Zombie Firms and Creative Destruction
I listened to an entertaining podcast. Here are my notes. Its a discussion between an economist and a policy expert, Ajay Shah, with a curious host, Amit Varma. The topic was on why the companies should be allowed to die.
We all want to avoid death and increase longevity, be it human lives or company. But we don't realise that death is unavoidable. Yes, there are companies that outlive by constant evolution and rebirth, but that percentage is very small. So, then as a society, we need to facilitate such a process in a graceful and swift manner. Governments should have bankruptcy laws that make it things easy for this and people should not sentimentally attach to this notion of the perennially living institution.
Companies exist to solve a customer's job. If a customer wants to fly from point A to point B, the task of an airline is to provide a mean to do that. After a point, what label is on the airline, doesn't matter to the customer as long as the job gets done at a reasonable cost. If a company is not able to provide such an option for a customer, the company should be able to file bankruptcy swiftly and smoothly. There will enable another company to take over the idle flights, repaint it and fly it from point A to point B at a different price point.
This mindbogglingly simple concept was put forth in a very lucid and easily understandable manner by the policy expert, Ajay. A true mark of an expert is to explain a complex system in a simple manner without losing the nuance. Kudos to the expert on getting it right and the host in steering the conversation.
I highly recommend you to give a listen if you want to understand how pricing works, what is creative destruction, why it is necessary, why the authors like Joseph Schumpeter and James Scott are relevant for our us.