The Impact of Changing Profitability on the Supply Side of the Economy

Abstract

In this chapter we shall be looking at work which has been done on corporate births and deaths. We shall also be presenting new work which looks at the determinants of the average liabilities with which firms fail. We hope to show that profits perform a crucial role in the Schumpeterian cycle, encouraging the establishment of new firms, as well as ensuring that the inefficient firm or the firm in a declining industry does not utilise scarce resources which could be better employed elsewhere. However, we will also be arguing that this role is not performed as efficiently as it might be and that government restrictions on the invisible hand can actually improve the efficiency of the supply side of the economy. In particular we will argue that bankruptcies impose costs upon an economy, costs which the American bankruptcy system does more to minimise than European systems.