|Bankruptcy is the fate of an inept company in a free market.

A free market is an economic system in which prices are determined by unrestricted competition between businesses. Resource utilization in the most efficient way by the most efficient entity is the cornerstone of the free market. The market is balanced when resources are distributed and used competitively. A free market always advocates for a model where prices always work for the benefit of the customers, which is true to some extent.

Now, imagine a world where there is a limited supply of flour. And there are 5 individuals bidding for the flour in order to make bread for the world. So, if the most efficient (that is low production cost, high quality) bread maker gets the hold of most of the limited amount of flour, the customers can get the best value for the bread with the best quality. This is because most of the limited resource available was used efficiently.

To understand why bankruptcy is essential in the free market model of the economy, let us assume the free market is right and always works on the side of customers and stakeholders. We should also be clear on the fact that the products we consume from the market are a result of work done on raw materials. That is, resources (the flour) are bought by entities (the bread makers) who are responsible to turn the raw resource into a usable product (the bread). Usually, different brands of products are supplied to the market by different suppliers and buyers pay the price for the products which they find reasonable in terms of price and quality. There’s a competition between the suppliers to provide product/service to the users within the most reasonable price and acceptable quality. The existence of competition between the suppliers guides the market towards better pricing and increased customer satisfaction.

Scenario 1: The resources (the flour) for production are neither distributed nor guided by the market or the competition. An inefficient company (bread maker) gets hold of most of the resources; production moves forward with higher production cost, inadequate management system, and misdirected visions of the board members. As a result, when the product (the bread) reaches the market, the price will be set high. A customer now has to pay more for the bread. If a customer spends more on bread, he will have less budget to spend on other products. This will affect the sales of other products in the market, which in turn will unsettle the price regulation system of the market. As a result of the unreasonable high prices in the market, the purchasing power of the money will plummet. This will result in a lower standard of living and inflation. Precisely the opposite of what “the free market” advocated.

Scenario 2: Resources are distributed by a healthy market competition where all the suppliers have the right to compete. The resources are efficiently used; the cost price is controlled; management plans efficiently in order to stay competitive in the market. Products are sent to the market and the customers pay the most reasonable price of the product. Users get the best value for money.

This is where bankruptcy asserts its significance. When companies like those in Scenario 1 start producing products, the results on the market could be devastating. In a free market, however, companies like these will collapse due to their unreasonably extravagant production costs, i.e. they go bankrupt. When this happens, the resources they were using will now be distributed amongst the more efficient ones. This encourages the companies to be more efficient and push forward this vision to provide the users with the best value for their money. Basically, bankruptcy will stop companies from using resources in an inefficient way. An alternative precept to be realized is that the government should not salvage the companies which are unabl e to exist in the competitive market. There are other ‘welfare plans’ government should be spending on for its people. To rescue such fallible entities by chipping in funds collected from the taxpayers’ money is nothing short of a crime.

Bankruptcy is the fate of an inept company in a free market. The fate that knocks it off the market when it becomes inefficient in utilizing the resources, when the company is stubborn in changing their values for the greater good, when short term visions blur the bigger picture and when companies get hold of resources by unhealthy means heading towards monopoly.