Too many zombie companies - support for the Austrian view again

An accurate and useful description of economic models and theories is that there's a nugget at least of truth in each one of them. Yea even unto some of the corners of Marxism, a monopsonist employer of labour is indeed a bad idea. The trick is in deciding which model should be applied to the analysis of which problem and when.

Which brings us to the Austrian view of recessions and their aftermath:

There are as many as 100,000 “zombie companies” holding back the economy by soaking up credit that could be used to finance the businesses of the future, a study has claimed.

The Organisation of Economic Co-operation and Development has assessed the impact on productivity of zombie firms kept on life support by their banks and has found that Britain would be growing more quickly if it encouraged a clearout.

Zombie companies have been cited as one of the reasons for Britain’s weak productivity growth, as they soak up capital that successful businesses could use. The OECD defined zombie firms as being more than ten years old and having “persistent problems meeting their interest payments”.

It added: “Zombie firms represent a drag on productivity growth as they congest markets and divert credit, investment and skills from flowing to more productive and successful firms and contribute to slowing down the diffusion of best practices and new technologies across our economies.”

A crude - very crude indeed - sketch of that Austrian view is that mistakes are made in economies. That's fine, that's what the market is, an error detection machine. But the crucial next part is that those errors must be killed off. Bankruptcy the mechanism by which this happens.

We can and should add in that comment of Warren Buffett's - it's when the tide goes out that you see who has been swimming in the nuddy. When times are generally good, in the upswing of a boom, mistakes can be and are covered up by that general enthusiasm. Recessions are, in this Austrian view, the necessary countervailing force, revealing and wiping out those accumulated errors. All of which is rather what the OECD is saying here. 

The policy implications of this view are harsh - when recession strikes just let it happen. Clear out that dead wood so that asset and production factors can be and are reallocated to more productive uses. Short sharp recessions are the way to deal with it, not ameliorative action which prevents economic pain for that simply extends the time span of said economic pain. 

Agreed, many don't like this view - but as the OECD is pointing out there's more than a nugget of truth to it all the same.