Ropchai Premsrirut, former assistant professor of economics at the University of Nevada, Las Vegas, explained recently in the Las Vegas Sun how he believes he is doing his part to prevent unemployment – namely, by not quickly ending the hemorrhaging of a money-losing restaurant he recently took over.
"At the beginning of August," recounts Premsrirut, "I took over control of Makino, a Japanese seafood buffet restaurant in Henderson. Sales per month have declined more than 50 percent. Revenues fell from more than $300,000 to now $140,000 per month, yielding me a current operating loss of more than $20,000 a month."
Although friends tell him to close the restaurant, Premsrirut is, naturally enough, reluctant to "lose all our capital investment of more than $1.5 million and … to lay off 30 employees."
The key questions that need to be asked are: Was the original investment basically sound? What realistic prospects are there for the business to genuinely turn around? And would this investment be a superior one, given other available investments? If all the answers here are positive, then it's in the interest of all involved – investors and employees – to seek to ride out the temporary slump in income.
If the answers are negative, however, then it's in the interest of all involved – investors and employees – that such bad investments, once identified, be liquidated.
"However, when I thought of the country's current economic conditions and the 30 employees – waitresses, janitors, chefs and cashiers – who depend on their jobs (some have children to take care of) and live paycheck to paycheck, I did not follow my friends' advice.
"I saw it as an opportunity for me to do something to help the community. Though it is a small contribution, if a lot of entrepreneurs were to take similar action, our economy would recover in the near future."
Not true. It was this kind of thinking that prolonged the agony of the Great Depression for a decade. Government officials and other people with good intentions tried to keep certain people employed by blocking the free choice of others – who otherwise would have provided better, sounder jobs.
Capital and labor both need to flow to the sectors of the economy that can most profitably put them to work – meaning: producing the goods and services that, in the estimation of most consumers, offer them the highest available value. Premsrirut's "solution," like that of Presidents Herbert Hoover and Franklin Roosevelt, has been to keep destroying wealth. While certain people are employed – for now – it's at the cost of the greater efficiency, productivity and general benefit that otherwise they and the larger Southern Nevada community would enjoy.
When a business does not make a profit, it means that society does not value the enterprise's efforts enough to make those efforts self-sustaining. Thus, profits and losses serve to encourage conservation of resources: If people use scarce resources intelligently and efficiently, they are rewarded.
If Premsrirut wants to benefit Southern Nevada economically, he will have to use the resources employed in his restaurant more efficiently – or liquidate and let someone else try. Continuing to operate at a loss simply destroys wealth.
Luckily for us, Premsrirut is only destroying his own wealth. But if his mindset were applied statewide or nationwide – say, via government programs to create jobs for the sake of creating jobs – it would simply mean wealth destruction on an epic scale.
After all, if government works programs were a viable way to cure unemployment and "get the economy moving," why not have the government hire people to simply dig holes and fill them in again? While that would be absurd, the principle is the same.
Yes, a private businessman, as an act of personal charity, can take a loss in order to keep giving others paychecks, if he so chooses. But government, by its nature, can only create its make-work jobs by destroying the real jobs that a free-market economy would otherwise produce and sustain.
Clearly, we all have a direct stake in protecting our free markets from government.
Patrick R. Gibbons is a researcher at the Nevada Policy Research Institute.