Business failures are not always bad, except when its recession

Over the last couple of years we have come to believe that normal laws of economics no longer apply. We began to believe that boom and bust really had ended, that growing public and private debt was not a problem, that monetary expansion merely offered benign growth, and that property prices - and stock markets for that matter - only went up. It became a sort of disease and the most serious case was none other than Gordon Brown, our Chancellor of the Exchequer and now Prime Minister.

But, we succumbed to his contagion willingly because, like the siren, he played the enchanting music we wanted to hear. And that he could play the all powerful human architect fitted our anthropic experience. This role is one he always wanted, craved. If he could provide endless prosperity and perhaps end poverty, then his slightly unhinged lifelong ambition to be Prime Minister would be amply justified.

Another reality of economic and business life we forgot was the understanding that business failure is an essential and cleansing action of the market. Not only that, but it can be a good in itself. Without the failure of some businesses, resources cannot be freed up to be allocated where they can be better employed. It is this constant reallocation of resources that enables progress.

This can, of course, go too far. When the economy goes into recession, more and more businesses go bust and because of the nature of recession, resources are not reallocated elsewhere. And this is a major problem of the credit crunch. As banks cease giving loans to businesses they believe are less viable than others, the money is not lent out to others. This is the imperative of recapitalisation. The banks have lost money on bad loans so it is not there for them to finance other businesses.

Business failure, up to a point, is an essential precursor to advancement. It is how the market works, but when other, usually government induced, errors are made, these failures come too thick and fast. Exacerbating this reduction of economic activity is the accompanying contraction of banking investment in new and expanding companies. Under such conditions, the economy ceases to regenerate itself, rather contracting to fit a more pessimistic age. This is where we are today. We cannot reverse this trend, all we can do is not make it worse than it need be.