Perhaps the most overlooked fact about industry and commerce is that they are run by people who differ greatly from one another in insight, foresight, leadership, organizational ability, and dedication -- just as people do in every other walk of life. If the economy is to achieve the most efficient use of its scarce resources, there must be some way of weeding out those business owners or managers who do not get the most from those resources.
Losses accomplish that. Bankruptcy shuts down the entire enterprise that is failing to come up to the standards of its competitors or is producing a product that has been superseded by some other product. Before reaching that point, however, losses canforce a firm to make internal reassessments of its policies and personnel. These include the chief executive, who can be replaced by irate stockholders who are not receiving the dividends they expected. The whole management team can also be replaced when outside financial interests realize that the business would be worth more if managed by someone else, and who therefore take over the business, in order to run it better and more profitably with a different set of managers.
Because assets tend to move through a competitive market to those who value them most, and who are therefore willing to bid the most for these assets, a poorly managed company is more valuable to outside investors, who are convinced that they can improve its performance, than to existing owners. These outside investors can therefore offer existing stockholders more for their stock than it is currently worth and still make a profit, if that stock's value later rises to the level expected when existing management is replaced by better managers.