Insolvency Law and Capitalism - Essay Example

Capitalism is a form of economic organization, whose main goal is to make profits. In order to achieve this, and sustain the capitalist system, capitalists must carry on the entrepreneurial spirit and continuously involve themselves in investing and re-investing capital into the economy (Schumpeter, 405-6). However, with limited capital, they must resort to other ways of financing their endeavors. One such way is through borrowed money. As Joseph Schumpeter writes, " . . . [C]apitalism is that form of private property economy in which innovations are carried out by means of borrowed money . . . " (179). Consequently, most business endeavors begin with debts.

However, with the existence of risks and uncertainties present in investments such as competition, accidents, or even problems caused by financial crises, business failures and bankruptcies, which are usually followed by disputes over a company or individual's financial arrangements, become commonplace. Such occurrences threaten the very fuel that drives capitalism: it threatens the value of a business' much needed capital and it threatens the smooth flow of economic activity. In order to avoid such problems, institutions were built in the form of insolvency laws.

Insolvency laws facilitate the liquidation of assets or possible reorganization of a bankrupt firm. It is meant to ensure that the process is smoothly executed, avoiding and solving conflicts, salvaging the company's capital, ensuring that all involved parties are treated fairly, and avoiding as much distortions in the economy as possible (Industry Canada). Thus, insolvency laws play a crucial role in the capitalist economy - it keeps valuable capital safe and it resolves conflicts, which are detrimental to continuous economic activity.

Aside from its role in the liquidation of assets, insolvency laws also provide capitalism a crucial benefit - it keeps the "entrepreneurial spirit" alive. According to Schumpeter, entrepreneurs are crucial to a capitalist society because "without entrepreneurial achievement, no capitalist returns . . . " (405-6), and consequently, no capitalism. However, the possibility of bankruptcy, or the legal and economic burdens that plague bankrupt businessmen, poses a great deterrent for entrepreneurs to engage in economic activity because of the high risks involved.

Insolvency laws solve this problem by providing not only protection for entrepreneurs in the face of bankruptcy, but also the possibility of "economic rebirth" - freedom from the clutches of bankruptcy and c chance to start anew - for bankrupt proprietors. Hence, in sustaining the capitalist system, insolvency laws become a necessary institution among capitalist societies. Unfortunately, it became a necessary evil as well because while sustaining capitalism, it created further problems that complicate the economic and social conditions within a society.

As Edward J. Balleisen writes in his book "Navigating Failure," the American response to bankruptcy, in the form of insolvency law, has created two opposing elements in American capitalist society - the risk taking culture of capital entrepreneurs and the reluctant attitude of wage-earning laborers towards them (21). Before the existence of insolvency laws, entrepreneurs