LIBM theory
|
|
LIBM Theory in Economics stands for the Legislatively Infallible Business Model Theory, which attempts to describe the effects of when laws or court rulings prevent a business to fail when it might have otherwise. Examples of this are FDIC insurance for United States banks, which ensures that account holders only lose money if they have more than $100,000 in deposits. The theory also covers utilities, the government guaranteeing of loans, and despite the word "business" in the name, even personal bankruptcies.
The idea and name was first coined by Karl Farmer, Economics professor at the University of Graz. He was studying the economic effect of various laws concerning landlords and rent control. He began to theorize that laws that increasingly allowed the landlord to do things like charge higher deposits, pass on repair costs to renters, etc. lowered the risk the landlord was taking until they served little economic function (in other words the prospect of renting out a house to tenants becomes more and more "infallible" at making money). Farmer argued that the main economic benefits of a landlord were to allow housing liquidity, lower housing prices, and spread out repair costs. The less landlords performed these functions, the more they were simply a kind of tax or "money skimming" off the net economic system. The more legislation allowed the economic utility of the landlord to decline, Graz argued that at some point it would be better for the government itself to become a landlord, all other things being equal. Then any income would be a real tax whose benefits theoretically would be shared by the community as a whole. Barring this, laws in a capitalist system must allow for the vital process of creative destruction.
This type of argument has been used by many later economists, both for against government regulation, both for and against individual business interests, and both for and against individual citizens interest. For example, it could be used to call for reform with the modern system of bankruptcy (making the consumer have to repay more debts), as well as for the nationalization of utilities.