General Electric has just announced that it will reduce its quarterly dividend to just one penny per share. This helps show what our mix of capitalism and the free market is truly good at. No, it’s not that we all get to be free, although that’s an obvious benefit, nor is it that we get to experiment and thus find those things that work, making us richer. The real value in the system is the way that it stops us from doing things that don’t work, thereby making us richer.

Sure, it’s a bit premature to insist that GE doesn’t work at all — it’s still in business, after all. We’ve not reached that brutal end stage of the game where an organization succumbs to bankruptcy, the fate of things that truly don’t work. But we’re quite obviously seeing that things don’t work there like they used to, some of the edge has gone.

GE dropped out of the Dow Jones industrial average back in June. Even then, it was the only one of the original index that still survived as an independent company. The penny dividend is simply a continuation of this same process. GE makes less money than it used to, which shows one of these advantages of free-market capitalism.

Our aim in any form of economic structure is to be able to produce the most with the least. We absolutely demand efficiency: output with the minimum of inputs. Profits are simply evidence that one is adding value, for that’s exactly what they are, the value of the output minus the costs of all of the inputs. The existence of profits show that value is being added in the process.

The advantage of capitalism is that people chase those profits for their own benefit. The system combined gives us an entirely objective measure of how well any activity is doing. We can just see, profits or not, whether value is being added. GE is doing less well than it used to, that we can all see.

That is something of value. We can and will allocate less capital in the future to GE. There’s just something less profitable either about the people doing it, the things they’re doing, or the way they’re doing it. Thus we want them to have fewer of our resources and others, that are more efficient, to have more of them. All of this being achieved by the internal workings of the system itself.

At the end of the process, as has happened to so many (Sears, for example), there is bankruptcy — the closing down of the organization itself, at least in that form. This may all seem brutal and that’s because it is. But contrast this with other methods of trying to achieve the same thing. What is it that we should be doing and how?

Say, politics. As a method of managing economic activity, it stinks. It never does do the one thing that we so desperately need, to stop doing something that doesn’t work. This is obvious from the burnt-out hulks of government programs that still litter the landscape. Failure is met not with an insistence of closing them down but a request for a larger budget.

Obviously, GE is not bankrupt, nor even close to it. But it’s a less efficient, less enriching organization than it used to be. Capitalism and markets containing their own feedback loops, which make this obvious, then deal with it. It’s the major reason why the system works so well — it stops us from doing those things that don’t work so well any more. At the extreme, the defining moment of the system is bankruptcy, when we simply stop doing something in a particular way — something that all other economic systems find terribly difficult to do.

Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.