And what exactly kept the families from just packing up and leaving? It would seem that it must have offered a better value proposition that anything else if people chose to stay there. Unless they were slaves, your whole point is moot.
It's very likely, that it was incredibly difficult to file for bankruptcy in the era of company towns in the US---i.e. 1880 (first bankruptcy bill was filed in 1889) through 1934.
For example, someone in a company town may not know that moving to the city will most definitely result in a better job, and out of fear of this ignorance, they continue to stay in a poor situation until it reaches a point where emotionally (rather than rationally), it becomes intolerable.
To me, the one of the purposes of good governance is to ensure that information is spread widely, and citizens are well educated in order to understand and take advantage of it.
Edit:
To add to it... recruiting children, laying debt upon them, and ensuring they only know about 1 kind of job is exactly the kind of asymmetric information that we make laws to prevent the formation of.
Plus there's always the chance that wherever you're moving TO is just a case of grass being greener across the fence and won't actually help anyway.
THAT is why the word "just" does not belong in that argument at all.
The company owned everything. The only way out without paying for company run transport, which you won't get without settling your debt, is to walk. Walkers are easily rounded up by debt collectors, and if you had a wife and children you wouldn't leave them.
These towns were set up to create a supply of indentured labour.
https://en.m.wikipedia.org/wiki/Switching_barriers
It is also why everyone is locked into sites like facebook (network effects) or cities like NYC even if they say they want to leave
GREAT SCENE: http://m.youtube.com/watch?v=LWZk24MA7TE
If the ridiculous scenario the GP suggested actually worked, we would see, you know, examples of it.
You mean like all the documented examples people posted? (see https://news.ycombinator.com/item?id=12178695 for an example)
Company towns enforcing debt slavery are an actual, genuine, true, real, factual part of US history. They existed. They really did work as described. People really did not manage to escape them. In several places it took literal armed revolution to break this system.
So if your theory of economics somehow predicts that such things are impossible, the problem is with your theory of economics.