By Steven Horwitz and Jack Knych
In today’s society failure has become something to
fear, avoid, and therefore prevent at all costs. Whether it is unemployment
compensation, farm subsidies, or bailouts for failing companies, the world
seems to view failure as having no redeeming social value. If success is all good and failure is all bad, then it seems as though we should do everything
we can to remedy or prevent failure.
But is that so? Without denying the value of
perseverance, and recognizing that the slogan “never give up” can be useful in
overcoming certain obstacles, we must keep in mind that failure can act as a guide to more worthwhile activities. For example, in 1921 Walt Disney started a company called the
Laugh-O-Gram Corporation, which went bankrupt two years later. If a friend of
Disney or the government hadn’t let him fail and move on, he might never have
become the Walt Disney we know today.
More important than this individual learning process
is the irreplaceable role failure plays in the social learning process of the
competitive market. When we refuse to allow failure to happen, or we cushion
its blow, we ultimately harm not only the person who failed but also all of
society by denying ourselves a key way to learn how best to allocate resources.
Without failure there’s no economic growth or improved human well-being.
Economists, especially those of the Austrian school,
often emphasize how entrepreneurs discover new knowledge and better ways of
producing things. But entrepreneurial endeavors frequently fail and the profits
thought to be in hand often don’t materialize. According to the U.S. Small
Business Administration, over half of small businesses fail within the first
five years. But failed entrepreneurial activity is just as important as
successful entrepreneurial activity. Markets are desirable not because they
lead smoothly to improved knowledge and better coordination, but because they
provide a process for learning from our mistakes and the incentive to correct
them. It’s not that entrepreneurs are just good at getting it right; it’s also
that they (like all of us) can know when they’ve got it wrong and can obtain
the information necessary to get it right next time.
On this view failure drives change. While success is
the engine that accelerates us toward our goals, it is failure that steers us
toward the most valuable goals possible. Once failure is recognized as being
just as important as success in the market process, it should be clear that the
goal of a society should be to create an environment that not only allows
people to succeed freely but to fail freely as well.
The Knowledge
Problem
Understanding this point requires a broader vision of
the market process. For Austrian economists the fundamental economic problem is
not the efficient allocation of given resources to our most valued ends at a
given time, but rather how we overcome the “knowledge problem”—the division of
knowledge that characterizes the social world. It is more important to figure
this out than to master the problem of resource allocation because new
knowledge drives economic growth and creates prosperity. If the main task of
the market were merely to allocate known resources to their most efficient
uses, economic growth would seem impossible, since we would be stuck in a
primitive world. Where is there any room for the innovation or change that
drives progress and improves our lives? If a plow is deemed the most efficient
use of iron and all iron is constantly allocated to making plows, how could
iron ever be allocated for a new invention such as a tractor? The answer is
that entrepreneurs change the most efficient use of resources by discovering
new uses. By understanding the economic problem posed by limited, unique, and
dispersed knowledge, we can better understand the role failure plays in coping
with this problem.
Competition figures prominently in this system.
Competition promotes entrepreneurial activity and the discovery of knowledge by
empowering a variety of decision-makers to try to find new and better ways of
using resources as well as new ends to achieve. This decentralization ensures
that what F. A. Hayek called the local knowledge of time and place will be best
used. Centralized planning, like other forms of government allocation,
necessarily relies on the knowledge of fewer people, limiting discovery and
restricting knowledge-dissemination to fewer channels. Competition is a better
way to overcome the knowledge problem.
Failure and
Opportunity
We can understand the role of failure if we recognize,
as Ludwig von Mises did, that all human action intends to “remove felt
uneasiness.” We are always striving to improve ourselves by achieving our
highest valued ends as often as we can. On these terms, failure is all around
us because no human ever achieves a complete lack of felt uneasiness. We always
have unsatisfied ends. Israel Kirzner uses the term “alertness” to describe how
the entrepreneurial element of human action identifies which ends to strive for
and which means are available. Kirzner says that for market action to occur,
entrepreneurs must first be alert to opportunities for profit. The possibility
of profit keeps entrepreneurs alert to the ways people strive for ends or make
use of means that fail to remove felt uneasiness. Once they’ve noticed this
failure in human knowledge, the same opportunity for profit spurs
entrepreneurial activity to find a new way to achieve those ends, or to find
better ends themselves. So a failure in human knowledge becomes the catalyst for producing new knowledge via
the entrepreneurial process.
When entrepreneurs attempt to correct a particular
failure in knowledge, they often fail themselves and incur losses because of
competition. Although bankruptcy is painful in the short term, such failure is
an integral part of how entrepreneurial activity and the market function.
Failure in a competitive society informs market participants about which
activities or jobs to strive for and which to avoid, lest they waste time and
money. Jobs that add value to society should be pursued, while those that fail
to add value should be eliminated. Markets help guide market participants far
better than any bureaucracy can because bureaucracies lack the market’s key
components of competition, profit, and loss, which reveal failures and allow
for their correction.
Because competition is a voyage into the unknown, we
can only know after the fact what works and what does not. Thus economic
failure is not “waste.” Calling entrepreneurial failure a “waste” implicitly
assumes that one knew ahead of time what the best use of resources was. Such
knowledge is not available to anyone, which is why failure is necessary to
provide the needed signals.
The subsidies, bailouts, stimulus packages, and other
interventions that now increasingly characterize the U.S. economy disrupt this
process. Farm subsidies (including cheap water out west), for example, prevent
entrepreneurs from finding and capitalizing on failures of knowledge in
farming. While there may be new and better ways to grow food, it is difficult
for entrepreneurs to find this out if farmers are kept afloat by the
government. Perhaps decentralized, local farming would be discovered as more
profitable if larger monoculture farms that are possibly damaging the
environment were allowed to fail. By preventing inefficient methods of
production from suffering losses, subsidies reduce the degree of failure in agricultural
markets and make it harder to know that misallocation has taken place and to
correct it.
Not letting Chrysler and General Motors fail during
the Great Recession prevented an entrepreneurial response to this misuse of
resources. The bailouts created two types of negative incentives. First, the
companies were encouraged to keep making cars when their losses showed the
resources and labor could better be used elsewhere. Second, the government
deterred any new entrepreneur from entering the industry and doing things
better. Many politicians defended the bailout because they did not want the
hundreds of thousands of autoworkers to become unemployed. But when hundreds of
thousands of workers become unemployed they do not disappear. They find
different jobs that would contribute to society in a better way than working
for a bankrupt auto company. The physical assets of bankrupt companies also get
reallocated to alert entrepreneurs looking for bargains. Failure is necessary
for learning and for success.
The Keynesian argument for government jobs programs is
that any sort of work will restart spending in a recession, even hiring people
to dig ditches and fill them up. But do a higher GDP and a job by themselves
make society better off? Would it be better to have a 2 percent unemployment
rate with 8 percent of the employed population doing jobs that don’t add real
value (so around 10 percent of the labor force is not adding real value) or
more unemployment with everyone who is working really adding value?
Unemployment
Unemployment is a form of failure, and it involves the
same considerations as when businesses fail. If a job no longer contributes
value this needs to be made clear so that those workers can find jobs that
actually do. Imagine if the disemployment of farmers had been prevented during
the transition to an industrial economy. In 1941, 41 percent of the U.S.
workforce was in agriculture. In 2011 the portion was 3 percent. Where would
industry be today if we had prevented the majority of the 41 percent from
losing their jobs and finding new ones? It is right that this sort of “failure”
was allowed to occur because the displaced farmers found new jobs in the cities
and elsewhere. Those new jobs helped society transition from agriculture to
industry to services, creating even newer jobs all along the way. This is
strong evidence that learning from failure takes place in labor markets.
Autopoiesis (life’s continuous production of itself)
is one of the principal characteristics of life, and constant change is its
essence. This applies to the economy as well. For us to maintain or increase a
high standard of living we must constantly change how we do things. This change
won’t be fueled by lucky guesses or by bureaucratic decrees, but instead often
by entrepreneurial activity in the face of failure in the market. Since that
activity drives the train of progress, it is in society’s interest that the
tracks be cleared of governmental obstacles.
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