Saturday, June 24, 2006

The Role (and Benefits) of Failure in Human Endeavors

All human projects and actions are subject to the possibility of failure. It does not matter whether the objective is good or evil, related to business or charity, patronage of the arts or religious. The best-laid plans of men can fail. In the realm of business, it has been estimated that 80% of new startups go belly-up within 5 years.

For this reason, government must step in to ensure that good businesses do not fail.

If you’ve been paying attention to this site so far (or are you using it as a sleeping aid?) you’ll realize that the previous statement was given completely in jest.

Hold on! We haven’t even examined the nature of failure yet, let alone its role in the cycle of economic activity, so it’s premature to be throwing out conclusions as to what to do about it.

So, just to spice things up a bit, let me hit you over the head with another shocking, outrageous assertion:

  • Failure is good!

Do you think I’m nuts yet? Let’s start with some acute examples to shake you out of your complacency. Imagine that a mugger is about to beat your face in with a motorcycle chain, but he slips on the ice and falls unconscious, allowing you to escape. He FAILED.

Are you getting my point yet? Failure is the flip side of success; without the one, the other has no meaning. Moreover, there are many things that you would hope to fail. Let us list just a few examples:

  • A terrorist plot to explode a ‘dirty’ bomb in YOUR city (thank you Osama).
  • A plan to eliminate your job and ship it to Outer Elbonia (thank you Scott Adams).
  • A marketing campaign which includes the withdrawal of your favorite soft drink from the market and its replacement with something with more sugar in it (thank you New Coke!)
  • A law abolishing the private practice of medicine (thank you Hillary Rodham Clinton).
  • An athletic training regimen on the part of the scum-of-the-earth team intended to beat YOUR favorite team in the national championship (thank you Denver Broncos).

From these examples it is easy to see how there is a definite benefit to failure when it applies to something you personally don’t desire. What is a little more difficult to comprehend is the benefit of failure when encountered in the pursuit of worthy goals. Let’s imagine a story to illustrate the point:

Two entrepreneurs of modest means liquidate their life savings to open a restaurant each, in close proximity to one another. One of them thrives and begins opening additional restaurants, initiating a franchise chain. Ten years later, the first company is going strong. The other goes bankrupt after one year. Isn’t this a clear-cut case of failure being a bad thing, even an injustice?

Certainly, from the point of view of the failed entrepreneur, this situation is painful. But let us come back to him/her in a minute.

Consider the situation from the point of view of the restaurant patron. Assuming a very simple model, in which both restaurants open in a free market with similar menu items and target clientele, what could make one succeed and the other fail? Perhaps the quality of the food. Perhaps the friendliness of the servers. Perhaps the first entrepreneur just worked harder, putting in longer hours. Or perhaps the location chosen by the second entrepreneur was just not quite as advantageous, i.e. not near enough to other businesses, theatres etc. or in a neighborhood with a higher crime rate than the first. It could be for any one of a million things. But in the final analysis, it was the customers who decided to patronize the first restaurant and to avoid the second; to leave fat tips on repeat visits to the first and to leave for the first and last time at the second.

The first entrepreneur satisfied the customers. If government, the mafia or any other organization were to step in at this point and force customers to give equal patronnage to the second, or to subsidize the second to compensate for losses, it would be going against the choices made by the customers. Moreover, such an interference would necessarily involve raising taxes on the customers and the first restaurant in order to divert funds to the second restaurant. This would reduce the customer’s income and ability to patronize any restaurants, and impair the first entrepreneur’s ability to open new extablishments and pay salaries to more employees, without necessarily improving the quality of product or service at the second restaurant. Job creation would suffer.

So, clearly, from the point of view of the customers, the first restaurateur and society at large, it is a benefit that the second restaurant is allowed to fail and close its doors quietly.

Economics can only tread lightly on the question of whether the second entrepreneur ‘deserved’ to fail. It can only explain that in a society in which consumers have freedom of choice, they will necessarily make such choices as favor one set of products and services over others. Again, there cannot be success without failure. This does not mean that, given two businesses, one must succeed and the other fail. It simply means, axiomatically, that people make choices; the same family can’t eat dinner on the same night at two different establishments.

Economics also makes the following observation. Most successful entrepreneurs have multiple failures in their history. That is, their current success has come only at the price of trying and failing, trying and failing, getting up and trying yet again and learning from their failures what works and what doesn’t work, until finally they get it right. Read the biographies of great entrepreneurs from Thomas Edison, Henry Ford through Colonel Sanders (KFC) and Steve Jobs (Apple Computer), and you’ll see a history of repeated failures. In his day, Babe Ruth had the highest strikeout record in major league baseball.

But what of our failed entrepreneur in the moment? Isn’t (s)he entitled to some consideration for effort? Well, there are a few possibilities:

  • He can appeal to his fellow citizens for assistance. This is the voluntary charity and assistance option, available from many secular and religious organizations, as well as informally through acquantance networks.
  • The government could subsidize him personally or his business. This presupposes that a law and/or program to do such things is already in place; we don’t assume that at the point of failure, the entrepreneur has the time, resources and connections sufficient to lobby government for favors. We have already discussed the general dis-utility of this option.
  • He could go to work for the competitor. This is not uncommon, however wounding it may be to the ego. If he wasn’t qualified to be the boss at one establishment, his knowledge, skills and experience might very well qualify him to work at one or two levels lower in the hierarchy at another firm in the same industry.
  • He could get a job in another line of business.
  • He could appeal to private investors to support him in his next venture, presumably convincing them that he’s learned from his mistakes and has a sure-fire, can’t-lose plan this time around.
  • He can wallow in self-pity, consume remaining assets, starve and die.

In any event, the most important question of what to do about anyone’s failure is less what specifically to do, but whether the solution will be accomplished via voluntary cooperation, or by coercive force, against the will of participants. Ethics teaches that the use of coercive force is wrong in the majority of cases; economics demonstrates that the use of force is counter-productive in the same majority of cases.

One more example of the benefit of failure. Have you ever had a boss you didn’t like? (You’re lying!) I mean, not only someone you had a hard time getting along with, not just someone whose orders you resented, but someone who you were convinced was incompetent, actually hurting the business and compelling you to participate in counter-productive activities? Don’t you wish that boss could just, well, FAIL?

Of course you have! We all have. And the truth is, it would be better for all stakeholders (though in the short term, perhaps not for competitors) that such a person be removed from his/her position and given the opportunity to rethink his/her market offering.

It is desirable that if a plan or enterprise is destined to fail, that it should fail as early and quickly as possible, in order to limit the time and scope of suffering. Imagine that you are embarking on a hot-air balloon expedition. The balloon has a fault in a seam which will cause it inevitably to rip, causing the balloon to fall back to earth. Would you prefer the fault be exposed at two meters, twenty meters, or two thousand meters of altititude? You would prefer, the sooner/lower the better, unless you have a parachute.

Similarly, imagine that you are involved in a business enterprise or investment portfolio that is destined to crash because the fundamental assumptions underlying the projections of success are erroneous. The market isn’t really there, customers don’t really want the product or service, or government is printing money so fast that it only seems like there’s a dramatic increase in market demand. When would you prefer this enterprise fail? When the stock price is at $10 per share? $100? $1000? You would prefer it to fail as soon as possible, before you sink anymore of your hard-earned uninflated money into it --- unless you’ve got a parachute, but how you happened to have a parachute under these circumstances could attract the attention of the Justice department.

If you’re an employee of such a firm, you don’t want to lose your job, of course, but this is not an option. Given a choice between sooner or later, you are better off that your firm and firms like it fail before they grow to the point of dumping even larger numbers of employees out on the street, to fight it out for unemployment benefits and reduced real employment opportunities. The best preference would have been never to have been lured into a doomed enterprise in the first place. The least bad ‘failure’ might just mean staying in a job that doesn’t thrill you, but which is at least grounded in reality.

In conclusion, then, the phenomenon of failure, in business as in any human endeavor, is a fundamentally good and necessary part of the functioning of society. If it’s going to fail, let it fail fast. Failure artificially postponed is pain augmented.

Copyright©2006 by Howard Hyde. All rights reserved.

Saturday, June 10, 2006

What about my medicine?

Transitions from Socialism to Capitalism

Pro-capitalist and libertarian politicians routinely lose debates and elections because of the challenge of people who have become dependent upon the system which is the target of reform. A Republican politician in a public debate once was unable to come up with a satisfactory answer to a senior citizen in the audience who demanded, “what about my medicine? How am I going to get my medicine”? It’s a fair question; as we seek to roll back government programs that never should have been established in the first place, we have to address transitions; getting from here to there.
In the case of senior citizens dependent upon government-managed retirement programs, the answer actually shouldn’t be that difficult. Permit me to imagine a response to that member of the audience.
“We will honor all contracts made with you and your generation, without reduction in service or benefits. We will not reneg on binding promises, because to do so would be wrong, immoral and destructive to society.
“What we do say is that for the next generation and the one after that, the contract has to be re-written, because it was fraudulent to begin with. This program is 100% guaranteed to go bankrupt and be unable to support anyone after X years as it is currently defined. If this program had been established in the same manner by a private corporation, its executives would be in jail today for foisting a Ponzi pyramid scheme upon the public.
“Before you judge this proposal as unfair or improper, take the example of your own life, the income that was taxed from you in order to reap the benefits that you enjoy today. Which of the following statements do you sincerely believe is true:

  • “I’m getting a better rate of return on my investment than any private health insurance or retirement savings plan could have offered me [That may be true for some in the currently retired generation; it will be less so with each passing year].
  • “The government is the most caring, knowledgeable and efficient agency for administering health care and retirement programs.
  • “If I have not saved enough or insured myself adequately, there is nobody, no private charity or religious organization that will lift a finger to help me or anyone else like me.
  • “If the government didn’t force people to contribute to the program, no one would save for their own retirement or health care.”

There is no reason for pro-capitalist politicians to be defensive about any of their principles. Bring on the challenges! Free markets and free people will make the solutions.

For additional perspectives on Social Security reform, see and Llewellyn Rockwell's contrarian article Save or Else.

(Suggestions for other links are welcome.)

Copyright © 2006 by Howard Hyde. All rights reserved.

Saturday, June 03, 2006

The Nature of Government and Political Power

Just what is Government, anyway? Ask that question and you may get many different answers, such as, ‘the institution for creating and enforcing laws’, or ‘the agency to ensure equality’, or ‘society’s way of making sure people don’t kill each other’, or ‘the organization that ensures that human needs come before profits’. However plausible or inaccurate these expressions may be, they all fall short of distinguishing government unequivocably from other institutions such as for-profit business, non-profit charities, religious/spiritual organizations, professional/collegial associations, or leisure clubs. Any of these types of organizations may actually engage in similar activities, attempting to feed people in need, clean up a toxic waste dump, triumph over an adversary or provide uplifting entertainment or spiritual experiences to the public.

Here then is a definition which cuts to the core distinguishing characteristic:

Government is the insitution of human society which assumes a monopoly privilege on the use of force.

Government takes as axiomatic (rightly or wrongly), that within its defined sphere, whether geographical or political, that it alone may legitimately use forcible and/or deadly coercion, enforcement and punishment in the pursuit of its objectives. Regardless of any goal or program a government may have, such as feeding the poor, eradicating disease, providing employment for citizens or protecting the environment, the difference between it and every other agency is that government pursues its goals with the implicit (frequently explicit) and presumed legitimate threat of violence against any involved parties who may be disinclined to comply.

A private, for-profit business corporation may include people with a strong desire to feed hungry people, but it is constrained by its resources, which can only be renewed through the earning of an excess of revenue over costs (profit) in the service of customers who freely exchange their wealth for the products and/or services of the company. A private company cannot levy taxes on citizens to pay for its altruistic or any other activities. A private organization that would force payment of ‘taxes’ from individuals who do not volunteer to be customers or donors, is not a legitimate business but an organized crime entity, a mafia, prosecutable under the natural law of a free society.

Churches, synagogues, temples and mosques may solicit donations or tithes from their flock, and may appeal to people’s (sense of) responsibility to God, yet under law in a secular capitalist society, the appeal does not have the force of an obligation, punishable in the breech. A church that would enforce its appeals for offerings by force of arms is a theocratic state, incompatible with Capitalism.

Therefore the monopoly on the use of force clearly differentiates government from all other of society’s institutions. This understanding has tremendous ramifications for how we should regard government, its role in society and in the economy, what enterprises it ought to participate in, what problems it ought to be used to attempt to solve. When we look at the concept of government in this way, we are more cognizant of the danger inherent in the expansion of the scope of government.

Copyright©2006 by Howard Hyde. All rights reserved.