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.