Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward.
I have not failed. I’ve just found 10,000 ways that won’t work. Thomas Alva Edison
It’s not enough to succeed. Others must fail. Gore Vidal
Failure is all around us. Herbert Spencer coined the phrase survival of the fittest but nature seems to be more about death than surviving. 99.99% of all biological species which have ever existed have become extinct. And just as species fail—and die out—so do companies. Failure in nature is measured over hundreds of millions of years. In Business the timescale is much shorter. We all know about Pan Am, WorldCom, Enron, and Lehman Brothers but they are merely the tip of the iceberg – ten per cent of all the companies in America disappear each year Is this a damning indictment of capitalism? Maybe but there is another way to look at things.
When we look at the capitalist system it is not difficult to appreciate what an incredible wealth-creating machine it is. However many people become distinctly uneasy about the failures that are also endemic to it. We are not comfortable with the fact that individual citizens, groups or regions are not doing so well or may actually be worse off. This is when we get the calls for governments to do something. These calls for action are understandable but we should apply some scepticism to them. The left’s schadenfreude about the current financial metdown is reflected in this satirical piece from the Daily Mash:
With more economic bad news on the way, Britain is this week bracing itself for a fresh wave of bullshit newspaper articles about the nature of capitalism. Senior editors at the Guardian and Independent are expected to work through lunch to maintain a steady supply of pieces about hubris, deregulation and why Marx was right all along…… At the Guardian, Jonathan Freedland and Polly Toynbee have been ordered to invent 50 brand new excuses for why socialism failed the first time and 50 exciting reasons for why it cannot fail the next time.
What we need to realise though is that sometimes success and failure are intertwined. As economist Thomas Sowell has pointed out it is no coincidence that Smith Corona was losing millions of dollars on its typewriters while Dell Was making millions on its computers or that the number of pay telephones declined as more people acquired their own mobile phones. In a system like that of the Soviet Union you didn’t get this degree of failures that the US has. The problem was that if something didn’t work very well it would continue on its way taking up valuable resource.
The concept of creative destruction comes to mind. It sounds like an oxymoron but it is a powerful tool for explaining progress in a capitalist system. It is associated with the Austrian economist Joseph Schumpeter. He employed it to describe the transformation wrought by radical innovation. For Schumpeter the key to long-term growth was the constant entry of innovative entrepreneurs into markets. Companies are always subject to the “gales of creative destruction. We look at established firms now and they seem all-powerful but over time these monopolies are undermined by newer more dynamic companies: we often lack this historical perspective. Schumpeter believed this destruction was important:
“This economic system cannot do without the ultima ratio of the complete destruction of those existences which are irretrievably associated with the hopelessly unadapted.”
All this talk of creative destruction brings me back to current banking crisis. It can be useful to analyse it from an evolutionary perspective. There are though some areas where the parallels between evolution and the banking sector just do not apply. Evolution is a blind, random process; there is no intelligent design. There are no governments, regulators or supervisors in the natural world. Can you imagine what it would be like if there were?:
Oh my God! The dinosaurs are becoming extinct! We have to organise a massive bailout with public funds.
In banking there is at least some kind of design in the system. They may not be omnipotent but there are some deities and they do have a lot of powers. Let’s take a look at regulators. They do have their own perspective and if there is one thing they don’t like, it is destruction. Former Fed chairman Paul Volcker expressed it like this:
“I can remember very clearly sitting in my office then, as President of the Federal Reserve Bank of New York, thinking that what this country needs is a first-class bank failure to teach us all a lesson – but please God not in my district. When I went to Washington, I had the same feeling – we need a clear lesson from market discipline, but please dear God, not in my country. Then if I read correctly the 1990s and what happened when the Mexican crisis came along, Bob Rubin and Alan Greenspan thought what we need is a good country failure to teach everybody a lesson but please not in a large country in my hemisphere.“
Regulators find it impossible to avoid protecting the banking system. It’s in their DNA. We are all familiar with the argument too big to fail. Japan shows us the danger of trying to keep hopelessly unadapted banks alive artificially. Extinction may sometimes be necessary and we avoid it at our peril.
The great dying: a memo to market dinosaurs Niall Ferguson