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ARTICLE

The Success of Failure

AUGUST 01, 1978 by THOMAS W. HAZLETT

Mr. Hazlett Is pursuing graduate studies In econom­ics at the University of California In Los Angeles, where he Is on the staff of the International in­stitute for Economic Research.

Without failure we’d be in big trouble.

 "Learning from our mistakes" is far more than a worn cliché; it is the gateway to an enormous truth about our entire economic system. Only by allowing our failures to run their due course may we ever chance to come by better ways of providing for our desires.

So much of the discussion of "fail­ure" has turned to the mere ex­changing of shibboleths. Everyday discourse is loaded with paeans to braving the chances for failure, ac­cepting great challenges, the noble nature of "sink or swim," and warn­ings that "nothing ventured, nothing gained." There seems to be an instantaneous acceptance that indi­viduals must, in their private af­fairs, be willing to risk something to make a showing in life. Not many would hedge on the idea that, if you take away the chance to flop, you simultaneously withdraw the oppor­tunity to soar.

Yet, in extending this simple morality to larger spheres, there looms a dichotomy. While the chal­lenge of life’s game is hearty for the individual soul, the goal of social institutions is to demolish all possi­ble exceptions to a preprogrammed "success." Security, the professed aim of scores of government pro­grams, seeks to place a prohibition on all deviations from the politically determined "success norm."

Now, from the individual’s perspective, security is a decent sort of thing to strive for and a happy one to achieve. People who are far from being millionaires take reasonable measures to enhance their own se­curity by purchasing insurance, get­ting an education (read: income se­curity), joining a union, working on a contractual basis, getting married and, let’s not forget, having children (could we call this a form of genetic social security?).

The distinctive characteristics of "private" security are that a person acts either to "pool" his risks volun­tarily with others, as in buying in­surance, or he takes positive action to lessen the uncertainty surround­ing his circumstances, as in gaining an education. "Public" security will be pursued from a diametrically dif­ferent angle: simply shifting the burden of failure from one group to another.

Forcibly Shifting the Burden

If we look at any government bureaucracy we can see the nature of the problem. When the govern­ment establishes "job security" via tenure rules (accompanied by cost­ of living escalators) the government is not "pooling" the risks of the workers nor is it taking positive action to reduce the uncertainty con­fronting the work force. It is forcibly transferring risks of failure from one group (government workers) to another group (private sector work­ers).

Now, from a moral view, this is a nasty break for the latter; the so called civil servants are neither very servile nor very civil for inflicting this injustice. But this is only the visible damage of the deal. The most pernicious effects are to be found in the economic results of this redis­tribution of risk.

Just as a man can only find suc­cess by winding his way through—and past—failure, an economic sys­tem must depend on its failings to signal its path of success. This pro­cess is certainly more important for our system as a whole for, whereas a man may follow the examples of those who have gone before, a sys­tem has no model to emulate. It must break its ground in darkness. Economic failings include many distasteful possibilities: people get­ting fired or laid-off, companies or individuals going bankrupt, product lines being discontinued, capital lying idle, stock equities falling in value, ad infinitum. All such distur­bances are the result of some mis­calculation in the plans of the econ­omy’s agents. People, businesses and governments cannot foresee the future, and so every unexpected change in our circumstances—even if it is, on the whole, a very favor­able one—will cause some people to end up in less fortunate conditions than they had anticipated.

Change May Be Painful

Even when our society eagerly greeted the innovation of the au­tomobile, for example, there were the poor blacksmiths being thrown out of work. And, in a recent movie, Woody Allen reminisces about an entire family that was wiped out by the introduction of automatic pinsetters. And, just as we pray for the cure for cancer, we know that, when it comes, we will see some bad economic news for the cobalt radia­tion industry.

These economic "failings" are tremendously important clues that, far from being swept under the rug, should be utilized as efficiently as possible for the value they contain. This value is both informational and motivational. It is the economic failure that allows us to see our mistakes and motivates us to correct them.

Failures are the "symptoms" of the economic organism. As the body of any living thing locates and cures its maladies by responding to its itches, aches and throbs, so the economy must behave to adjust to its unemployments, malinvestments and inefficiencies. Professor Axel Leijonhufvud discusses this organis­tic parallel by citing a biologist’s description of a biological system:

An organism is an integrated unit of structure and functions. In an organism, all molecules have to work in harmony. Each molecule has to know what the other molecules are doing. Each molecule must be able to receive messages and must be disciplined enough to obey or­ders. How has the organism solved the problem of intermolecular communica­tion?

Professor Leijonhufvud suggests that, in the above passage, we sim­ply substitute the word "economy" for "organism" and the word "trans­actors" for "molecules." Reread the passage this way.

Thus, do we arrive at the essence of the coordination problem.

Adjust or Perish

If a living organism attempted to ignore certain biochemical signals it would soon degenerate into mul­titudinous plagues and perish. And when an economic system fails, as Prof. Leijonhufvud is fond of saying, to "mend its ways" in response to signs of ill health, it will likewise degenerate into economic anemia and witness economic diseases im­mensely greater in magnitude than the initial symptoms.

The ease with which our society has let this helpful analogy slip past is demonstrated by the single statis­tic that, for all of 1977, for all of the federal government, just 223 work­ers were fired. Out of two million federal jobholders, that represents about one out of every ten thousand employees. You’d probably have a better chance of being assaulted by a lightning bolt in Palm Springs or of receiving Sophia Loren’s phone number from Computer Date.

More than the lack of individual failure in government is the absence of any way for departments and agencies of government to fail. When a public bureaucracy falls short of some assigned goal it is not driven to a cheap merger or bank­ruptcy as in the "ruthless" competi­tion of the market place. Indeed, gross failures on the part of particu­lar bureaucracies often send out enormously beneficial signals for the individual bureaucrats.

Witness the incredible failure of the Federal Energy Administration. Founded as a "temporary" agency to cushion the effects of the Arab oil embargo in 197374, the Agency was given the goal of Project Indepen­dence. The idea was to lessen oil imports over the years until, by 1985, we were to be completely—and patriotically—self sufficient in energy.

The FEA went about this goal in rather bizarre fashion. It promptly slapped a "crude oil equalization" tax on domestic producers, and used the resultant revenues to subsidize oil imports. But, let us not quibble over methodology, let us simply look at the results. When the FEA was born in 1973, the U.S. imported ¹/3 of its oil; today we import ½:

By 1976 the President’s Task Force on FEA Regulations was led to conclude:

FEA regulations, as they now exist, confer few if any benefits upon the pub­lic. . . . In return for this lack of benefits and sense of false security, the American businessman, the taxpayer, and the pe­troleum consumer, must incur higher costs than might otherwise be the case. Indeed, continuation of the present regu­latory mechanism will result in long run inefficiencies for the American economy.

Failure may not come in a more plainly marked wrapper than the Federal Energy Administration. So how does the government cleanse us of the FEA burden? By exponential expansion!

Bureaucratic Growth

In 1977 the FEA opened its new offices with "Department of Energy" on the marquee. It has now attained full cabinet rank and boasts 20,000 full timers "economizing" our energy with a ten billion dollar budget. Apart from its institutional successes, FEA aficionados have scored well. The Agency’s first direc­tor went on to become Secretary of the Treasury, the second has gone on to an esteemed academic post, and the third and present director, now a cabinet member, sits at the right hand of our President.

In contrast to the artificial seren­ity of the public sphere, there were over 200,000 bankruptcies, individ­ual and corporate, in 1977 and sev­eral millions of workers were forced to switch jobs in the private sector.

As much as we would like to minimize such disruptions and fail­ures (particularly the bankruptcy figures which are influenced by laws extremely generous to defaulters), we do not want to eliminate real errors of judgment and competence by "assuming them away." We want to "bleed" our system, purge the failing, and find a better way tomor­row.

Government bureaucracy has de­livered a Brave New World to its protected clients: do not fear the future for it contains no failure. The job security of the public sector pre­cludes any adjustment process whereby we purge the bad and try something new. "Government with­out failure" can only bring about "institutions without success."

Upon reflection, when was the last time that a government bureaucracy was closed and cleared away due to its failing to meet the needs of the consumers? The private market place displays a veritable barrage of such leapfrogging, with bankruptcies, mergers, corporate takeovers and shakeups, proxy fights, "inside information" and all the "ravages" of "dog eat dog" com­petition. Yet it is this constant, re­lentless panic to discover today’s failure and to gobble it up at a bargain price that promotes an in­cessant tendency toward most effi­ciently reaching for the consumer’s dollar.

The Test at the Market

To illustrate the respective mechanisms of the market and the bureaucracy, it is interesting to re­view the Wall Street Journal on any given day. Look at the incredible information just on the stock mar­ket alone. Here we have the rela­tive values, as judged by millions of traders, of the earning power of thousands of companies. A mistake (or unsolicited disaster) accruing to any of these firms reflects itself to the entire market in the price of the stock in a matter of—amazingly ­seconds. No government study. No environmental impact statement. No six year lawsuit. A private com­pany can flunk the market test in seconds.

Look around the rest of the Jour­nal. Articles on quarterly earnings reports, new product lines, man­agement personnel shuffles, changes in corporate profit strategies, in technologies, in mar­keting techniques. All are based on the quest of private persons to meet the challenge of market competi­tion, to best deliver the stockholders the highest sales at the lowest cost. In other words, to avoid flunking that market test. And here there is no room for pontification. Speech writers don’t produce profit state­ments—accountants do.

The state has no room, no need, and no desire for a competitive test of its economic programs. Its motivation is to gain political efficiency, and this brand of activity takes on characteristics quite distinct from those required for economic effi­ciency. The appeal of the market solution is that, in the famous words of Adam Smith, each individual "neither intends to promote the pub­lic interest, nor knows how much he is promoting it . . . he intends only his own gain and he is in this . . . led by an invisible hand to promote an end which was no part of his inten­tion. By pursuing his own interest he frequently promotes that of soci­ety more effectually than when he really intends to promote it."

The Political Test

Conversely, the drive for political efficiency can result in the most wasteful and fraudulent of activities and may foster the emergence of regimented, bureaucratic systems which are totally unresponsive to the public and which suffocate our spontaneous forces for creativity. As Professor Milton Friedman com­ments on the inverse of Smith’s eco­nomic "invisible hand":

The invisible hand in politics is as potent a force for harm as the invisible hand in economics is for good. In politics, men who intend only to promote the public interest, as they conceive it, are "led by an invisible hand to promote an end that was no part of their intention." They become front men for special inter­ests they would never knowingly serve.

They end up sacrificing the public inter­est to the special interest, the interest of consumers to that of producers, the interest of the masses who never go to college to that of those who attend col­lege, the interest of the poor working class saddled with employment taxes to that of the middle class who get dispro­portionate benefits from social security, and so on down the line.

The rewards of success can only be fully effective where the risks from failure are real. Success and failure must be two sides of an indivisible coin. And it is only when we toss this coin fairly, without precluding the chance it may come up tails, can we gain the knowledge to steer our­selves toward a better way of doing things. The game of life is, natur­ally, a trial and error process, and only by allowing ourselves to face our failings and to correct our bear­ings will we move progressively.

How Protectionism Betrays and Destroys the Individual

Some of our best emotions nudge us to fudge. We want to do whatever "must" be done to cover up the downside risks of contemporary so­ciety. But if we are loyal to these "best emotions" when it comes to our public institutions we may well be­tray our "best judgment." There is a most compelling argument against such state action to directly outlaw social problems. For by such "protec­tionism" we seal ourselves off from the phenomenal dynamism of indi­vidual initiative that will, when all is said and done, still be the attri­bute of man that brings home the bread. As F. A. Hayek reveals:

To the ambitious and impatient re­former, filled with indignation at a par­ticular evil, nothing short of the com­plete abolition of that evil by the quick­est and most direct means will seem adequate. If every person now suffering from unemployment, ill health, or in­adequate provision for his old age is at once to be relieved of his cares, nothing short of an all comprehensive and com­pulsory scheme will suffice. But if, in our impatience to solve such problems im­mediately, we give government exclu­sive and monopolistic powers, we may find that we have been shortsighted. If the quickest way to a now visible solu­tion becomes the only permissible one and all alternative experimentation is precluded, and if what now seems the best method of satisfying a need is made the sole starting point for all future de­velopment, we may perhaps reach our present goal sooner, but we shall proba­bly at the same time prevent the emer­gence of more effective alternative solu­tions. It is often those who are most anxious to use our existing knowledge and powers to the full that do most to impair the future growth of knowledge by the methods they use. The controlled single channel development toward which impatience and administrative convenience have frequently inclined the reformer and which, especially in the field of social insurance, has become characteristic of the modern welfare state may well become the chief obstacle to future improvement.

At bottom, the price of synthetic success today will surely be the loss of opportunity for authentic success tomorrow.

***

Legislated Security Is Bondage

There has never yet come down from any government any substantial improvement in the conditions of the masses of the people, unless it found its own initiative in the mind, the heart, and the courage of the people. Take from the people of our country the source of initiative and the opportunity to aspire and to struggle in order that that aspiration may become a reality, and though you couch your action in any sympathetic terms, it will fail of its purpose and be the undoing of the vital forces that go to make up a virile people. Look over all the world where you will, and see those governments where the features of compulsory benevolence have been established, and you will find the initiative taken from the hearts of the people.

Samuel Gompers, from an address to union members, December 5, 1916

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August 1978

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