Failure is what makes us rich

May 13, 2013

A little over two years ago, while writing on how to fail the right way, we quoted Harvard Professor Shikhar Ghosh:  “manage failure so that enterprises fail but people can still succeed…[and] build a society that can reinvent itself as the world changes.”

Last week Kevin D. Williamson updated the famous Leonard Read essay “I, Pencil” to discuss the same idea:  how society reinvents itself via creative destruction.  (You can watch a brief video summary of the original 1958 essay here at our YouTube channel.)

Williamson recounts a humorous story about the first cell phone call before moving on to how dramatically the technology has evolved in a short period of time:

20 years of creative destruction

Everybody knows the first words spoken on a telephone call — Alexander Graham Bell’s simple demand “Mr. Watson, come here. I want to see you.”

April marked the 40th anniversary of the first cell-phone call, which was quite different in tone. Two research teams had been competing to bring the first real consumer cell phone to market, and the first mobile call was placed by Motorola engineer Marty Cooper to his chief rival, Joel Engel of Bell Labs. “Joel, this is Marty,” he said. “I’m calling you from a cell phone.” In other words: “You lose, suckers.”

It took nearly a century to get from Alexander Graham Bell’s conversation to Marty Cooper’s, even though the basic technologies of mobile phones — telephony and radio — date from the 19th century. Conversely, it took only 66 years for mankind to go from the Wright brothers’ flight at Kitty Hawk to Neil Armstrong’s stroll on the moon. Technology does not move in predictable ways.

But it does move.

We treat technological progress as though it were a natural process, and we speak of Moore’s law — computers’ processing power doubles every two years — as though it were one of the laws of thermodynamics. But it is not an inevitable, natural process. It is the outcome of a particular social order.

When I am speaking to students, I like to show them a still from the Oliver Stone movie Wall Street in which the masterful financier Gordon Gekko is talking on his cell phone, a Motorola DynaTac 8000X. The students always — always — laugh: The ridiculous thing is more than a foot long and weighs a couple of pounds. But the revelatory fact that takes a while to sink in is this: You had to be a millionaire to have one. The phone cost the equivalent of nearly $10,000, it cost about $1,000 a month to operate, and you couldn’t text or play Angry Birds on it.

When the first DynaTac showed up in a movie — it was Sixteen Candles, a few years before Wall Street — it was located in the front seat of a Rolls-Royce, which is where such things were found 25 or 30 years ago. By comparison, an iPhone 5 is a wonder, a commonplace miracle. My question for the students is: How is it that the cell phones in your pockets get better and cheaper every year, but your schools get more expensive and less effective? (Or, if you live in one of the better school districts, get much more expensive and stagnate?) How is it that Gordon Gekko’s ultimate status symbol looks to our eyes as ridiculous as Molly Ringwald’s Reagan-era wardrobe and asymmetrical hairdos? That didn’t just happen.

Later the author broadens his argument from the single technology (handful of technologies?) to the economy, and society, at large:

Market propositions are experimental propositions. Some, such as the iPhone and the No. 2 pencil, are wildly successful; others, such as New Coke or Clairol’s Touch of Yogurt Shampoo, are not. Products come and go, executives come and go, firms come and go… What we really are saying is: “Failure works.” Corporations are mortal. Failure is not only an important part of the market process, it is the most important part of the market process.

U.S. Steel was at the height of its power a behemoth, the largest American business, the first corporation in the world to have a market value in excess of $1 billion. It was formed out of the union of J. P. Morgan’s business interests and Andrew Carnegie’s steel empire. When Carnegie took payment for the interests he sold to Morgan — the equivalent of $6 billion in contemporary dollars — he received it in the form of 50-year gold bonds, documents that took up so much room that the bank in which they were deposited had to build a special vault to house them.

U.S. Steel seemed to be a permanent thing, but it is today a shadow of itself, reduced to a mere division of another firm, surviving mainly in name, and that name reduced to grandiosity: U.S. Steel Corporation indeed, as though it were the U.S. Mint or the U.S. Army. It produces barely more steel today than it did in Morgan’s time, and it is well below Staples and Rite Aid on the Fortune 500.

The decline of U.S. Steel was bad for the company’s shareholders and its employees, but it was good for people who use steel — meaning everybody else in the world. U.S. Steel was itself the product of an improved business model that had displaced older, less efficient competitors. Without the pressure and opportunity created by the possibility of failure, the U.S. steel industry — and the entire U.S. economy — would be (at best) stuck in the early 19th century. It seems paradoxical, but failure is what makes us rich. (And we are, even in these troubled times, fabulously rich.)  We’d all be a lot worse off if corporations such as U.S. Steel lived forever (which is one more reason not to engage in bailouts).


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