There is a lot that is said about how capitalism is efficient and how it brings freedom to the individual. But I think that another aspect of capitalism should be added to those two to create a free market triumvirate: failure.
Yes, failure is one of the three most important features of capitalism. Failure destroys many hopes and dreams, true. But failure is also responsible for destroying stupid ideas.
In capitalism failure is not only permissible but is the only real tool it has to affect the market. Capitalism itself does not create great business ideas. It’s a system that allows great ideas to thrive because it divorces the state from the market. And by divorcing the state from the market it fosters an environment where dumb ideas eventually, usually quickly, get axed.
Capitalism’s utilization of failure makes it so that unproductive ideas and businesses lead to loss of income and sometimes wealth. People and businesses who find themselves in a position where they are making little to no money have two choices: get better or go home. There’s no in between that is sustainable. Even Bill Gates, if he were to change the course of Microsoft so that it was now a, I don’t know, a VCR company, even Microsoft, with all its resources, would eventually run out of money and be forced to quit because capitalism does not suffer fools.
A real example of a bad decision by a big, strong company that did something stupid and got hurt would be Coke. Remember back in the 1980′s when they came out with New Coke? Well, they did a bunch of testing and market research and everything they did said that this would be a boondoggle for them. Unfortunately for them the market didn’t agree. They failed. Their bottom line was hurt and this stinging failure forced them to change direction and go to a product that was profitable.
Failure is unique to capitalism because statist economies have to recognize failure first and then make the changes necessary by government fiat to right their wrong. Failures aren’t handled the same way in statist economies because they don’t want to admit to their citizens and the world that they made a mistake.
During my reading of Heaven on Earth I became painfully aware of this reality. Take the Owenites at New Harmony, for example. They brought in a bunch of uber-intellectuals and their little community still failed because they clung to failed policies for so long that it brought down the whole lot of ‘em.
This same situation is true for every other centrally planned economy. They routinely suppress failure in their economies allowing unprofitable policies and state-controlled businesses to linger. The longer they linger the more damage is done to their economy.
Failure, in economics-speak, is creative destruction. Famously posited by Schumpeter in the early 20th century creative destruction is described thusly:
process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.
Let’s put it a different way. I lift weights and the purpose of lifting weights is to break down muscle fibers so that they have to repair themselves and come back stronger. By pushing my muscle fibers to failure has allowed me to increase my bench from less then 200 lbs to more then 350 lbs today. Economics work the same way.
In America people and businesses are (mostly) allowed to fail. This perpetual threat to one’s livelihood, more then anything else, forces entrepreneurism in order to thrive. You want to become rich in America you shouldn’t run for office or work for the government. If you want to become rich in America you have to serve your fellow man better then the next guy. And, lucky for you, failure is there to instantly tell you when you’ve made a mistake on your road to fortune. Without failure being allowed how else would you know no one really wants your widget?
This is why I abhor government handouts. Handouts mitigate the threat of failure and allow unprofitable ventures to continue on well past the time they would have failed in capitalism. Having people pursuing unprofitable professions and companies pursuing unprofitable objectives hurts the overall economy because of all the wasted resources.
Failure strengthens capitalistic economies because unprofitability is not tolerated; unprofitability is utterly pulverized by capitalism’s sledge hammer. BigT
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