Good morning FR readers! Happy Monday!! We hope you all had a nice weekend.
As usual, Monday’s post comes to us via Stephen Hall. Thank you , Stephen. Have a good day everyone!
(This is a post from years ago, which has once again become relevant in light of recent talk of bailouts yet again. This post first ran in December of 2008, and I am now posting it again, unchanged, a decade later. But, I’m adding a picture.)
One of the most basic and essential of capitalist principles is not the accumulation of wealth, it is the concept of permissible failure. In order to allow people to succeed in a capitalist economy you have to be willing to permit them to fail. Failure is essential to capitalism.
Before Henry Ford met success with Ford Motor Co. his first two attempts at making cars ended in failure and bankruptcy. Of course, unlike people, the life of a corporation is indefinite, or in legalistic terms, perpetual. We now come to a time when that third corporation faces possible bankruptcy, government bailout and even possibly complete failure.
At a time when our government is throwing money at our economic woes without any attempt to correct or fix the source of those same economic problems, it behooves us to examine the merit of failure. If we believe that those who deserve to succeed should be allowed to succeed, then it must logically follow that those who deserve to fail must be allowed to fail.
The virtue of failure is that it teaches people what not to do, which is very often more important than knowing what to do. If you create a computer program with a fatal flaw or error, that program will crash when placed under the proper stress, then you learn how to fix that flaw. Failure is an invaluable learning experience. Thomas A. Edison once had occasion to remark that he had not failed a thousand times to produce a working lightbulb, he had merely learned a thousand ways not to make a lightbulb.
Americans have so far departed from these fundamental principles of capitalism that they have developed and inordinate and unnatural fear of failure. We hear that the big automobile manufacturers are simply too big to fail (ignoring to monopoly that is the UAW) and that AIG and other banks are too important to our economy to be allowed to fail, but apparently not Lehman Brothers. (We are oddly, and politically, picky and choosy on deciding who is important and who is not.)
With colossal failures come colossal economic insight and enlightenment. In refusing to permit those mortgage banks to fail, we can avoid admitting and learning the lessons that government sponsored altruistic lending practices through such entities as Fannie Mae and Freddie Mac to individuals with bad credit, scant resources and risky speculation is an invitation to economic disaster. We can also avoid having to face up to the idea that tying all of these risky loans together and spreading around the risk to a lot large number of banks doesn’t reduce the risk, it simply links together the fate, future and soundness of those banks.
In bailing out large car makers, we can avoid, however temporarily, learning the lessons that foolishly giving in to the demands of powerful monopoly unions to pay exorbitant benefits and retirement packages, a.k.a. legacy costs, only works in periods of expanding market share. Car makers can also avoid what other industries have learned concerning the runaway cost potential of defined benefit plans versus a set contribution benefit plan.
Union bosses can avoid facing the reality that unrealistic demands which drive employers into insolvency are not in their membership’s long-term best interests, and that corporations are not endless fountains of money. Executives in banks and car makers will not have to learn that lavish spending and bonuses when the company is losing money is just a bit offensive to those whose money and jobs they are losing. White collar bank tellers and loan officers will not have to learn that the public cares far more about the blue collar auto workers even though they earn four times as much money.
Aside from the lessons that failure teaches us, there is opportunity for the wise to benefit from the folly of others. This crass opportunism is precisely how fortunes are made in capitalist societies. It is how those with merit seize the opportunity to succeed. Failure is not the end in and of itself, but an opportunity, an opening for those who have the ability, perspective and courage to take advantage of the situation.
Take for a present example, a young couple who have been scrimping and saving to build up a down payment to buy their first house, wise enough to know that they could not afford the inflated prices in a housing market bubble on their limited income. They suddenly face a flurry of foreclosures and falling prices from people foolishly and hopelessly overextended financially and banks desperate to unload these assets at fire-sale prices. The wise young couple purchase a far better house than they otherwise could have afforded with low interest rates locked in saving them money and increasing the value of their equity.
Another example of a modest industrialist who has a passion for cars but no way to break into the automotive industry. He has an idea for a new type of car that he knows the public will love and takes advantage of the latest technology. The large car companies go out of business and he now has the opportunity, perhaps in conjunction with several of his friends and associates financial backing to purchase the equipment, and maybe a building, at a discounted price in a bankruptcy sale so that his new car company can begin.
Perhaps another industrialist needs to expand his small aircraft production, but is unable to find sufficient space in a good location that he can afford, or find enough workers willing to work at the wages he can afford to pay. Suddenly, a number of employees are looking for work and an ideal building comes on the market for sale because of the failure of GM.
Are we so cold, heartless and callous as to deny all these wise, thrifty and courageous people the countless opportunities to grow and prosper because out of our cowering fear we are unable and unwilling to allow companies to fail. Must we then compound such injuries with the insult of taxing these good and wise people ever more to pay, subsidize and sustain failing and foolish endeavors of avarice and incompetence.
Failure does indeed create hardship and suffering, but it also creates opportunity and growth. An ancient giant oak in an old forest collapses from the corruption at its core taking down a wide swath of smaller trees with it as it falls, yet in its wake the forest floor comes alive with new growth that now has new opportunity for access to the precious sunlight. If failure is not permitted, we are simply propping up old corrupted dead and dying trees, which if not allowed to thin naturally will merely provide dry fuel for the raging fire that will sweep away the entire forest.
Bailout the corrupt if you so wish, just don’t blame me when the economy burns down around you.
