Book Review: Tim Harford's Adapt - Why Success Always Begins With Failure

The release of Freakonomics in 2005 happily led to a growing number of books that brought familiar, everyday stories to bear on economics. As opposed to graphs and charts, economics is a study of why people do things as these unique publications made abundantly clear.

Tim Harford's The Undercover Economist was part of the new wave of humanized economics books that sought to make the esoteric readily accessible. Though the concept of pricing might seem difficult, it's not if explained through the prism of a heaving Starbucks in Washington, D.C. Harford has made economics fun once again, and in the process has developed quite a following.

His latest book, Adapt: Why Success Always Starts With Failure, is a very timely one considering the global economy has suffered myriad body blows since 2008 owing to a political class utterly oblivious to the essential economic truth in Harford's title. Though there's a fair amount to disagree with in Adapt, its basic point that failure in market economies "seems to go hand in hand with rapid progress" makes it a useful read.

Considering the notion of failure, Harford's stories and statistics are great, and are worth the price of admission on their own.

Looking at the ten largest companies in the world in 1912, by 1995 only two, General Electric and Shell, could still claim a spot in the team picture. Gone were the likes of U.S. Steel, Pullman, Singer, and one most almost certainly wouldn't recognize today, J&P Coats.

As for the widely used and quoted 1982 book, In Search of Excellence, at the time of its publication it was required reading for corporate CEOs. A fascinating book for sure, but even more fascinating is what Harford recounts about the excellent companies featured in the book. Two years later, nearly a third were in serious financial trouble.

Going back to the World War II era, Harford recounts that military savant Winston Churchill deemed the Spitfire fighter aircraft "unworthy." What's scary there is that Churchill was brilliant, and on military matters, a genius in the eyes of many. Ultimately the Spitfire was decisive when it came to the second World War's outcome, but even Churchill didn't initially see the iconic plane's potential.

The above examples of course speak to the sheer absurdity of anti-trust laws. The beauty of life, sports and capitalism is that none are static; what or who is great today is very often not indicative of what will matter in the future. The history of capitalism points to a great deal of churn at the top of commerce, yet the lawyers at the Justice Department continue to reveal their monumental hubris through attempts to make sure companies that are big by virtue of customers "voting" them that size, don't get too big. What a waste.

Regarding the now prosaic automobile, Harford reminds us that "At the dawn of the automobile industry, two thousand firms were operating in the United States. Around 1 per cent of them survived." Considering computers, arguably the greatest innovation of modern times, Harford notes that the "most successful industry of the last forty years has been built on failure after failure."

All of this can't be stressed enough. Failure is a certain signal that capitalism is working, that limited human, mechanical and financial capital that is being underutilized will quickly be reoriented toward those with a stated objective to manage it better. If failure didn't exist we'd have to invent it, because it truly does author all commercial progress.

It says here that the weak dollar remains the biggest weight on the global economic recovery, but not too far behind the dollar must be the rush among the global political class to erase the economic booster shot that is failure. Harford's book provides numerous examples of how "the market fumbles its way to success", and for those examples, Adapt is very much a must-read.

For good or bad, this writer presumes bad, a lot of time was spent by Harford on the egregious military errors made in modern times on the battlefield. That this is arguably not Harford's area of expertise isn't the problem so much as it's hard for a reviewer whose knowledge of military/war is exponentially less than the author's to make any profound judgments on his commentary. Nonetheless, it's worth trying.

One of Harford's main points concerning the act of war is that "clashes of ideas" lead to good ideas. LBJ's horrifying oversight of the Vietnam war looms large in this narrative, and there Harford opines that "The last thing Lyndon Johnson needed was to be confronted with a unanimous view. He desperately needed to hear disagreement."

The non-expert reply to the above is that Harford is merely embracing the modern cliché about how "teams of rivals" drive better decision making. But do they? Having read Richard Nixon's No More Vietnams, and more important, the novels of Vietnam vet and now Senator James Webb, it seems the greater point is that LBJ and his staff quite simply didn't have a clue.

Indeed, opposition or none, who in their right mind would send troops into battle with the proverbial one arm tied behind their backs? Who would tie up fighter jets in rules of engagement that hamstrung their ability to chase the enemy to the enemy's base? Leaving out the good or the bad of the Vietnam War, the simple truth is that once President Nixon essentially allowed U.S. troops to fight to win, the war basically ended in victorious fashion for the U.S.

After that, and absent Watergate, the South Vietnamese would have continued to get funding and the 1975 debacle arguably wouldn't have happened. It's hard to see where idea clashes could have saved two hopelessly deluded men - LBJ and McNamara - from stupendously bad decisions.

Harford sees the Bay of Pigs as another instance of a President (Kennedy) woefully short of dissenting opinion, but as Barry Goldwater noted in his memoirs, Kennedy's problem boiled down to a lack of nerve when it came to providing the U.S. backed troops with air support. No doubt there's something to be said for an absence of groupthink in bureaucracies, but if the person in charge has a good grasp on personnel, it's easy to presume that groupthink leads to good decisions.

On the subject of innovations, and the incentives necessary to achieve them, Harford appears a bit wishy-washy. Indeed, one frustration with the book has to do with Harford engaging in "two-handed" economist thinking. He seemingly leans libertarian, but won't make the full leap.

Though Harford acknowledges that the U.S. government funded National Institute of Health's "risk averse approach misses out on many ideas that matter", two pages earlier he made the questionable assertion that "The NIH's expert-led, results-based, rational evaluation of projects is a sensible way to produce a steady stream of high-quality, can't-go-wrong scientific research." Color this reviewer skeptical, and after that curious about what medical advances will never see the light of day thanks to government distortion of what should be a free-for-all.

With regard to the Internet, perhaps looking to straddle the fence once again, Harford throws bureaucrats a bone in noting that it "resulted from a project funded by Pentagon pen-pushers", but that it "took dorm-room innovators to unleash its potential." Harford argues much the same with the now ubiquitous GPS. Still, he's always eager to tout the government's role, and the frustration here, particularly for someone (Harford) who was once the recipient of the Bastiat Prize, is that he doesn't ask the more important question: how much sooner the world would have enjoyed the Internet and GPS systems absent so much government destruction of capital.

And destroy capital is what governments do. Harford points to a government-backed VC fund in Denmark that lost 60% of its value in short order, along with a regional one in the UK that lost 94%. But ever unwilling to completely discount what he apparently deems the necessary role of government in our advancement, he promotes the Taiwanese government's alleged role in creating the nation's orchid industry. Sure, but wouldn't entrepreneurs have eventually figured this out on their own, not to mention what industry was perhaps lost thanks to the government in the Republic of China spending limited capital to help create one for orchids.

Concerning the environment, Harford offers great statistics revealing how very "ungreen" are the actions of those who presume to be environmentally aware. We've all witnessed the smug grocery shoppers skipping the plastic bags in favor of reusable ones brought from home, but Harford notes that those plastic bags provided by grocery stores account for 1/100th of the carbon emissions of the food environmentalists put in them.

Those who embrace the theory of global warming are seemingly always turning off lights and other appliances, but the cappuccinos they drink (think milk) while congratulating themselves for their forward-thinking ways are responsible for far more carbon emissions than result from plugging in a mobile phone, or turning on a kettle. Priuses are the status symbol for the green in our midst, but Harford helpfully points out that "a Prius in congested traffic will cause more emissions indirectly by slowing cars down than it will emit directly."

But ever the two-handed economist, after exposing some of the hypocrisies of the green movement, Harford throws the inevitable life raft to it with his questionable suggestion that renewable energy is "something that most people agree is desirable." Whether true or not, Bastiat would be spinning. Assuming there's broad agreement about the need for alternative fuels, it would be nice if the alleged majority who support this leap would not ask skeptics (including this writer) to pay for what they deem desirable in the form of government funding and other subsidies necessary to prop up forms of energy that can't make it on their own.

Where Adapt was most disappointing was in its analysis of the "financial crisis." Indeed, while at least nominally a book about how failure is an essential input for progress, Harford goes wobbly when it comes to banks as though they're somehow different from other businesses. Before the chapter on the "financial crisis" Harford acknowledges that "governments love to back losers", but when the "loser" is a bank, he seems to be saying they're sacred.

As it applies to banks, "the financial crisis showed that a tolerant attitude to failure is a dangerous tactic". Two pages later he adds on that the "financial system needs to be made safer. Rules must be introduced, one way or another, to prevent banks from collapsing in future."

What's interesting about the above is that ever one to straddle, Harford acknowledges later in the chapter a study showing that of 216 allegations of financial fraud in U.S. companies between 1996 and 2004, "auditors and financial regulators discovered only one in six." So despite evidence stating the obvious, that someone whose ambition is financial regulation is decidedly not up to the task of regulating the brightest financial minds in the world, he embraces the notion that "it is far more productive to design better systems than to hope for better people." Of course these systems would be designed by the very individuals batting below the Mendoza line when it comes to sleuthing fraud.

What Harford seems to miss first is that the "financial crisis" was no such thing; rather it was a government crisis caused by the original sin of bailing out Bear Stearns. Absent this grave government error, Lehman Brothers' eventual collapse would have been a relatively quiet market event owing to market participants preparing themselves for the inevitable.

If the above is doubted, one need only read more of Harford's chapter on the "crisis." Indeed, as his research found, at the time of the Lehman bankruptcy, Lehman Europe alone "held over $40 billion in cash, shares and other assets on behalf of its clients." The high number tells us that many in the markets expected a Lehman bailout, thus the "crisis" was merely a panic caused by a government that had no consistent policy when it came to financial failures. Here it should be said that governments shouldn't have any banking policies other than a one-line rule that says "If you fail, you die."

Harford surely expresses displeasure with the size of banks, and that's why the policy must be one of failures being allowed to fail. If the markets know that banks are far from sacred - precisely because they're not (more on that later) - those who deal with banks will necessarily spread the risk around as they do with equities. Harford's view that banks are somehow different ensures that they'll grow large, and that some will eventually need to be saved.

Harford's other alleged solutions involve hybrid banks (one a "casino", one just a prosaic depository institution) and other requirements for greater capital cushions, but there he shows an impressive lack of historical knowledge. For one, banks in the U.K. and the U.S. easily got around capital cushions in the ‘70s with loans made through unregulated institutions offshore, plus to the extent that such requirements actually have teeth, they merely create dead, unprofitable institutions walking.

As Americans we know this intimately given what happened with the S&Ls. Made highly dull by regulators, by the 1970s they no longer had a market purpose. They didn't because regulations almost by definition inhibit profitable activity. But with the S&Ls having developed political constituencies, the rules governing their behavior were gradually relaxed on the way to a scenario of private profits and public losses that singed taxpayers greatly. Harford is unwittingly calling for a sequel.

What he's seemingly unaware of is that banks quite simply aren't that important to our financial system. Sure enough, as of 2008 80% of lending was already occurring outside the banking sector.

The above is important because Harford argues that saving the banks was essential to ensure a robust lending environment. Wrong. Not only does most lending already occur outside of the banks, but what Harford also misses is that credit should be tight during financial crises. That's the case because per his presumably forgotten point early in the book about failure authoring success, tight credit is the market's way of starving the failures so that limited capital can reach the winners.

Lastly, what Harford misses most of all is how very much the markets for at least a century have been trying to kill off the traditional banking sector, only for governments to prop banks up. That governments continue to regulate and coddle banks means that we have an anachronistic concept holding back the positive evolution of the commercial system. We need the very failure that Harford lauds elsewhere to be tried on banking, but he quite oddly sees money lending as something different.

What's strange to this reviewer is that early on in Adapt it was made plain that the chapter on the "financial crisis" would be offering unique insights into what happened. Talk about expectations dashed. Other than some weak attempts to tie an oil rig explosion to banking collapses, the chapter on the "financial crisis" merely rehashed a lot of old news, all the while contradicting the book's central theme which lauds the good that comes from failure.

So while there's a lot to criticize with Adapt, it's still something that's recommendable. Harford tells fun stories, and unearths exciting facts that this writer will use for many years to come. Still, what a shame that Tim Harford didn't stay close throughout to his essential theme that failure goes hand-in-hand with progress.