Without Failure, There's Little Growth

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The global economy and financial markets continue to be whip-sawed by turmoil and tremors, most recently emanating from the Euro-zone countries of Greece and Italy. The iconic images of the Acropolis and Coliseum turn out to be ironic symbols of the crumbling finances of their home countries.

The Great Recession may have officially ended in 2009 but the Great Hangover continues.

A constant theme during this most difficult of periods has been politicians' fear of private sector failures. Across the spectrum, from the biggest banking, insurance and auto companies to the smallest homeowners behind on mortgage payments, the government has intervened to preempt failure. This aversion to failure has been a bipartisan global affair, to include central bankers.

While done with good intentions, minimizing failure as a public policy prescription fails itself in recognizing the necessary role that failure plays in an adapting and healthy economy.

Viewing the economy in the framework of a complex eco-system is a useful exercise. Imagine the idea of propping up all the dead and dying trees in a forest. In addition to being a laborious and expensive project, it would be counterproductive to the long-term health of the forest.

Before long, growth of the live trees would be stifled and any new sprouts would find opportunity cramped. In time, the entire forest would be moribund.

A capitalist economy operates in similar fashion, where failures that go out of business open up opportunities for agile and innovative enterprises to expand and build market share with new business models or new product offerings. Regardless of what eco-system, dispensing with deadwood is a great boon for growth.

Keeping with the system framework there are important lessons to be learned from systems engineers. Systems engineering is a relatively new, multidisciplinary field focused on the design and management of highly complex systems - examples include telecom networks, nuclear power plants and the Hubble Space Telescope. The global economy represents one of the most complex systems on the planet.

A recent panel of distinguished systems engineers on the subject of "Learning from Failure in Systems Engineering" concluded with three key points:

•Failure is an option at every step in the process except the final goal.

•Failure in intermediate steps is an opportunity to reassess - it is a responsibility to learn, to review the assumptions and to redefine the problem.

•Adding more process in response to failure diffuses the value of failure, diffuses the chance to learn from failure and lessens the chance to succeed through failure.

The first point is the most important, but the third is especially relevant to the current economic situation.

The recently enacted Dodd Frank Wall Street Reform and Consumer Protection Act is 2000-plus pages of process piled on an already heavily regulated banking industry. As the panel report warned, "if additional layers of unnecessary process do indeed have malicious consequences, their addition simply to satisfy human desires or remove leadership from the hot seat of public opinion may be severely detrimental. ... The more process you lay on top, the more layers of inspectors, the farther away you get from that personal level of accountability."

The story of the American economy is a fascinating tale of famous entrepreneurs overcoming failure time and again on their paths to fame, fortune and household name status. Their remarks on the subject of failure are instructive:

Thomas Edison: "I have not failed once. I have just found 2,000 ways that don't work." Henry Ford, "Failure is simply the opportunity to begin again, this time more intelligently."

Steve Wozniak (co-founder of Apple): "Failure is what moves you forward. Listen to failure."

Gordon Moore (co-founder of Intel): "Failures are not something to be avoided. You want to have them happen as quickly as you can so you can make progress rapidly."

President Teddy Roosevelt delivered a memorable speech on the subject of failure in Paris at the Sorbonne back in 1910. The heart of its message is more relevant today then ever:

"The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming ... who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."

Applying TR's words, the choice is simple but stark - an economy that embraces the triumph of high achievement and failure while daring greatly or an economy that knows no defeat but is cold and timid.


Ashby M. Foote III is president of Vector Money Management in Jackson, MS. Contact him at ashby@vectormm.com.

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