Mr. Hazlett Is pursuing graduate studies In economics at the University of California In Los Angeles, where he Is on the staff of the International institute for Economic Research.
Without failure we’d be in big trouble.
"Learning from our mistakes" is far more than a worn cliché; it is the gateway to an enormous truth about our entire economic system. Only by allowing our failures to run their due course may we ever chance to come by better ways of providing for our desires.
So much of the discussion of "failure" has turned to the mere exchanging of shibboleths. Everyday discourse is loaded with paeans to braving the chances for failure, accepting great challenges, the noble nature of "sink or swim," and warnings that "nothing ventured, nothing gained." There seems to be an instantaneous acceptance that individuals must, in their private affairs, be willing to risk something to make a showing in life. Not many would hedge on the idea that, if you take away the chance to flop, you simultaneously withdraw the opportunity to soar.
Yet, in extending this simple morality to larger spheres, there looms a dichotomy. While the challenge of life’s game is hearty for the individual soul, the goal of social institutions is to demolish all possible exceptions to a preprogrammed "success." Security, the professed aim of scores of government programs, seeks to place a prohibition on all deviations from the politically determined "success norm."
Now, from the individual’s perspective, security is a decent sort of thing to strive for and a happy one to achieve. People who are far from being millionaires take reasonable measures to enhance their own security by purchasing insurance, getting an education (read: income security), joining a union, working on a contractual basis, getting married and, let’s not forget, having children (could we call this a form of genetic social security?).
The distinctive characteristics of "private" security are that a person acts either to "pool" his risks voluntarily with others, as in buying insurance, or he takes positive action to lessen the uncertainty surrounding his circumstances, as in gaining an education. "Public" security will be pursued from a diametrically different angle: simply shifting the burden of failure from one group to another.
Forcibly Shifting the Burden
If we look at any government bureaucracy we can see the nature of the problem. When the government establishes "job security" via tenure rules (accompanied by cost of living escalators) the government is not "pooling" the risks of the workers nor is it taking positive action to reduce the uncertainty confronting the work force. It is forcibly transferring risks of failure from one group (government workers) to another group (private sector workers).
Now, from a moral view, this is a nasty break for the latter; the so called civil servants are neither very servile nor very civil for inflicting this injustice. But this is only the visible damage of the deal. The most pernicious effects are to be found in the economic results of this redistribution of risk.
Just as a man can only find success by winding his way through—and past—failure, an economic system must depend on its failings to signal its path of success. This process is certainly more important for our system as a whole for, whereas a man may follow the examples of those who have gone before, a system has no model to emulate. It must break its ground in darkness. Economic failings include many distasteful possibilities: people getting fired or laid-off, companies or individuals going bankrupt, product lines being discontinued, capital lying idle, stock equities falling in value, ad infinitum. All such disturbances are the result of some miscalculation in the plans of the economy’s agents. People, businesses and governments cannot foresee the future, and so every unexpected change in our circumstances—even if it is, on the whole, a very favorable one—will cause some people to end up in less fortunate conditions than they had anticipated.
Change May Be Painful
Even when our society eagerly greeted the innovation of the automobile, for example, there were the poor blacksmiths being thrown out of work. And, in a recent movie, Woody Allen reminisces about an entire family that was wiped out by the introduction of automatic pinsetters. And, just as we pray for the cure for cancer, we know that, when it comes, we will see some bad economic news for the cobalt radiation industry.
These economic "failings" are tremendously important clues that, far from being swept under the rug, should be utilized as efficiently as possible for the value they contain. This value is both informational and motivational. It is the economic failure that allows us to see our mistakes and motivates us to correct them.
Failures are the "symptoms" of the economic organism. As the body of any living thing locates and cures its maladies by responding to its itches, aches and throbs, so the economy must behave to adjust to its unemployments, malinvestments and inefficiencies. Professor Axel Leijonhufvud discusses this organistic parallel by citing a biologist’s description of a biological system:
An organism is an integrated unit of structure and functions. In an organism, all molecules have to work in harmony. Each molecule has to know what the other molecules are doing. Each molecule must be able to receive messages and must be disciplined enough to obey orders. How has the organism solved the problem of intermolecular communication?
Professor Leijonhufvud suggests that, in the above passage, we simply substitute the word "economy" for "organism" and the word "transactors" for "molecules." Reread the passage this way.
Thus, do we arrive at the essence of the coordination problem.
Adjust or Perish
If a living organism attempted to ignore certain biochemical signals it would soon degenerate into multitudinous plagues and perish. And when an economic system fails, as Prof. Leijonhufvud is fond of saying, to "mend its ways" in response to signs of ill health, it will likewise degenerate into economic anemia and witness economic diseases immensely greater in magnitude than the initial symptoms.
The ease with which our society has let this helpful analogy slip past is demonstrated by the single statistic that, for all of 1977, for all of the federal government, just 223 workers were fired. Out of two million federal jobholders, that represents about one out of every ten thousand employees. You’d probably have a better chance of being assaulted by a lightning bolt in Palm Springs or of receiving Sophia Loren’s phone number from Computer Date.
More than the lack of individual failure in government is the absence of any way for departments and agencies of government to fail. When a public bureaucracy falls short of some assigned goal it is not driven to a cheap merger or bankruptcy as in the "ruthless" competition of the market place. Indeed, gross failures on the part of particular bureaucracies often send out enormously beneficial signals for the individual bureaucrats.
Witness the incredible failure of the Federal Energy Administration. Founded as a "temporary" agency to cushion the effects of the Arab oil embargo in 197374, the Agency was given the goal of Project Independence. The idea was to lessen oil imports over the years until, by 1985, we were to be completely—and patriotically—self sufficient in energy.
The FEA went about this goal in rather bizarre fashion. It promptly slapped a "crude oil equalization" tax on domestic producers, and used the resultant revenues to subsidize oil imports. But, let us not quibble over methodology, let us simply look at the results. When the FEA was born in 1973, the U.S. imported ¹/3 of its oil; today we import ½:
By 1976 the President’s Task Force on FEA Regulations was led to conclude:
FEA regulations, as they now exist, confer few if any benefits upon the public. . . . In return for this lack of benefits and sense of false security, the American businessman, the taxpayer, and the petroleum consumer, must incur higher costs than might otherwise be the case. Indeed, continuation of the present regulatory mechanism will result in long run inefficiencies for the American economy.
Failure may not come in a more plainly marked wrapper than the Federal Energy Administration. So how does the government cleanse us of the FEA burden? By exponential expansion!
In 1977 the FEA opened its new offices with "Department of Energy" on the marquee. It has now attained full cabinet rank and boasts 20,000 full timers "economizing" our energy with a ten billion dollar budget. Apart from its institutional successes, FEA aficionados have scored well. The Agency’s first director went on to become Secretary of the Treasury, the second has gone on to an esteemed academic post, and the third and present director, now a cabinet member, sits at the right hand of our President.
In contrast to the artificial serenity of the public sphere, there were over 200,000 bankruptcies, individual and corporate, in 1977 and several millions of workers were forced to switch jobs in the private sector.
As much as we would like to minimize such disruptions and failures (particularly the bankruptcy figures which are influenced by laws extremely generous to defaulters), we do not want to eliminate real errors of judgment and competence by "assuming them away." We want to "bleed" our system, purge the failing, and find a better way tomorrow.
Government bureaucracy has delivered a Brave New World to its protected clients: do not fear the future for it contains no failure. The job security of the public sector precludes any adjustment process whereby we purge the bad and try something new. "Government without failure" can only bring about "institutions without success."
Upon reflection, when was the last time that a government bureaucracy was closed and cleared away due to its failing to meet the needs of the consumers? The private market place displays a veritable barrage of such leapfrogging, with bankruptcies, mergers, corporate takeovers and shakeups, proxy fights, "inside information" and all the "ravages" of "dog eat dog" competition. Yet it is this constant, relentless panic to discover today’s failure and to gobble it up at a bargain price that promotes an incessant tendency toward most efficiently reaching for the consumer’s dollar.
The Test at the Market
To illustrate the respective mechanisms of the market and the bureaucracy, it is interesting to review the Wall Street Journal on any given day. Look at the incredible information just on the stock market alone. Here we have the relative values, as judged by millions of traders, of the earning power of thousands of companies. A mistake (or unsolicited disaster) accruing to any of these firms reflects itself to the entire market in the price of the stock in a matter of—amazingly seconds. No government study. No environmental impact statement. No six year lawsuit. A private company can flunk the market test in seconds.
Look around the rest of the Journal. Articles on quarterly earnings reports, new product lines, management personnel shuffles, changes in corporate profit strategies, in technologies, in marketing techniques. All are based on the quest of private persons to meet the challenge of market competition, to best deliver the stockholders the highest sales at the lowest cost. In other words, to avoid flunking that market test. And here there is no room for pontification. Speech writers don’t produce profit statements—accountants do.
The state has no room, no need, and no desire for a competitive test of its economic programs. Its motivation is to gain political efficiency, and this brand of activity takes on characteristics quite distinct from those required for economic efficiency. The appeal of the market solution is that, in the famous words of Adam Smith, each individual "neither intends to promote the public interest, nor knows how much he is promoting it . . . he intends only his own gain and he is in this . . . led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it."
The Political Test
Conversely, the drive for political efficiency can result in the most wasteful and fraudulent of activities and may foster the emergence of regimented, bureaucratic systems which are totally unresponsive to the public and which suffocate our spontaneous forces for creativity. As Professor Milton Friedman comments on the inverse of Smith’s economic "invisible hand":
The invisible hand in politics is as potent a force for harm as the invisible hand in economics is for good. In politics, men who intend only to promote the public interest, as they conceive it, are "led by an invisible hand to promote an end that was no part of their intention." They become front men for special interests they would never knowingly serve.
They end up sacrificing the public interest to the special interest, the interest of consumers to that of producers, the interest of the masses who never go to college to that of those who attend college, the interest of the poor working class saddled with employment taxes to that of the middle class who get disproportionate benefits from social security, and so on down the line.
The rewards of success can only be fully effective where the risks from failure are real. Success and failure must be two sides of an indivisible coin. And it is only when we toss this coin fairly, without precluding the chance it may come up tails, can we gain the knowledge to steer ourselves toward a better way of doing things. The game of life is, naturally, a trial and error process, and only by allowing ourselves to face our failings and to correct our bearings will we move progressively.
How Protectionism Betrays and Destroys the Individual
Some of our best emotions nudge us to fudge. We want to do whatever "must" be done to cover up the downside risks of contemporary society. But if we are loyal to these "best emotions" when it comes to our public institutions we may well betray our "best judgment." There is a most compelling argument against such state action to directly outlaw social problems. For by such "protectionism" we seal ourselves off from the phenomenal dynamism of individual initiative that will, when all is said and done, still be the attribute of man that brings home the bread. As F. A. Hayek reveals:
To the ambitious and impatient reformer, filled with indignation at a particular evil, nothing short of the complete abolition of that evil by the quickest and most direct means will seem adequate. If every person now suffering from unemployment, ill health, or inadequate provision for his old age is at once to be relieved of his cares, nothing short of an all comprehensive and compulsory scheme will suffice. But if, in our impatience to solve such problems immediately, we give government exclusive and monopolistic powers, we may find that we have been shortsighted. If the quickest way to a now visible solution becomes the only permissible one and all alternative experimentation is precluded, and if what now seems the best method of satisfying a need is made the sole starting point for all future development, we may perhaps reach our present goal sooner, but we shall probably at the same time prevent the emergence of more effective alternative solutions. It is often those who are most anxious to use our existing knowledge and powers to the full that do most to impair the future growth of knowledge by the methods they use. The controlled single channel development toward which impatience and administrative convenience have frequently inclined the reformer and which, especially in the field of social insurance, has become characteristic of the modern welfare state may well become the chief obstacle to future improvement.
At bottom, the price of synthetic success today will surely be the loss of opportunity for authentic success tomorrow.
Legislated Security Is Bondage
There has never yet come down from any government any substantial improvement in the conditions of the masses of the people, unless it found its own initiative in the mind, the heart, and the courage of the people. Take from the people of our country the source of initiative and the opportunity to aspire and to struggle in order that that aspiration may become a reality, and though you couch your action in any sympathetic terms, it will fail of its purpose and be the undoing of the vital forces that go to make up a virile people. Look over all the world where you will, and see those governments where the features of compulsory benevolence have been established, and you will find the initiative taken from the hearts of the people.
Samuel Gompers, from an address to union members, December 5, 1916