The benefits of failure


Capitalism is based on failure. But that's no problem, since life is based on failure. That's the view of Professor Paul Ormerod, who outlined the idea at an Economic Research Council meeting I attended in London.

Ormerod points out that over 99.99% of all known species are dead. And roughly 10% of all US companies disappear each year too. Even when things are booming, you get extiction: in 1469, Venice boasted twelve firms engaged in the dotcom boom of its day – printing. By 1474, nine of them had failed. Sound familiar? Some 995 of the 2000 US firms making cars in 1900 disappeared. Of the world's 100 top companies in 1912, just over half survive, but only 19 are still in the top 100 – and most of those have changed beyond recognition.

Yet it's amazing how many people hark back to Marx, complaining that capitalism produces more and more concentration. John Kenneth Galbraith played the same tune in his book The New Industrial State. But by then, big-company America was at its zenith: from there on, it has been a story of the proliferation of new, small companies.

And it's that proliferation – that constant innovation coming from new, small firms – that makes free-market systems so vibrant, productive, and beneficial to humanity. Just as the small mammals proliferated when the dinosaurs declined, so so new small businesses spring up and become larger businesses. America's commitment to (relatively) low taxation and (relatively) light regulation and its (relatively) strong commitment to personal freedom is, I think, the main reason why it consistently outperforms statist backwaters like Europe. The biosphere and the economic sphere change constantly. You have to adapt and innovate. And decentralized, market systems are a lot better at adapting and innovating than socialist ones.