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Salutary Failures

It may be one of my only clear contributions to my three year-old son Brendan’s outlook on life that every time he tries to build something or figure out how a new toy works and gets it wrong, he says to himself, “Whoops. Try again.” And then he tries it again.

I give myself credit for this because ever since he has been able to manipulate things with his hands, I’ve been telling him “Try again” every time he didn’t get something right. I don’t pretend that such failures are the same as success. The point is not to be afraid of failure. Successes in life often come at the end of a long road of many failures. Anyone who has struggled to learn a sport or musical instrument knows how true this can be. So do those who have tried their hand at entrepreneurship.

Which brings me to National Entrepreneurs Day. One has been proposed in the U.S. House of Representatives, and probabilist Nassim Taleb has given us a fully developed argument as to why we should have one. I second the motion. In Antifragile, his 2012 book, Taleb confesses that he is “an ingrate toward the man whose overconfidence caused him to open a restaurant and fail, enjoying my nice meal while he is probably eating canned tuna.”

This lack of gratitude is a moral failing of all of us in modern society, says Taleb. Hence his idea:

In order to progress, modern society should be treating ruined entrepreneurs in the same way we honor dead soldiers, perhaps not with as much honor, but using the exact same logic. . . . For there is no such thing as a failed soldier, dead or alive (unless he acted in a cowardly manner)—likewise, there is no such thing as a failed entrepreneur or failed scientific researcher.

According to Taleb’s concept of antifragility, environments that are able to benefit from unseen shocks are those that are decentralized and seemingly volatile. As counterintuitive as it may sound, failure is not a bad thing so long as there is a lot of it. Economically speaking, the more entrepreneurs an economy has, the fewer eggs it places in just a few (typically big) baskets. When something unexpected disrupts a big player, there is someone else ready to exploit the opportunity for gain and the economy endures and even benefits from the loss, making it not just robust but the opposite of fragile—that is, “antifragile.” In order for that “someone” to be likely to be there, however, it is imperative that as many people as possible be able to take risks and try to succeed, even if that means that most of them fail. The freer markets can be, the better.

Taleb’s commemoration message for a National Entrepreneurs Day goes like this:

Most of you will fail, disrespected, impoverished, but we are grateful for the risks you are taking and the sacrifices you are making for the sake of the economic growth of the planet and pulling others out of poverty. You are the source of our antifragility. Our nation thanks you.

Consider that Labor Day, which grew out of the Pullman strike of 1894, was originally meant to demonstrate “the strength and esprit de corps of the trade and labor organizations.” For better or for worse, most Americans have forgotten that. We have turned it, as is our wont, into an individualist opportunity to get a day off to drink beer and barbeque. So we might consider celebrating the people who created those workers’ jobs in the first place. To which a union stalwart might respond: business owners make more money than workers, so every day is already Entrepreneurs Day. This would be a mistake, since startups often do not post profits for years, and small business owners may not be any richer than the local factory’s union rep. In fact, the union rep actually gets paid extra for overtime and has a far more stable income.

This debate, in any case, does not meet Taleb’s point, for he wants to commemorate not those who created jobs but those who crashed and burned. When it comes to that, let’s be clear that the sacrifices of failed entrepreneurs are not comparable to the sacrifices of the lives of fallen soldiers. But the seriousness of the latter should not impede us from appreciating the weight of the former. Soldiers protect the way of life that entrepreneurs help to create and sustain in the first place. So they’re on the same team.

Perhaps it would help if we had a clearer picture of just how difficult entrepreneurship is. Frank H. Knight, one of the founders of the Chicago school of economics, was one of the earliest economists to recognize the entrepreneur as the “central figure” of the free enterprise system in his Risk, Uncertainty, and Profit (1921). Among other insights, Knight emphasized that the entrepreneur needs not only “fitness for the work” of managing an enterprise but to be an excellent judge of risk and character. For Knight, any uncertainty that can be measured does not constitute a genuine risk. But it is willingness to take on genuine, unmeasurable risk that characterizes the entrepreneur’s sacrifice.

For example, if a person knows that for every 100 good widgets she makes, 10 more will be defective, then she will simply make 110 widgets for every 100 widget order, figuring in the expense of the defective ones as a cost. What constitutes a real risk is the reliability of one’s own calculations of uncertainty. That is, there are countless unmeasurable factors outside of one’s control. The good entrepreneur is able to account for these through intuitive judgment.

Furthermore, the entrepreneur also needs to be a good judge of other people’s judgments. And that is another way of saying she must be a good judge of character. If a business partner promises 100 widgets by next week, how likely is it that this partner’s projection is accurate? What about next week? And so on. One must be able to accurately estimate the general reliability of oneself and one’s business partners to succeed as an entrepreneur.

“It is one of the mysteries of the workings of mind that we are able to form estimates of ‘general ability’ which have any value,” wrote Knight, “but the fact that we do is of course indisputable.”

Adding to this picture is Joseph Schumpeter’s famous concept of “creative destruction,” coined in his 1942 book Capitalism, Socialism, and Democracy. Innovative firms disrupt markets, says Schumpeter, displacing some few while uplifting many others, just as the automobile industry displaced the blacksmith but raised the quality of life for the vast majority of Americans. The creative destruction caused by innovation, he claimed, drives economic development. It “is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

While agreeing with Schumpeter that the entrepreneur drives economic development, economist and rabbi Israel M. Kirzner paints a different picture of how this takes place in his 1973 book Competition and Entrepreneurship. For Kirzner, entrepreneurial activity is characterized by alertness to opportunities for profit brought about by conditions of imperfect information (i.e. the real world).

At any given time, there will be some people selling for less than what other people are currently buying. The entrepreneur steps in and buys from the sellers for a little more and sells to the buyers for a little less. As a result, despite the addition of a middleman, everyone benefits: the sellers make more, the buyers spend less, and the entrepreneur profits. Writes Kirzner:

What our decision maker without means [the entrepreneur] needs to arrive at the best decision is simply to know where these unexploited opportunities exist, [and thus] To discover these unexploited opportunities requires alertness.

Putting these elements together adds up to a portrait of the entrepreneur as someone who not only takes risks but does so on the basis of refined judgment; who drives economic growth through disruptive innovation; and who stabilizes the market through exploiting profit opportunities created by imperfect information.

A final element can and should be added. Father Robert Sirico highlights George Gilder’s contribution that “entrepreneurship is an act of faith, an inescapably religious act.” As the Epistle to the Hebrews put it, “faith is the assurance of things hoped for, the conviction of things not seen” (Hebrews 11:1).

Nor is it hard to see how this follows from the foregoing. There are innumerable unseen and unmeasurable factors that affect any enterprise, from the reliability of one’s and one’s business partners’ predictions, to game-changing creative destruction, to being in the right place at the right time with enough alertness to see the opportunity that everyone else is missing. Faith gives people the assurance they need to nevertheless take a risk and act in the midst of all that uncertainty.

For to dare to put one’s own skin in the game and give it a shot requires a tremendous amount of courage. And courage, of course, is one of the cardinal virtues. There ought to be a recognition of its nobility even when, as Taleb says, most people who try to make it as entrepreneurs, don’t. The courage of the entrepreneur may be a step below that of the soldier but the sacrifices of those who fail are no less vital for our society in the end.

The third Tuesday in November is the day proposed by Rep. Scott Peters (D-CA) to establish a National Entrepreneurs Day. If we all drum up support from now until then, maybe on that symbolic day they’ll bring the resolution out of committee and vote on it.

Reader Discussion

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on September 24, 2015 at 09:13:50 am

I would much prefer a civic people's day, maybe National Civic People's day. Let celebration of entrepreneurs be included along with all the other risk takers. I'd like it to coincide with Ratification Day, June 21. National freedom, July 4 is important, but not as essential as no-harm personal liberty and domestic goodwill (PL&DG), and achievable combination that is essential for safety in its broadest usage.

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Phil Beaver
on September 24, 2015 at 09:14:34 am

that should be an instead of and

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Phil Beaver
on September 24, 2015 at 12:40:14 pm

“In order to progress, modern society should be treating ruined entrepreneurs in the same way we honor dead soldiers, perhaps not with as much honor, but using the exact same logic. . . . For there is no such thing as a failed soldier, dead or alive (unless he acted in a cowardly manner) . . . .”

[T]he more entrepreneurs an economy has, the fewer eggs it places in just a few (typically big) baskets. When something unexpected disrupts a big player, there is someone else ready to exploit the opportunity for gain and the economy endures and even benefits from the loss, making it not just robust but the opposite of fragile—that is, “antifragile.” In order for that “someone” to be likely to be there, however, it is imperative that as many people as possible be able to take risks and try to succeed, even if that means that most of them fail. The freer markets can be, the better.

Right. Free markets are good enough for our troops, so they should be good enough for entrepreneurs. After all, how do we motivate our troops? It’s been the same since the middle ages: They go abroad, capturing foreign nobles to hold for ransom, and torturing the peasants into giving up whatever funds they have. If a soldier dies, too bad for him; we leave his body to be eaten by the birds, and his family to starve. But there’s fabulous wealth for the few who survive to the end of the campaign, right?

To the contrary: Society motivates our troops by paying them a salary based largely on time served and rank. Sure, they get some boost for hazardous duty pay -- but that’s not really for motivation, given that the soldiers don’t get much say about whether or not they go into hazardous duty. But we tell troops that if they get hurt, there is an enormous apparatus assembled to get them well; if they get captured, there is an enormous apparatus assembled to get them freed; if they die, there is an enormous apparatus assembled to given them an honorable burial, and to compensate their families. This enormous apparatus is not the product of any one soldier’s initiative; it is created and funded by the society that expects to benefit from the incentives it is creating. It is the antithesis of a free market; it is socialization.

But isn’t this really the point of Pahman’s essay? Entrepreneurs take risks that create enormous benefits for society, yet generally bear the cost of those risks alone. This situation screams “EXTERNALITY!” Why would anyone with even an inkling of knowledge about economics doubt that, subject solely to free markets, we should expect sub-optimal amounts of entrepreneurship?

To be sure, praise is a kind of reward, and by praising risk-takers who fail Pahman is engaging in a kind of tampering with standard market incentives. But how characteristically pathetic. How should we get better teachers? I know: Let’s boost their prestige through low-cost symbolic means such as putting one on the Space Shuttle. Yeah, that’ll keep teachers from taking higher-paying jobs in other professions!

Hey, I’m all in favor of exploiting low-cost motivators, too. As Napoleon observed, men are willing to die for a bit of ribbon, so let’s make use of that fact. But where our troops’ motivation is concerned, we don’t stop there. We also put our society’s money behind its interests.

And so it should be for entrepreneurs. While a National Entrepreneurs Day may motivate some people to pursue entrepreneurship, I humbly suggest that the social safety net will do more. In particular, I expect that Obamacare -- enabling people to get health insurance at reasonable cost without having a stick to their corporate jobs -- does vastly more than a National Entrepreneurs Day to encourage people to strike out on their own.

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nobody.really
on September 24, 2015 at 14:30:21 pm

[…] at the Library of Law and Liberty, I take a cue from probablist Nassim Nicholas Taleb and call for the commemoration of a National […]

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Entrepreneur Day | Acton PowerBlog
on September 24, 2015 at 14:55:24 pm

" I humbly suggest that the social safety net will do more. In particular, I expect that Obamacare — enabling people to get health insurance at reasonable cost without having a stick to their corporate jobs — ..."

Forgetting, of course, that costs for health care are going up as a result of this governmental beneficence - or that for the somewhat successful or early stage entrepreneur with say 30 employees may no longer be able to meet costs as a result of the mandated added costs of coverage - but, at least, you are humble about it!

As for paragraphs #2 and #3: "To the contrary: Society ...... we should expect sub-optimal amounts of entrepreneurship? ", I think you misread the *motivations* of both the soldier and the entrepreneur, at least based upon my own personal understanding(s). The soldier does not consider available medical care prior to engaging the enemy nor is the pay / benefits sufficient motivation for the risks willingly undertaken; nor is the entrepreneur motivated by the thought that a government provided safety net may be available. Rather, it is the expectation that a) profit may be realized, b) the opportunity to engage in an economic activity that is more suited to ones habits, skills, or tastes is not to be missed and / or c) "I just want to be my own boss"

Most weigh the risk - those previously so inclined are more apt to take the risk; do we really want more folks not so properly prepared, either psychologically or skill-wise, to jump in simply because the government may provide a safety net. I suppose one would if the object were to *socialize* failure (oops, a redundancy, there).

The essayist is correct about the value of failure; I am not so certain that there is as dire a need for more entrepreneurs as either he or Nobody suggests.

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gabe
on September 24, 2015 at 15:03:09 pm

Oops, after the words "willingly undertaken" please add: No, we are *motivated* by something non-material; for a soldier to be motivated by a safety net is ludicrous as the combat soldiers role is to expose one self to rather "unsafe" conditions.

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gabe
on September 24, 2015 at 15:46:30 pm

I am not so certain that there is as dire a need for more entrepreneurs as either he or Nobody suggests.

Actually, as I was posting my remarks, I was having just that thought: How could we determine the optimal amount of risk-taking? Perhaps Pahman and I are both mistaken, society already exceeds the optimal amount of entrepreneurship, and we should NOT encourage greater risk-taking. Given the externalities, this outcome would surprise me -- but perhaps the level of return for successful entrepreneurs is so vast as to provide sufficient encouragement to attract entrepreneurs, even when confronted with the fact that society will soak up much of the benefits.

I sometimes hear the issue of the appropriate interest rate discussed in terms of how much risk-taking society should encourage. Lower interest rates => people pursuing more risky ventures (including criminal ventures).

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nobody.really
on September 24, 2015 at 19:25:17 pm

Hey Nobody - I had not thought of that particular (potential) result of lower interest rates - but I suppose that it is actually possible. The permutations for prosecutable mischief are uncountable.

I think, however, that we enter into *risky* territory when we, that is our guvmnt, decides that we are going to encourage risk taking. Witness, the foibles of the "sustainable" energy industrialists (I use that term intentionally) whereby the guvmnt provided risk assurance in the form of substantial subsidies (and guaranteed mandated usage - see California & Washington states) AND yet they still failed.

I do not think, based upon some of your past comments, that you would disagree with me here. Government ought not to be in the business of *fostering* particular enterprises but rather should be ever vigilant in guarding against anti- competitive (TRULY anti-competitive) practices.

It would have been wonderful for the guvmnt to tell me that when I started my small business that they would guarantee X,Y, and Z. Then again,being the knucklehead that I am, I probably would have told them to pound sand AS I was already pre-disposed to do this.

Take care

back to football - thank goodness the guvmnt has not seen fit to minimize or cushion risk there!!!! Ha!

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gabe
on September 24, 2015 at 22:32:24 pm

I think, however, that we enter into *risky* territory when we, that is our guvmnt, decides that we are going to encourage risk taking.

Yes, we do. But we also enter into risky territory when government refrains. The challenge is to identify the optimal balance of risks.

Libertarianism is built on a belief in spheres of autonomy. I live within my sphere, and so long as I do nothing to disturb the status quo (e.g., intrude upon someone else’s sphere, or enter into a contract surrendering some aspect of my autonomy) I’m safe there.

I subscribe to a more Darwinian view: My sphere of autonomy is only as strong as the society defending it – and more specifically, only as strong as my society’s ability to fend off rival societies. The “status quo” that I must rely on cannot simply refer to maintaining stasis; it must refer to maintaining the strength of my society relative to the strength of rival societies. In sum, society has an existential interest in achieving not stasis, but rather a level of growth that at least matches the growth rates of our potential rivals. If we avoid doing “risky” things we will avoid any harm that comes from those risks – as well as any benefit, and will be steamrolled by the neighboring government that WAS willing to take risks and thus WAS able to outgrow us.

Witness, the foibles of the “sustainable” energy industrialists (I use that term intentionally) whereby the guvmnt provided risk assurance in the form of substantial subsidies (and guaranteed mandated usage – see California & Washington states) AND yet they still failed.

I’m not sure what you are referring to specifically.

Yes, the Energy Dept. loaned money to Solyndra, and the electric car company Fisker, and solar company Abound, and they all went bust. As of last year, these and other companies had defaulted on $780 million – representing a whopping 2.28 percent of the loaned funds -- a success rate that would make any venture capitalist green with envy. In short, the Energy Dept's loan program is both successful and profitable.

I do not think, based upon some of your past comments, that you would disagree with me here. Government ought not to be in the business of *fostering* particular enterprises but rather should be ever vigilant in guarding against anti- competitive (TRULY anti-competitive) practices.

In fairness, I’ve gone back and forth on this. I see several issues:

1. Market failures and second-best solutions: Government is justified to intervene in markets to correct failures such as externalities a/k/a pollution. Ideally, we’d deal with pollution by taxing it. But because conservatives have so stigmatized the concept of taxation, we as stuck with second-best solutions such as subsidizing what we think will be the lesser of evils. This puts us in the unfortunate position of “picking winners.”

2. Corruption: It is not clear that government is better than market forces at picking winners. Moreover, the opportunity for inappropriate considerations to influence the allocation of funds is overwhelming.

3. The growth imperative: That said, government (as the agent of society) has an existential need to promote growth.

It would have been wonderful for the guvmnt to tell me that when I started my small business that they would guarantee X,Y, and Z.

Well, they did – even if you weren’t listening. Government provided you with the protection of bankruptcy laws, so that you could escape some of the consequences of your risk-taking. And government provided you with the ability to write off losses on your taxes, and even to carry over losses for a number of years, thereby socializing some of the costs of the risks you took. And as I noted, government provides a variety of social safety net programs to provide some protections if everything goes up in smoke. Yes, gov’t could do more – but it’s not as if they’re doing nothing.

back to football….

Lord help us, not more Seahawk nonsense….

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nobody.really
on September 25, 2015 at 10:45:12 am

Fair enough - "you had me at": "The challenge is to identify the optimal balance of risks. "

And that takes us from the theoretical realm (your comments above, which i am in general agreement with) and into the practical wherein the lack of (in Scott Amorians formulation) a *noble* people and Legislative segment leads us into much mischief and unsuccessful policy.

You are correct - even a number of the founders were prepared to "stimulate" growth; yet, the structure imposed upon the governing apparatus was one designed to minimize the *occasions of sin* as the old catechisms used to say. The possibility for abuse of discretion / grant(s) of authority were too great to allow the guvmnt to enter into, much less control, the economic sphere to the current extent.

Unfortunately, nowadays it is all about "Show(ing) me the Money."

Oops, I got back to football, again!

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gabe

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