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.