The Virtues of Failure

Over at Cafe Hayek, Don Boudreaux has a great post on the virtues of entrepreneurship.  His post is full of the good side of successful entrepreneurship (let’s call that positive entrepreneurship).  But there is also good that comes from unsuccessful entrepreneurship (let’s call that negative entrepreneurship).

It’s weird to think of failure of having a good side.  For those who fail, it certainly doesn’t seem good.  For those who risked it all and lost, it can be hard to see the positive.  But failure teaches us what not to do.

Why is knowing what not to do important?  For the simple reason we do not live in Heaven.  Ours is a world of scarce resources.  There simply aren’t enough resources to satisfy every want out there.  So, we need to allocate our resources to their most productive uses.

And that is where failure comes in.  When schemes fail, it is a signal that the resources were not deployed in their most efficient manner.  They were not employed serving others’ or their owners’ needs.  Or their deployment was too costly, that there were other resources available that could meet the same need with less cost.

If failure is not allowed in an economy (say, firms are bailed out or protectionist tariffs are passed, or subsidies given), then the signals the failure provides are not properly transmitted.  This encourages the continued misuse of resources, diverting them from more useful causes and can lead to shortages.

Positive entrepreneurship is important, if it weren’t for success our lives would be stagnant, but we should not discount the learning process negative entrepreneurship provides.

5 thoughts on “The Virtues of Failure

  1. To mangle Samuel Johnson, the prospect of loss and failure wonderfully concentrates the mind.

    It is the risk of private money which causes new projects to be carefully watched and gives an incentive to fail as cheaply as possible, if one must fail.

    In government, the only participant who is hurt by a failed project is the taxpayer not at the table,

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  2. I like your post, but I question your conclusion “This (not allowing failure) encourages the continued misuse of resources, diverting them from more useful causes and can lead to SHORTAGES.” (my emphasis)

    Are you considering price ceilings to be part of not-allowing-failure machinery?

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        • Shortages are a depletion of a resource and its use for non-productive means. So, for example, let’s say the government subsidizes and prevents failures of solar power plants. That causes more engineers to be diverted into that market and away from other power plant markets where they’d have been more useful. This creates a relative shortage of engineers as there is an artificially high quantity demanded of them, but no change in quantity supplied (at least initially. This condition would, in turn, raise wages for engineers, creating more engineers, but diverting labor from other uses).

          All this happens with no price ceiling. Artificial price changes still happen

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