NCPA - National Center for Policy Analysis

The Importance of Failure

November 1, 2011

Failure, though stigmatized by modern society as something to avoid at all cost, plays an irreplaceable role in the functioning of effective and efficient markets.  When we refuse to allow failure to happen, or we cushion its blow, we ultimately harm not only the person who failed but also all of society by denying ourselves a key way to learn how best to allocate resources.  Without failure there's no economic growth or improved human wellbeing, say Steven Horwitz and Jack Knych, of St. Lawrence University.

The importance of failure is particularly true within the entrepreneurial sector.

  • The U.S. Small Business Administration has issued reports that more than half of all small businesses fail within their first five years.
  • Undoubtedly, there is considerable personal pain and enormous amounts of effort that go into the bankruptcy process that make it an event that most would prefer to avoid.
  • However, business failure is crucial in the drive to solve the "knowledge problem."
  • Within society, the greater amount of knowledge that any one decision-maker has when making a choice, the better that choice is likely to be.
  • Therefore, when we recognize business failure as an opportunity to learn, its value becomes paramount as it disseminates information to other actors in the sector about good and bad business practices.
  • This information sharing is essential in competitive markets that want to innovate and create.

The modern Keynesian state, however, has greatly disrupted the process of information sharing by limiting the ability to fail.  Contemporary economists and politicians institute policies with the ultimate goal of failure prevention.  For example, farm subsidies allow American agriculture to stay afloat artificially, preventing its failure and limiting market access of new actors who might be able to identify farming methods that would not require government support.  The bailouts of Chrysler and General Motors had a similar effect, locking workers into jobs that are not efficient.  Through these policies and many others, the federal government undermines the social value of failure, say Horwitz and Knych.

Source: Steven Horwitz and Jack Knych, "The Importance of Failure," Freeman Online, October 27, 2011.

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