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22 March 2012updated 07 Sep 2021 11:12am

Failure, the awkward truth of economic growth

For Silicon Valley's "fail faster" read "too big to fail" in the City.

By Tim Harford

In 1982, In Search of Excellence was a blockbuster business book. The authors, Tom Peters and Robert Waterman, studied the world’s most excellent companies in search of wider lessons.

Yet a couple of years after the book was published, BusinessWeek weighed in with a simple cover story: “Oops! Who’s Excellent Now?” Thirteen of the 43 companies that Peters and Waterman had praised as paragons of excellence had fallen into serious financial trouble.

I’ve discovered that this sudden outbreak of failure isn’t some kind of “curse of Tom Peters”. It’s an unavoidable part of the way economic growth happens.

Around 10 per cent of American companies disappear every year – that’s not a recession year, it’s an average. They are constantly being replaced by rivals who through good management – or, often, good fortune – have figured out a way to provide a service or a product that is better and cheaper.

And this constant churn of success and failure is actually good news for the economy as a whole – compare Silicon Valley (“fail faster”) with the City (“too big to fail”). Academic work also suggests that creative destruction is real, and healthy.

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Now this is an awkward truth. The consensus in British politics today remains that government needs to learn lessons from the private sector, but we continue to draw the wrong lessons: that success comes from the profit motive, incentive-based targets, or the brilliance of business leaders.

In fact, success comes from the evolutionary process of trial and error. Outside the Darwinian world of the free market, that means rapid prototyping and piloting, carefully controlled experiments, or a more informal culture of trying new things and being prepared to acknowledge that there will be many small and awkward failures for every big achievement.

This is a lesson we can apply in education and policing, in fighting climate change or fighting in Afghanistan. It’s even a lesson we should take to heart in our own lives. But it’s not easy.

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We voters won’t get politicians who are willing to experiment unless we show that we aren’t interested in being presented with a veneer of infallibility, covering a stagnating policy environment. As the mathematician Goro Shimura once commented, “It is very difficult to make good mistakes.”

Tim Harford will be speaking about his book “Adapt: Why Success Always Starts With Failure” at the Oxford Literary Festival (24 March – 1 April) as part of the Leadership Series supported by HSBC Premier. For more information go to www.oxfordliteraryfestival.org. The book has just been published in paperback by Abacus.