Deseret News Archives,
Sunday, March 10, 2002

Edition: All
Section: Money
Page: M01
Length: 66 lines

Failure teaches valuable lessons

During the same period, there were hundreds, maybe even thousands of bankruptcies too small to get any attention from the media. Is this a sign that the economy is sick?

No. In my opinion, I believe that this is the sign of a healthy economy.

About 100 years ago, a famous economist named Joseph Shumpeter made the statement that entrepreneurs' greatest benefit to society is that of "creative destruction." By innovating to find lower-cost ways of producing existing products or to find new products that replace the function of older products in a way that consumers prefer, entrepreneurs keep an economy vibrant and healthy. Unfortunately, that means companies that don't adopt the newer, lower-cost production methods and companies that only make the older, less-desirable products die.

All living organisms die. Thousands of cells in your body die every day and are sloughed off by your body's systems. They are replaced by newer, stronger cells. Without this constant renewal, the body itself would soon die.

How we deal with failure determines how dynamic and healthy an economy is. I once read an article about a ceremony performed in an Asian economy if a bankruptcy occurs. The business manager who was at the head of a company that went into bankruptcy got down on his knees. His creditors came in and cursed him. His family then came in, cursed him and told him that he had dishonored the family name. With societal intolerance of failure like that, it is clear why entrepreneurship is much less common in that culture.

In the United States, if you start a company that goes bankrupt, you have simply passed the first level of your entrepreneurship education. You are eminently employable. In fact, many companies would find you a very desirable employee because you exhibited the drive to start a business. You have learned important lessons about what works and what doesn't work.

Virtually all of the successful entrepreneurs who support the Center for Entrepreneurship at BYU had at least one failure before they had a success. Many had several failures. They all confirm that the lessons they learned from failure were critical to their eventual success.

Kmart went bankrupt in part because a clever entrepreneur, Sam Walton of Wal-Mart, found a way to substantially reduce the cost of delivering products to consumers. Kmart was forced to reduce prices to compete but was unable to reduce costs enough to survive with the new lower prices. Consumers and the economy benefit from the lower prices and more productive techniques that Wal-Mart introduced.

In a dynamic, competitive economy, losses indicate that someone else has a better way of doing it or is offering a higher quality product at a lower price. Capitalism is brutal but efficient.

In many countries, governments spend billions subsidizing companies to avoid the layoffs and unemployment that would result from bankruptcies. The result is lower productivity, higher prices and a lower standard of living.

Next time you hear of a bankruptcy, feel bad for the people who suffer, but realize that it is the sign of a healthy, dynamic economy. It will be a whole lot easier for the laid-off workers to find new jobs in a healthy economy than in an economy in which the government subsidizes inefficiency.

Hal Heaton is associated with the BYU Center for Entrepreneurship. He can be reached via e-mail at cfe@byu.edu.

© 2001 Deseret News Publishing Co.