Failure and Progress: The Bright Side of the Dismal Science
by Dwight R. Lee and Richard B. McKenzie (Washington, D.C.: Cato Institute, 1993); 163 pages; $10.95.
In An Economist’s Protest (1927), English economist Edwin Cannan remarked, “Modern civilization, nearly all civilization, is based on the principle of making things pleasant for those who please the market and unpleasant for those who fail to do so, and whatever defects this principle may have, it is better than none.”
Ultimately there are only two ways for men’s activities to be coordinated in the social system of division of labor: through either enforced command or voluntary cooperation. Under enforced command, the political authority, regardless of the ideological label under which it justifies itself, dictates and directs the use of labor and resources according to a plan devised by those controlling the coercive powers of the state. Under voluntary cooperation, men are left free, in a political system limited to the protection of the citizenry’s life and property, to enter peacefully into exchange relationships with one another on the basis of mutual agreement and anticipated mutual gains from trade.
But a system founded on the premise of voluntary cooperation is also one in which each participant must accept the fact that his success or failure is dependent upon whether he has succeeded or not in producing and offering for sale something that others in the society value sufficiently for the seller to earn a return in excess of the costs he has incurred in bringing it to market. If he has misjudged what the consumers want and the price they are willing to pay for what he brings to market, he suffers a loss rather than earns a profit.
But his failure, his suffering of a loss, is in fact the market’s feedback information that tells him that he has devoted his efforts in the wrong direction; he learns either that consumers prefer some other commodity more than the one he has offered to them, or that others have succeeded in devising ways of marketing that product at a lower price than the one at which he can sell it. Whatever the reason, his failure to earn as much as he had expected or his actual suffering of a loss is telling him that he needs to adjust his behavior. He must either shift into making something consumers prefer more or creatively think of ways to match the competition by offering a better or cheaper version of the product.
Explaining this principle of the market and why even failure and loss is a healthy element in a free economy is the theme of Dwight Lee’s and Richard McKenzie’s book Failure and Success: The Bright Side of the Dismal Science . The central idea that they try to convey is that an economic system that allows individuals to fail and bear the consequences of their mistakes in the market is a social arrangement more conducive to the economic prosperity of all than is a political arrangement in which the state can be drawn upon to protect an expanding number of individuals from the negative effects of the miscalculations that have produced financial losses or lost employment.
Every innovation and improvement in the quality and available quantities of the goods brought to market involves a disruption of the status quo. New technologies replace old ones; new products on the market displace some that were previously purchased. New patterns of consumer preferences increase the demand for some goods and decrease the demand for others. The employers’ demand for certain types of labor increases for the goods now in higher demand, and the demand for certain types of labor decreases in the industries experiencing a decrease in consumer demand.
If an economy is to adapt to these types of changing circumstances, and with the greatest ease and rapidity, every individual experiencing these changes in his respective corner of the market must be willing to respond appropriately to what the market dictates as the revised course of action that each participant should now follow. But this “dictation” by the market does not involve either the use of force or its threatened application. Rather, it is merely a changing set of monetary rewards that the market offers for different activities performed; and each individual is left free to adjust and respond as he considers best and most profitable in the new environment of changed supply and demand conditions.
There are several dangers when people turn to the state for protection and security from the winds of peaceful market change, Lee and McKenzie argue. First, the only source from which the state can provide subsidies to support loss-making producers is through taxing those who are successful and profit-making. This has at least two negative effects: it weakens the incentives of those who have been successful to be as industrious as before; and it redistributes resources away from the production of products that consumers actually want and are willing to pay for.
Second, once the state becomes a mechanism through which political protections and privileges may be received, individuals will have incentives to devote their time and wealth to the acquisition of favors from the state, instead of using them to manufacture things that consumers on the market desire to buy.
Third, those who are meant to be the recipients of assistance from the state often end up being harmed rather than helped by this endeavor to save them from their own failures and mistakes. Such assistance creates a politics and psychology of dependency that traps many of these people in the very poverty and low-income status that state support was meant to cure.
What, then, can and should the state do? Lee and McKenzie reply that “the single most effective government poverty program consists of government doing nothing more than establishing an environment that facilitates market exchanges.” That is, to leave the market free, open and unregulated, so that men are left free to compete freely to attain their various and mutual ends.
