Economic Success Depends On Constant Failure

By Dwight R. Lee and Richard B. McKenzie
November 14, 1996

The entire world now recognizes that private enterprise is the only road to economic prosperity. Yet the administration in Washington sees more government intrusions into the private sector as the best route to political popularity. President Clinton is staking his presidency on the belief that undermining the prosperity that everyone wants, and that only the private enterprise system can deliver, is politically clever. And he may be right.

The market economy is such a powerful engine in the production of wealth because it excels at letting people know when the resources they are using in one activity would be more productively used in another activity. That market communication not only provides important information, it comes in a form that no one can ignore, economic failure. Economic failure is to the economy what physical pain is to the body. No one enjoys pain, but without it the body would lack the information needed to maintain its health.

Those who experience unemployment feel pain, but because of that pain they are likely to obtain new employment in which they provide more value to consumers. Most unemployed workers now find new jobs within a few weeks. The evidence from Europe shows clearly that extending unemployment compensation increases the average length of unemployment and reduces the productivity of the economy.

Business failures are painful. But the only way an economy can take full advantage of the new technologies that are sweeping the globe is for some business to fail and make way for others to expand. A major reason for Japan’s rapid economic growth is a business failure rate that is higher than that of the United States. Attempts to target some American firms and industries for special government assistance would reduce economic growth.

As agricultural technology has improved, we have been able to produce more food and fiber with fewer workers and less land, making it possible to produce more of other products consumers want. The result has been painful bankruptcies for millions of farmers. In 1940, for example, there were 6.1 million farms in the United States. In 1989 there were only 2.2 million. The movement off the farm was painful for many, but it resulted in far greater wealth for the entire economy.

As consumers we all receive the general benefits of economic success because there are always a few suffering the concentrated pain of economic failure. Unfortunately, the characteristic that makes the marketplace so successful economically makes it extremely vulnerable politically. Because it provides general benefits by imposing concentrated costs, the private enterprise system finds itself in an unrelenting battle against special-interest political influence.

An industry and its workers, threatened with economic failure, can reap immediate and concentrated benefits from government action in the form of extended unemployment compensation, subsidies, loan guarantees, tax breaks, mandates, and import restrictions. Already organized through its unions and professional organizations, an industry group can easily communicate its demands in ways that politicians ignore at their peril.

The benefits an interest group thus receives are more than offset by the costs of a less productive economy. But those costs, though large in the aggregate, are spread so thinly over the entire population that they go unnoticed politically. Most people are not even aware of the slightly higher prices they pay or the slightly reduced choices they have when market competition is rendered less intense by special-interest legislation. So when considering a proposal that will protect a few against economic failure at the expense of the many, politicians can be expected to hear from the few but not from the many. As opposed to the marketplace, the political process reduces the general wealth of the economy by concealing failure rather than revealing it. Governing programs financed in the name of reducing economic failure do nothing more than reduce the visible failure to the politically privileged by increasing the invisible failure suffered by those not so privileged.

If President Clinton is serious about change, and about reducing the influence of special lobbys, he is on the wrong track. He is proposing to expand the role of government in the economy, all in the name of helping those who are facing one form of economic failure or another. No matter how well-intended those programs, or how deserving the expected recipients, the programs will invariably be taken over by organized interests that will use them to shift the cost of failure from themselves to others. That may be politically shrewd, but it’s more of the same old special-interest politics that candidate Clinton promised to change. Real change would be to put the general interest ahead of special interests by reducing futile government attempts to reduce economic failure and unleashing the full productive force of the marketplace.

Dwight R. Lee is a professor of economics at the University of Georgia. Richard B. McKenzie is a professor of economics at the University of California, Irvine. They are authors of Failure and Progress: The Bright Side of the Dismal Science (Cato Institute, 1993.)