Supply-Side Economics Lesson No. 7
Memo To: Polyconomics University students
From: Professor Wanniski
Re: Success and Failure
We have a new student, Gareth Emery, of Itchen College, United Kingdom, who spotted a letter I wrote to Wired magazine about why there is always more failure than success in a thriving economy. It stirred up an interesting exchange, which follows.
Gareth Emery: Obviously in a thriving capitalist system there will be more failure than success, but do you think that this is a good thing? Why should the true people behind the projects make little profit, when business executives make money on the efforts of other people?
Reply by Jude Wanniski: All success is the result of failure. It takes repeated attempts to succeed before success is achieved. Just think how many times you tried to eat with a spoon before you got the hang of it, let alone a knife and fork. Success, of course, is "better" than failure, but success is not possible without failure. The progress of civilization is the accumulation of myriad failures followed by small successes, with the successes incorporated into the intellectual capital of mankind. Those societies that encourage failure in that way also encourage success. A father who punishes his sons for their failed attempts discourages them from making new attempts. See what I mean?
Gareth Emery: You say success is "better" than failure, but success is not possible without failure. Obviously, yes. But the amount of potential success in a society is proportional to the amount of failure. In our current political state, a capitalist system, we have the capability for the huge financial success of some, while others will fail to the degree that they cannot even afford to feed or house themselves. Is this chronic failure of so many really worth it if only a few at the top hugely succeed? I say that it's not. A socialist country would limit the success, or stop too many people from radically succeeding, but would also cut down the number of failures, therefore caring for more people and doing the best for the people of the country. Obviously, the country could not be as economically strong as before, but the well being of the citizens must come ahead of anything else.
JW: You are prepared to accept a weaker economy as long as poverty is reduced in the system designed for this purpose. So am I. This is what civilization is all about. Society, like a family, makes sure the weakest and least able to take care of themselves are supported by those who are strong and successful. You seem to think a "socialism" which prevents the more able family members from succeeding will somehow benefit the weak and helpless family members. This was the path attempted by the USSR and Communist China. Any system designed to help the poor by impoverishing the rich will lead to complete and total impoverishment of all. I will agree with you that the current state of our capitalist system is in need of major repair. When it is functioning at a peak of performance, it invites maximum social mobility. A "fluid society," if you will, which theoretically does not establish legal barriers to people born at the bottom to get to the top, or prevent people at the top from getting to the bottom. An "idea" at the bottom cannot rise to the top without the support of the people at the top who have both the capital and the wit to know a good idea when they see it. Socialism, as you describe it, is a system whereby the government confiscates the capital of the people at the top and then hands it out to people at the bottom who have worthy "ideas." A systemic breakdown is inevitable, as was the breakdown in the USSR and PRC.
To the second part to Gareth Emery's comment, JW replies: Who are the "true people" behind a project? Those who take the risks are the true people behind a project that could either succeed or fail. The biggest risk-takers are those who invest their after-tax income in new projects, most of which will fail. These are not "business executives," but simply "investors," who have the option of betting on a new mousetrap company, or spending their wealth on wine, women and song. Business executives are paid more money than "workers" because the role of a business executive is to minimize the risks inherent in a project. If a business executive fails, he or she will not be able to find employment as an executive, but will have to drop back as a worker.
Gareth Emery: It's strange that the only people whose contribution to a project is valued are the people with the money, the "investors". These are not the people behind companies, nor the people with the skill to create their own. Almost all of the time they will be funding people with skills much higher than their own. The people who should be valued are the ones with the skill to create new projects, not the fatcats with so much wealth they can afford to gamble with the shares of other companies. Remember that the initial ideas would not be available without the "workers."
JW: You are of course correct that in almost every case an investor does not have the skills to create new projects. The investor has the capital, though, which is the key ingredient in taking an idea on paper into reality. You seem to want the government to take the investor's capital away from him/her and give it to a worthy person with an idea. One thing you may not have thought of is that the "investor" who has capital has not only worked to acquire the capital but has already paid taxes to the government. Capital is after-tax income. The person who has acquired capital by working and paying taxes as a "worker," who is someone you and I would both celebrate, should not be so quickly denigrated by you when he/she invests that after-tax income in another person's ideas. Don't simply think of an "investor" as some rich man in a top hat and tuxedo, smoking a long cigar. Almost all investment comes from the masses, who chip in their savings to a big pool of savings, which is managed by people who seem to know how to assess risk better than the masses of ordinary people. As you are trying to sort all this out in your mind, Gareth, imagine yourself at a crossroads in your life. One path will take you in the direction of making the poor rich, the other will take you in the direction of making the rich poor. If you choose the latter path, I can't help you. If you choose the former path, I can, if you continue to join us in our Internet university.