The Benefit of Losing
One of the greatest inventors in human history was Thomas Edison, often called the “Wizard of Menlo Park.” In fact, one of his innovations is used to illustrate individuals coming up with new ideas — the lightbulb. Similar bulbs were in use but unreliable and he came along and changed how things were done, making bulbs less pricey and more reliable.
In order to do that he created a vacuum inside the bulb and then had to find the right filament to use. In one interview he said he tried 3,000 different filaments before success; other sources said it was closer to 6,000.
What is clear is he failed thousands of times before he succeeded. However, Edison did not see these attempts as failures. He explicitly stated, “I have not failed 10,000 times — I’ve found 10,000 ways that will not work.”
Everyone would like a system that guarantees success at everything they try but that’s just not how reality works. In addition, mistakes often are useful for teaching lessons. Many a teacher has discovered that students who fail at solving problems often benefit when they are taken through their error step by step. They learn where they went wrong and improve as a result.
Educator/lawyer Colin Seale said, “Students cannot develop into critical thinkers if they regularly freeze out of fear of making a mistake.” Learning from mistakes helps students become better-problem solvers and critical thinkers.
Of course, all this requires innovation. Problems are not solved by making the same mistakes of the past. They need new thinkers tackling the issues in new ways. Of course, we often find a culture or regulatory system that desperately clings to the old ways, no matter how badly they have failed.
All this applies to basic economic problems. Innovators threaten to upset the apple cart and those entrenched in the status quo want them stopped. The right innovation could entirely put them out of business. Look at how many places in the world have effectively stopped using wires strung from poles to deliver telephone service.
In the United States President Jimmy Carter started the deregulation of the telephone business — which was largely a monopoly. President Reagan continued the policy and “Ma Bell,” the dominant company, screamed about it. Naysayers said it would destroy the service.
Instead there was an explosion of innovation. Liberal economist and Nobel Prize winner Milton Friedman illustrated the same principle worked in economics. He said, “What we have is NOT a profit system, it’s a profit and loss system. The loss part is just as important as the profit part.” Yes, he was saying failed businesses can be just as critical to economic progress as successes.
Every business venture takes existing wealth, combines it with labor, and hopes to make a profit doing so. But to make a profit they have to take all the costs of capital investment, labor, and goods and services to create a product that, in the end, is more valuable than all the costs. It is only by taken lesser valued factors and combining them to create a value that is greater that the entrepreneur is able to make a profit.
At the same time there is the opposite; businesses that accrue losses because the product of their labor is worth less than the total investment made. This does some important things; it gives the entrepreneur incentives to do their best to get it right. Even failing is telling other entrepreneurs what doesn’t work. It’s like the failed filaments in Edison’s lightbulb.
Losses discipline the bad entrepreneur for destroying wealth while profits reward the successful entrepreneur for increasing wealth. Better yet the failed entrepreneur is losing his own capital or that freely provided him by others willing to take a gamble. He doesn’t impose his loses on innocent bystanders — well not unless the political elite intervene to do so. In a free, depoliticized market the entrepreneur is risking his own money.
In the world of state-owned enterprises this is not the case. Taxpayers are forced to risk their money to bailout or subsidize ventures which are destroying wealth and creating greater poverty.
As Dr. Friedman pointed out, “If an entrepreneur’s project doesn’t work, he closes it down. If it had been a government project, it would have been expanded, because there is not the discipline of the profit and loss element.”
Political manipulation of markets doesn’t increase wealth, it is typically used to support failures and keep them draining the economic lifeblood of a nation. It may be an airline that continues to lose year after year, a telephone monopoly that keep their antiquated wire-based system afloat or government protected electrical producers who literally can’t kept the lightbulbs burning.
