What America Needs Is A Few Good Failures

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Still, even in this country, no one wants to fail, and again the business "ins" hold an advantage over the unorganized "outs" in their ability to lobby for legislation -- tax relief, tariff laws, regulations -- that would tend to keep them in when market forces might otherwise tend to push them out. Not too many people are in the legislative halls arguing in favor of failure, even when it might have the effect of freeing up assets currently managed by some identifiable "in" for more efficient use by some unknown business "out."

The implications of Birch's revelations about the importance of a highly energized minority of small, young companies to the job-generation process and of the distinction that Vesper draws between entrepreneurs and the rest of the business universe are worrisome when put up against the kind of national policy planning that Republicans and Democrats are talking about today.

Democrats are experiencing an ideological evolution. The old party, created during Franklin D. Roosevelt's era and headed today by House Speaker Thomas P. "Tip" O'Neill Jr., divided the world into two groups -- workers and bosses -- and set the two against each other. The new generation of Democrats has a different vision: Workers and bosses, their differences reconciled, will be joined by government, and together all three will plan for the economic future. They call it a national industrial policy, and while different versions still compete for acceptance, the centerpiece of each of them is a forum where business, labor and government can meet to plan for their common well being Reagan Republicans reject the Democratic idea of creating a national industrial policy because, they say, it offends their free-market sensibilities. More likely it is because they are offended by the idea of giving labor and government a seat at the planning table. They prefer to let business, through its Washington representatives, dictate economic planning. What more protection could any Democrat-inspired industry-labor-government committee have granted to a single company, motorcycle-maker Harley-Davidson Motor Co., than the Reagan White House provided with the 49.4% tariff wall it erected around the ill-managed company's non-competitive product? Whether formally planned or not, this "free market" administration skewed the 1981 tax bill, the biggest business tax cut in history, toward large, capital-intensive industries at the expense of those business sectors in which most employment and market growth was taking place.

None of this is to reject or applaud either the Democratic or the Republican approaches to national industrial planning, but only to put a point on one of the non-quantitative observations Birch makes, which is that the interest groups that affect decision making in Washington, and in state capitals, whether formally or informally, speak for the past, or at best the present -- but never the future. "Rifles," says Birch, "are well represented in Washington. Artificial intelligence is not."

In Holland, business failure is not tolerated. If a large business is financially weak, the government frequently becomes a bail-out investor. Consequently, the Dutch government ends up owning as much as 25% to 30% of these so-called private sector companies. The result, Birch says, is that considerably fewer businesses fail, but the whole Dutch economy is experiencing difficulty in adjusting to new forms of economic growth. It is a tradeoff: micro-security for macro-risk.

The U.S. economy, on the other hand, is still strong -- it has macro-security -- in part because we tolerate a relatively high level of micro-risk: a few companies succeed, most fail, and entrepreneurs are, so far at least, at liberty to try again.

What if the U.S. government had bailed out Arp Instruments? Protected it from foreign competition? It would have saved one company and 200 jobs. And the cost? Well, what is one entrepreneur like David Friend worth? Flow many jobs will the three companies he has started since Arp eventually create? More or less than 200?

We can't be sure, you see. And neither can public-policy makers.

If government uses tax policy and import tariffs to keep old-line American steel companies alive, isn't it also keeping assets out of the hands of entrepreneurs who might, if they had the chance, create the successor industry? What Birch has shown us about the job-generation process suggests, at least, that somebody should be asking the question.

Spokesmen for small business and big business, for manufacturers and retailers, for high tech and low tech, for all the business "ins" -- can always argue that their respective interest group is an important part of the economy and deserves attention. But if Birch's work has taught us anything, it is that safeguarding the untidy process that includes business births, deaths, growth, and decline should take precedence over the preservation of any single interest group. In evaluating public policy, the question should not be, "How many jobs will this save?" Rather we should ask, "Will this foster enterprise?" -- that is, if we are interested in the long-term macro-security of the United States. Unfortunately, that question is not likely to be asked so long as micro-security is what gets votes.

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