{"id":1000,"date":"2013-03-30T19:12:14","date_gmt":"2013-03-30T19:12:14","guid":{"rendered":"http:\/\/www.rationalargumentator.com\/index\/?p=1000"},"modified":"2014-02-09T04:46:12","modified_gmt":"2014-02-09T04:46:12","slug":"on-brakes-and-mistakes","status":"publish","type":"post","link":"https:\/\/www.rationalargumentator.com\/index\/blog\/2013\/03\/on-brakes-and-mistakes\/","title":{"rendered":"On Brakes and Mistakes – Article by Sanford Ikeda"},"content":{"rendered":"
\n
\"The<\/div>\n<\/div>\n
Sanford Ikeda
\n<\/big><\/big><\/strong><\/span><\/div>\n
March 30, 2013<\/big><\/strong><\/span><\/div>\n
Recommend this page<\/a>.<\/strong><\/div>\n
******************************<\/div>\n

Here\u2019s an observation from a recent column<\/a> in The Economist<\/em> magazine on \u201cThe Transience of Power\u201d:<\/p>\n

“In 1980 a corporation in the top fifth of its industry had only a 10% chance of falling out of that tier in five years. Eighteen years later that chance had risen to 25%.”<\/p>\n

Competition makes it hard to stay at the top even as it offers a way off the bottom. Data on income mobility<\/a>\u00a0also support the idea. And despite occasional downturns (some quite large, as we well know), per-capita gross domestic product in the United States<\/a> keeps rising steadily over time<\/a>. These two phenomena, economic growth and competitive shaking out, are of course connected.<\/p>\n

Different Ways of Thinking About Economic Growth<\/strong><\/h4>\n

Economists in the mainstream (neoclassical) tradition are trained to think of growth mainly as raising the rate of producing existing products<\/a>. For example, a higher rate of saving allows firms to employ more and more capital and labor, generating ever-higher rates of output. It reminds me of the Steve Martin movie, The Jerk<\/em>, in which a man who is born in a run-down shack eventually strikes it rich and builds himself a much bigger house that is just a scaled-up version of the old shack.<\/p>\n

But economist Paul Romer<\/a>, for one, has said,<\/p>\n

“If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking.”<\/p>\n

So growth through innovation, technical advance, and making new products is more important than just using more inputs to do more of the same thing. The late Harvard economist Joseph Schumpeter<\/a>\u00a0came even closer to the truth when he famously described competitive innovation as a \u201cgale of creative destruction\u201d\u2014building up and tearing down\u2014with creation staying just ahead of destruction.<\/p>\n

But standard economic theory has had trouble incorporating the kind of economic growth driven by game-changing innovators such as Apple, Facebook, and McDonalds. Mathematically modeling ignorance and error, ambition and resourcefulness, and creativity and commitment has so far been too challenging for the mainstream.<\/p>\n

What\u2019s the Source of Economic Growth?<\/strong><\/h4>\n

Achieving economic growth through innovation means someone is taking chances, sometimes big chances, to break new ground. As Schumpeter put it<\/a>, what it takes is finding \u201cthe new consumers\u2019 goods, the new methods of production or transportation, the new markets, the new forms of industrial organization.\u201d Although talented people are behind this process, we sometimes put too much stress on bold \u201ccaptains of industry\u201d such as Steve Jobs, Mark Zuckerberg, and Ray Kroc. The personalities of the players are important\u2014but so are the rules of the game.<\/p>\n

Imagine if cars had no brakes. How slowly and cautiously we would have to drive! \u00a0Clearly, brakes on cars enable us to drive faster and safer. How? Well, brakes give us the freedom to make a lot of mistakes\u2014entering a turn too fast or taking our eyes off the road for too long\u2014without causing disaster. We can take more chances with brakes than without them. (Of course, good brakes can also seduce us into driving recklessly, but that\u2019s a story for another day.) Similarly, economic development of the Schumpeterian variety presupposes lots of experimentation, and that in turn means making plenty of mistakes.<\/p>\n

Markets Mean Mistakes<\/strong><\/h4>\n

Now imagine a world in which people looked down on innovators. That\u2019s hard to do in our time, but as Deirdre McClosky argues in her 2010 book, Bourgeois Dignity: Why Economists Can\u2019t Explain the Modern World<\/em><\/a>, \u00a0it wasn\u2019t that long ago when most people disdained innovators who challenged established ways of thinking and doing. The result was cultural and economic stagnation. Making an innovator a figure of dignity worthy of respect, which she says began to take hold about 400 years ago, has sparked unprecedented economic development and prosperity.<\/p>\n

But a smart, creative, ambitious, and committed person is likely to make mistakes. And so a culture that lauds spectacular success also needs to at least tolerate spectacular failure. You can\u2019t have trial without error or profit without loss.<\/p>\n

Let me be clear. I\u2019m not saying that people in an innovative society should champion failure. I\u2019m saying they must expect potential innovators to make a lot of mistakes and so have not only the right institutions in place (private property, contract, and so on) but also the right psychological mindset\u2014which is something static societies can\u2019t do.<\/p>\n

Change, Uncertainty, and Tolerance<\/strong><\/h4>\n

If you think you already know everything, anyone who thinks differently must be wrong. So why tolerate them?<\/p>\n

One of the great differences between the modern world and the various dark ages <\/a>mankind has gone through is how rapidly today our lives change. There\u2019s immeasurably more uncertainty in the era of creative destruction than in times dominated by the \u201ctried and true.\u201d \u00a0But the more we realize how much uncertainty there is about what we think we know, the more we ought to be willing to admit that we may be wrong and the other guy may, at least sometimes, be right. And so if we see someone succeed or fail, we think, \u201cThat could have been me!\u201d In a sense, an advancing society welcomes mistakes as much as it embraces triumphs, just as a fast car needs brakes as much as it needs an engine.<\/p>\n

That\u2019s not just fancy talk. The evidence\u2014prosperity\u2014is all around us.<\/p>\n

\n

Sanford Ikeda<\/a> is an associate professor of economics at Purchase College, SUNY, and the author of <\/em>The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.<\/strong><\/p>\n

This article was published by The Foundation for Economic Education<\/a> and may be freely distributed, subject to a Creative Commons Attribution United States License<\/a>, which requires that credit be given to the author<\/strong><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Sanford Ikeda March 30, 2013 Recommend this page. ****************************** Here\u2019s an observation from a recent column in The Economist magazine on \u201cThe Transience of Power\u201d: “In 1980 a corporation in the top fifth of its industry had only a 10% chance of falling out of that tier in five years. Eighteen years later that chance had risen to 25%.” Competition makes it hard to stay at the top even as it offers a way off the bottom. Data on income…<\/p>\n

Read More Read More<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[655,1376,323,227,829,830,1905,1907,819,1227,1906,810,322,900,899,1734,1648,1908],"class_list":["post-1000","post","type-post","status-publish","format-standard","hentry","category-economics","tag-capital","tag-deirdre-mccloskey","tag-economic-growth","tag-free-market","tag-gdp","tag-gross-domestic-product","tag-income-mobility","tag-joseph-schumpeter","tag-labor","tag-markets","tag-paul-romer","tag-production","tag-prosperity","tag-sandy-ikeda","tag-sanford-ikeda","tag-tolerance","tag-trial-and-error","tag-uncertainty"],"_links":{"self":[{"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/posts\/1000","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/comments?post=1000"}],"version-history":[{"count":2,"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/posts\/1000\/revisions"}],"predecessor-version":[{"id":2044,"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/posts\/1000\/revisions\/2044"}],"wp:attachment":[{"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/media?parent=1000"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/categories?post=1000"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/tags?post=1000"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}