Tuesday, July 5, 2011

Adapt: Why Success Always Starts with Failure by Tim Harford

I’ve been a Tim Harford fan ever since I read The Undercover Economist several years ago. He’s quite good at that elusive, valuable art:

He has the ability to articulate insights into how the world works that you intuitively recognize as true immediately. You only needed someone to come along and put them into words.

A few weeks ago he did an interview for The Browser in which he recommended five books for people to better understand the practical side of economics. I’ve already pledged to read all five by the end of this year, and the fact that he includes a Cory Doctorow novel and a book written in cartoon format only makes me more confident in his choices.

His book Adapt: Why Success Always Starts with Failure is full of wisdom. Harford explores the lives and careers of several people, but the one figure he keeps coming back to, the chief protagonist of the book if it has one, is Russian economist Peter Palchinsky. Palchinsky was an advisor to many of the gigantic Soviet public works projects in the 1920s. If a project was not going well, or even worse, judged ill-conceived from the beginning and doomed to be an expensive failure, he told his superiors this in no uncertain terms. This turned out to be an unhealthy habit. In 1928, he was taken away by the secret police and executed.

Palchinsky’s three principles, distilled by Harford and referenced repeatedly throughout the book, are as follows: First, seek out new ideas and try new things. Second, when trying something new, do it on a scale where failure is survivable. Third, seek out feedback and learn from your mistakes as you go along.

The Soviet Union’s institutional inability to follow these three principles, Harford argues, was the main reason why it was never able to catch up to the Western economies. Yes, there were other flaws, moral flaws, but it was the country's inability to innovate effectively that led to its economic downfall.

Harford has made articles available for free online that offer a taste of what Adapt is about; book trailers, if you will. Slate offers “The Airplane that Saved the World”, all about the RAF’s Spitfire, an experimental aircraft design that nearly got killed in the early 1930s, long before it went on to help win the Battle of Britain. Moral: We should encourage environments where crazy new ideas are fostered and protected from capricious management.

Also see “Positive Black Swans”, about funding scientific research so as to produce maximum good. Moral: Allocating funding to “safe” lines of research that promise incremental advancement is all well and good and necessary for society. But we’ll be even better off if, in addition to safe, highly promising research, we also encourage and fund what Harford calls “lottery tickets”: far riskier avenues of research that may well lead nowhere, but also hold the promise of revolutionizing their fields if they succeed. Harford argues it’s most effective to fund both types.

Eventually, of course, he comes to the financial crisis.

We shouldn't bail out massive companies that are about to go under. Which is not to say we should heap all our blame on the Bush and Obama administrations for doing so; they felt they had no choice because, to use the infamous quote, they were ‘too big to fail’. Maybe they were, but that itself was the problem. No company should be too big to fail. The whole point of a limited liability corporation is that it can collapse without destroying human lives. Companies aren’t people. If a company is going to fail, let it fail. A single tree shouldn’t be so important that its collapse would bring down half the forest with it. (Note: My words, not Harford's.) Creative destruction is a good thing - high rates of failure can presage economic growth.

The second Palchinsky principle says that failure must be survivable; an organization (or a life?) ought to be structured so that a singe catastrophe can't bring down the entire structure. In 1995, an employee making unsupervised trades at Barings Bank managed to singlehandedly destroy his 300-year-old company. He had made wildly speculative trades with the bank's capital without supervision. He had broken the law (and did a stint in prison as a result), but he hadn't really acted maliciously. The whole time he probably thought, "I know what I'm doing." There will always be reckless people. There will always be setbacks and disasters. They should be anticipated and planned for.

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