The Gift of Failure

Many people talk about the successes of the market. But what it really allows is failure.

Photo: Dodgerton Skillhause. Source: Morguefile

Centuries ago, if you couldn’t pay your bills, you went to debtor’s prison where you rotted until you could get someone to bail you out. In ancient Rome, if you pledged yourself as collateral and couldn’t pay your loan you would become your lender’s slave. Colonial Virginia was settled by thousands of indentured (i.e. indebted) servants paying off their debts with their labor.

In the US we abolished debtor’s prisons by the mid-1800s. Some notable people had been imprisoned, including Light-Horse Harry Lee, a Colonel in the Revolutionary War and Governor of Virginia. We replaced prison with bankruptcy, a way to start over.

This came to mind as I thought about Puerto Rico, Federal bankruptcy laws, and Uber. In San Francisco earlier this month, the city’s biggest cab company has filed to restructure its business. San Francisco is the birthplace of Uber. Traditional taxi services have been struggling as the ride-sharing service has gained market share. It turns out that people like calling for a cab with an app on their smart-phones. The San Francisco cab company couldn’t compete—it had lost too many riders and drivers.

Photo: Dan Tada. Source: Morguefile

This is what some have called “creative destruction.” Commercial structures are disrupted from within, as new patterns and processes of economic life evolve. In this case, people make choices that are cheaper or more convenient to them, and a monopolistic business has to make way for a more competitive alternative. By allowing the taxis to fail, consumers win. And the assets and drivers of the cab company go somewhere else.

In these days of too-big-to-fail banks, territories, and hospital systems, it’s important to remember: we can either learn from our failures, or send them to prison.

Douglas R. Tengdin, CFA

Chief Investment Officer

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