Faber £12.99 pp267

A few weeks ago, the prospective Conservative candidate for Sedgefield, Tony Blair’s constituency, was forced to stand down after generating some unwelcome controversy. Danny Kruger, a Tory researcher, had spoken of a period of “creative destruction” in the public services. To uneducated ears, his use of “destruction” signalled a secret opposition plan to demolish public services. But creative destruction, an expression invented by Joseph Schumpeter, the Austrian economist, is something rather different. Schumpeter, as Paul Ormerod notes, gave us his “gales of creative destruction” under which old ideas, technologies, skills and equipment become obsolete and are replaced, bringing “continuous progress and improved standards of living for everyone”. The unfortunate Kruger meant well.

Ormerod is an original thinker, as his previous books, The Death of Economics and Butterfly Economics, have demonstrated. Why Most Things Fail is bravely titled for a book that deserves to be read but might put off casual business browsers at airport bookstalls. He is concerned about what he describes as the Iron Law of Failure. And this is where his approach differs, as he points out. Business and economics are usually concerned with success.

But failure is the key to understanding how economies work. “Failure is all around us,” he writes. “Failure is pervasive. Failure is everywhere, across time, across place and across different aspects of life; 99.99% of all biological species that have ever existed are now extinct. More than 10% of all the companies in America disappear each year.”

The juxtaposition of biology and economics is deliberate. Ormerod’s approach to economics, drawing on the work of Schumpeter, Friedrich Hayek and modern economists such as Vernon Smith, the American Nobel prize-winner, is evolutionary. Adaptation is the key to survival. The weak fall by the wayside. Of the top 100 global companies in 1912, only 19 were still in the list by 1995; nearly half have been absorbed into other businesses or gone bankrupt. Economies do not stand still, and extinction is never far away.

Human behaviour is adaptive and at times unpredictable, but it roots out solutions. Often those solutions are not those anybody would have predicted in advance. The “hub-and-spoke” system for American airlines, in which they have a main base and service other airports from it, so that their route map looks like a bicycle wheel, works effectively, as Smith has pointed out. But nobody would have set out to design such a system; it was the product of adaptive behaviour. Companies fail because they fail to adapt to their customers’ changing needs, or to new competitors. Brands fail because they do not evolve, or because they evolve in the wrong way. Capitalism roots out failure and punishes it. Some critics see this failure as proof that markets do not work. The very expression “market failures”, often used by the present government, implies a certain lack of comfort with markets.

Yet failure, Schumpeter’s process of creative destruction, is essential to the workings of markets. It may also be essential to success. Most successful self-made millionaires have a couple of failures, even bankruptcies, behind them.Ormerod cites the example of Coca-Cola. Twenty years ago Coca-Cola launched New Coke, its response to the competitive challenge from Pepsi. It was a disaster. Customers did not like the product and, as important, did not want it foisted on them without having a say. Coca-Cola, after an embarrassing few months, withdrew New Coke. It was a corporate calamity, a great example of the kind of failure that free markets throw up. But the company recovered, having recognised its mistake early enough.

But what would have happened if we were in a centrally planned system, and the state drinks producer changed its recipe? Consumers would have to like it or lump it, they probably would not have an alternative, and there would be a significant loss of consumer satisfaction. Markets adapt as a result of failure. In planned systems, in contrast, failure is permanent. Which is why those who call for state intervention every time there is a corporate or market failure are so wrong. And perhaps it is why, in the end, creative destruction would not have worked for Britain’s bureaucratic public services.

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