The Failure Tour Of New York : Planet Money On today's Planet Money, we hit the streets with economist Tim Harford. In his new book, Adapt, Harford argues that success always starts with failure.

The Failure Tour Of New York

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(SOUNDBITE OF TV SHOW, "GLEE")

JANE LYNCH: (As Sue Sylvester) This is what we call a total disaster, ladies. I'm going to ask you to smell your armpits. That's the smell of failure, and it's stinking up my office.

(SOUNDBITE OF KINGS OF CONVENIENCE SONG, "FAILURE")

ROBERT SMITH, HOST:

Hello, and welcome to PLANET MONEY. I'm Robert Smith.

DAVID KESTENBAUM, BYLINE: And I'm David Kestenbaum. Today is Friday, June 3, and that was a clip from the TV show "Glee" you heard at the top. Today on the podcast, failure is an option - pretty good one, actually. We talked to a guy who says failure is what keeps economies ticking.

SMITH: In fact, we'll take you on a tour of 500 years' worth of failure in New York City. We'll visit one of the most valuable objects we can find, one of the most beautiful buildings and one of the most important companies - and, yes, every single one, a symbol of failure.

KESTENBAUM: But first, the PLANET MONEY indicator from Jacob Goldstein.

JACOB GOLDSTEIN, BYLINE: Today's PLANET MONEY indicator - 25 million. Twenty-five million Americans now fall into a category called broader unemployment. That's according to the big jobs report that came out today. And this is an astonishingly high number. It's more than the entire population of the state of New York, and it's about twice as high as it was before the recession.

KESTENBAUM: This number, broader unemployment - this appears in the report. It's this line - they call it U-6, right?

GOLDSTEIN: Right. It's definitely buried, as U-6 suggests. Yeah.

KESTENBAUM: So U-6 - it is all the people who are counted in the normal unemployment rate, but it also includes people who have been looking for a job in the past year but didn't happen to be looking in the past four weeks. And it includes people who are working part time but would like to be working full time. And if you add all those people in, it's a much larger number.

GOLDSTEIN: Yeah. So the U-6 unemployment rate - it's about 16%. And, you know, I grabbed this number out of today's jobs report because it's sort of buried, and it is really striking and pretty frightening. But really, today's jobs report was so bad that I could have pulled almost any number out of it, and it would have been striking and scary. The economy added only about 54,000 jobs in May, which is not even enough to keep up with population growth, and the regular headline unemployment rate went up to 9.1%. So you know, looking back over the year, we had a couple of good, strong months of solid job growth but just got crushed in May. This is a really, really bad, scary jobs report.

KESTENBAUM: Should I say thank you? Thanks, Jacob.

GOLDSTEIN: Thanks.

KESTENBAUM: It's a pretty easy segue from there to our show today, which is about failure.

SMITH: Failure. Failure is, obviously, a part of life. I am familiar with failure. David - not so much.

KESTENBAUM: I'm not.

SMITH: Yes. But most people have experienced failure, but nobody brags about it. Nobody talks about it.

KESTENBAUM: And nobody writes books - there are no business books called "10 Easy Steps To Bankruptcy" or "How Not To Get Things Done."

SMITH: (Laughter).

KESTENBAUM: Wait, I got another one - "The Inefficient Executive."

SMITH: "Somebody Hid My Cheese, And I Will Never, Ever, Ever Find It."

KESTENBAUM: (Laughter).

SMITH: I mean, that's just depressing. Look, everybody wants to be a success, and every company sets out to make a ton of money. They want to grow forever. You know, even if you look at economic policies by a nation, I mean, no president stands up and says, here is my path to failure. No. It's the path to success and avoiding failure.

KESTENBAUM: But our guest today says we are thinking about this all wrong. The important thing, he says, is failure. Tim Harford is one of our favorite economists. He writes the Undercover Economist column for The Financial Times.

SMITH: And he came by our office, and instead of just talking to him about his book in the studio, we said, you know what? Prove it to us. Take us out into the streets of New York and show us how failure works.

(SOUNDBITE OF ELEVATOR BELL)

KESTENBAUM: All right. We're in the NPR elevator with Tim Harford. Tim, what's the name of your new book?

TIM HARFORD: It's "Adapt: Why Success Always Starts With Failure."

KESTENBAUM: All right. So we're going to go on a failure and disaster tour of New York. Is that OK with you?

HARFORD: Are there any failures in New York?

SMITH: There are many of them. We see them everywhere every day.

HARFORD: OK. Well, I'm looking forward to being introduced and to see what we can draw from them.

SMITH: Our first stop is right across the street from the NPR New York studios. It's the main library.

HARFORD: This is amazing. This is the New York Public Library. This is the building that keeps getting blown up in all the movies, right?

SMITH: Exactly. We're trying to keep it safe, though.

KESTENBAUM: Our first example is right here in the lobby of the library. Tim talks about this thing in his book, but he's never actually seen one before - a Gutenberg Bible.

SMITH: Which is strange, right? A strange example of failure. I mean, if anything, the Gutenberg Bible would have to be considered one of the most successful objects of all time.

KESTENBAUM: Yeah, I mean, the book is still there, right? We didn't lose it. Like, it's survived all this time.

SMITH: Yeah, in plexiglass. It's the world's most famous book. It's one of the first ones printed with movable type. I mean, in fact, it started 500 years of mass communication. What we do right now is an outgrowth of the Gutenberg Bible.

KESTENBAUM: But it was a total flop for Johannes Gutenberg, the father of the printing press. He basically went bankrupt.

How does it feel looking at this Bible?

HARFORD: It feels very special. It's amazing. We've got quite low light so that the Bible isn't disturbed. It's in a glass case all by itself in the middle of this beautiful marble-paneled room. And the Bible itself - I mean, it doesn't look...

KESTENBAUM: Doesn't look like a failure?

HARFORD: It doesn't look like a failure. It's over 500 years old, doesn't look over 500 years old. But, yeah, the man who created it and the man who made it possible was not only a failure in that he went bankrupt, but this was the book that did it to him.

SMITH: Did no one want to buy it? Was there just no market for a book?

HARFORD: Well, these books are incredibly expensive, and the early publishing industry did what you would have expected, right? They tried to make books, and it turns out books are so expensive that you might as well handwrite them rather than print them. And the business model that eventually worked out - and it wasn't obvious at all - was printing papal indulgences. So these are kind of like a, you know, you get into heaven free from the pope, and they're basically leaflets. So they printed these leaflets for the church, and that was the successful business model that actually kept the early printing industry afloat.

KESTENBAUM: He couldn't make a living printing the most popular book on the planet forever?

SMITH: And having a monopoly?

HARFORD: Well, this is what we often find. What looks to be the most obvious idea turns out not to be the obvious idea. You would think that, clearly, this is the way to make money. And it turns out not - that the way to make money or the way to be successful turns out to be something else, some other idea that some other guy comes up with. And that's so often the case. We assume - because he was brilliant enough to create the printing press in the first place, we tend to assume, well, he must have made a success out of it. But it doesn't work like that, doesn't mean that he's a successful businessman just because he was a successful inventor.

KESTENBAUM: Isn't it often true that we - those stories don't get told at all? - that we sort of make a nice, clear narrative about the one person who obviously had the great idea that then became - you know, became a big success?

HARFORD: Well, there's something called the halo effect, which is very common in business publishing, where you assume because somebody gets something right, they get everything right. And we tend to discard this long, tangled history of failure that leads to these successes 'cause most successful businesses basically got train wrecks behind them - people learning by doing until you finally perfect the idea.

SMITH: So this is what failure looks like in the 1400s. We're going to jump forward in time 450 years and see another form of failure also here in New York.

(SOUNDBITE OF CAR ENGINE REVVING)

KESTENBAUM: (Whistling). Hey, it works. Look.

(SOUNDBITE OF CAR DOOR CLOSING)

KESTENBAUM: Do you know where the Woolworth Building is? Woolworth Building - it's on Broadway and around City Hall. Yeah, there was a day when everyone knew where the Woolworth Building was.

SMITH: In the early 1900s, this was the tallest building in the world for about 17 years.

HARFORD: It was, like, a cathedral of commerce.

SMITH: And this building we're going to see, the skyscraper itself, is not the failure. In fact, the Woolworth Building is still up, still gorgeous. And they're talking about making it into a condo building. So the building itself is a success.

KESTENBAUM: But Woolworths, the company, the classic five-and-dime store, that is gone. How does a business that was once one of the largest retailers in the world just disappear? Well, it turns out that Woolworths went from being a company that knew how to adapt to a company that could not.

SMITH: So we've arrived in Lower Manhattan.

HARFORD: And it's a truly amazing building. And, of course, the building is still here, and Woolworths stores aren't.

SMITH: You know, even Woolworths as the five-and-dime was a story in success and failure. Frank Woolworth apparently tried several different concepts for a store before he came up with Woolworths. And his big innovation was to actually put the products out where people could touch them. Before that time, you would have to go to the counter and ask for a ball of twine or something. And he came up with this idea of just putting the products out and trusting the people.

HARFORD: And it seems so obvious. And I guess the interesting thing about that idea is that you can't copyright that. You can't trademark that. So the moment Woolworth does it and demonstrates that it's a good way to do business, suddenly everybody's doing it that way. And I mean, that's the truth in a lot of market innovations. Somebody comes up with a good idea. Everyone copies it. The old way of doing things, which doesn't work, gets wiped out. And that's how success gets built on failure. It's a selection strongly in favor of the ideas that are working.

KESTENBAUM: This is the idea of creative destruction, is that right?

HARFORD: The whole process of economic growth is constant replacement of stuff that maybe used to work and doesn't work anymore with something that works better. You knock down the old buildings. You use a new building. You get rid of the old cars. You have a modern car that works better. You get rid of old business models, and you replace them with new business models.

SMITH: Well, I mean, that's why we really came down here because, for a while, Woolworths was the new business model. I mean, they were this huge, successful company. And then along comes a new company, along comes Walmart. And I think it was by 1991, Walmart has taken over Woolworths' place on the Dow Jones Industrial Average. By 1997, Woolworths has closed all of its stores. So how should we think about success and failure when a - such a successful company can go under?

HARFORD: Well, the fact that Walmart replaced Woolworth - I mean, that's the way it works. Ten percent of American companies go out of business every year. And it's tempting to say, hey, but, you know, the economy still works despite that failure. Actually, the truth is the economy works because of that failure 'cause you have to get rid of these old ideas, these old firms and replace them with something better. Otherwise, you don't get economic growth. And there is evidence that's been gathered by a group of economists - one of them is Randall Mork - that shows that countries where they have greater turnover in the big corporations - where the big corporations are being replaced by other big corporations more quickly, there's more economic growth.

SMITH: I guess what I don't understand is something like Woolworths was the largest company of its kind at one point. It was rich. It had so much money, so much name recognition. Yes, the world changes. But why isn't Woolworths prepared to make that change? They should be better prepared than anyone. They could have been Walmart. Why didn't they go out to the rural areas and build giant stores 10 times the size of the normal stores?

HARFORD: The answer to the question I think comes from a business school professor called Clayton Christensen who studied innovations, and he has a book called "The Innovator's Dilemma." And what he said is, when you have an incremental innovation where it's just about trying to do what you already do a little bit better, the established firms are really good at that. They've got all the resources. They've got all the expertise. And they're really, really great at incrementally improving their processes. But whenever there's a disruptive innovation that comes along, a totally different way of doing something, that causes a problem for the established firms.

KESTENBAUM: But it sort of takes, as an assumption, that most things will fail at some point, which says something bad about us as a species, like, you know?

HARFORD: No.

KESTENBAUM: Ideally, one company would - you know, a group of people would get together. They'd make something. And then they'd figured out how to adapt. And basically, it says we can't adapt. We're bad at that. Eventually, we fail.

HARFORD: It's sad in a way. But the thing is, companies were never built to last forever. One of the great innovations in economic history was the idea of limited liability companies. You can set up a company, and limited liability refers to what happens when the company goes bankrupt. And this is regarded as being an absolute cornerstone of economic growth, creating a company that is kind of - it's OK when it goes bankrupt. So I don't see it as depressing. What I see is this is a process we need learn to harness. It works in, say, the market for five-and-dime stores, but, you know, can we get it to work more in other systems? Can we get it to work more in politics, for instance? And it doesn't seem so easy.

SMITH: You know, it's interesting, David, because when you start to listen to Tim and he takes you on this tour, you start to see everything through the lens of failure. And once you buy the assumption that failure is essential in an economy, that it's this natural process, then you start to see that things go terribly wrong if for some reason you can't have failure.

KESTENBAUM: If you look at, like, a totalitarian government where you have state-sponsored industries that are not allowed to fail - something like the old Soviet Union or North Korea today - in that situation, there is no push for innovation because old industries survive no matter what. You know, the government just keeps them around. They just stay alive, and they clog the system.

SMITH: Yeah, it's the same danger in the market economy with monopolies. If a company has complete control over an industry, I mean, the problem isn't just that they dictate prices - I mean, that is a problem. But it's also that they can't fail. There's no competition. They're so large they don't have to adapt, and smaller companies can't come in and take advantage of their failures. And there's no room for anyone else in the market.

So we're back out here on the street on Broadway, and we've been talking so far about the good parts of failure, the how failure leads to success. But we're close to Wall Street. So I thought we'd go down there and talk about what happens when failure doesn't always work out so well.

HARFORD: Oh, yeah, Wall Street. Those guys. Yeah, they're kind of awkward for the thesis. OK, let's go.

SMITH: So we've arrived here at 70 Pine Street, which is the American International Building, which people may know by its initials AIG.

HARFORD: One more monument to failure. So AIG, huge insurance company, was basically offering to insure a lot of the bets that Wall Street was taking during the financial crisis. They were saying if these bets go wrong - bets on subprime mortgages for instance, products that were related to subprime mortgages - if these bets go wrong, AIG will make Wall Street whole again. And nobody seemed to stop and think, can one company actually fix the whole of Wall Street if Wall Street collectively makes the same error? Then, of course, that was what happened. Wall Street did - they all made the same error at the same time, and the bill landed at AIG. And then very quickly, the bill was moved from AIG to the Federal Reserve, who bailed them out.

SMITH: But the thesis of your book is that failure can lead to success. And so under that theory, in 2008, sure, we had some bad banks. Lehman Brothers went under. We had troubles at Bear Stearns. Some banks needed to be bought. We could say, isn't that a fertile ground for new companies to come up and be successful?

HARFORD: Well, I hope so, but I don't take such an optimistic view. I mean, in some ways you could say, well, look, Lehman Brothers was badly run, made bad decisions, and it went bankrupt, and that's the way it should be. But the trouble is, that didn't just affect Lehman Brothers. That affected the whole financial system. So what we had in finance was a system where it wasn't possible for failures to be isolated. It wasn't just a case of Woolworth being replaced by Walmart. You had a company go under, and it suddenly was bringing all the other companies down with it. That's clearly not a very productive way to manage failure. You don't get this sweeping away of old ideas and replacing with new ideas. You just get the entire edifice collapsing at the same time. So that's not good, and that's not productive. And that does not lead to success.

Question that really arises for me is, is there a way that we can regulate Wall Street or reform Wall Street in a way that makes it work just a little bit like other markets so that an individual bank could go under and fail because it wasn't making the right bets, it wasn't making good decisions, it wasn't satisfying the needs of its customers? Could you make it so that that happened and that was fine and then the entire financial system didn't then collapse as a result? But, of course, we have this classic phrase now, too big to fail. I mean, that really tells you what was wrong with Wall Street, that we created institutions that couldn't fail safely.

SMITH: And David, this was the big revelation for me in Tim's work. You know, I always thought the major problem with too big to fail was that it would end up being a huge bill for taxpayers, that we'd have to bail out these companies. And that's true, and that's a bummer. But Tim argues that there's another cost if you're too big to fail. I mean, if failure is not an option, then you can't learn from your mistakes. These companies can't adapt. Instead of screwing up and going bankrupt, they screw up and they make record profits.

KESTENBAUM: Failure - you can really think of it as really information. It's kind of the signal that tells us what's working and what's not.

SMITH: It's like evolution.

HARFORD: If we have a system where everything goes wrong at the same time, where we're not able to learn, where we keep pushing bad ideas even though they failed, we keep backing them, that's a system that itself is going to fail.

SMITH: Well, thank you so much for this tour of failure - at least the New York iteration of it. I guess we could go to any city in the world and do the same thing.

HARFORD: Well, I'm sure New York does failure better than anywhere else 'cause it does success better than anywhere else.

SMITH: Oh, you're too kind. Thank you so much.

KESTENBAUM: Take care.

HARFORD: Good luck.

KESTENBAUM: Good luck with your new book about failure.

(SOUNDBITE OF SONG, "FAILURE")

KINGS OF CONVENIENCE: (Singing) Failure is always the best way to learn, retracing your steps till you know. Have no fear, your wounds will heal.

KESTENBAUM: As always, we want to hear what you think. And tell us your favorite examples of unlikely economic failure. You can send us email, planetmoney@npr.org. You can also find us on Facebook and Twitter.

SMITH: Or on the web at npr.org/money.

KESTENBAUM: I'm David Kestenbaum.

SMITH: And I'm Robert Smith. Thanks for listening.

(SOUNDBITE OF KINGS OF CONVENIENCE SONG, "FAILURE")

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