Economics of failure

In the city of Ann Arbor, Michigan, there is a unique place run by the German market research institute GfK Custom Research North America colloquially referred to as the Museum of Failed Products. It exhibits more than 70,000 food and household brands and consumer items shunned by consumers that are now extinct. Among the top picks of America’s biggest failures are smokeless cigarettes, colorless cola and spray toothpaste.

They were born through inventive ideas and insight, but went straight to the graveyard because they simply did not meet the public’s appetite. The museum shows that the world’s leading capitalist country, the United States, celebrates even the dark side of the harsh commercial world to offer lessons on how innovation and technology, regardless of creativity and sensationalism, can end in failure.

In our society in Korea, entrepreneurs, inventors and developers cannot leisurely walk through the past and carefully examine their failures. Once you fail, that is the end of your story. More than 900,000 new businesses open every year in Korea and 850,000 of them end up shutting down. Out of every 10 start-ups, four disappear within a year.

Failure is stigmatized for life. When a businessman goes bankrupt, his family, relatives and friends drown together in the swamp of collective debt liability. The scarlet letter of bankruptcy follows you everywhere and precludes the opportunity to rebound. This is why we find few risk-takers but a wealth of followers all taking the road often traveled.

Since President Park Geun-hye announced her slogan of building and fostering a “creative economy,” voices have become louder, calling for more tolerance of and encouragement toward failure. The president herself said, “The creative economy will never blossom in an environment so harsh toward failure.”

She called for more systematic support for business failure. The government came up with measures to exempt liability for those who act as guarantors for promising start-up businesses and offer financial aid to those endeavoring to start anew after failure. A society only has a future when it encourages passion and tackles challenges without fear of consequences. Business consultant Tom Peters also advises to “reward excellent failure and punish mediocre success.”

But there are precautions against the blind tolerance of failure. When failures are winked at repeatedly, one could be misled. Responsibility toward failure could disappear and immunity could breed moral hazard. Most of those who fail tend to be soft on themselves. They repeat mistakes because they do not learn from them. The museum of failed products vividly demonstrates how failures can be repeated if one does not study and learn from past mistakes.

Economically speaking, failure is a loss of opportunity and an increase in cost, and companies try to avoid mistakes by studying them. Amazon succeeded with its digital e-reader Kindle because it thoroughly researched why other electronic book brands failed.

In Japan and the United States, there are even scholars who study failures. Yotara Hatamura, a professor at the University of Tokyo, differentiates between good and bad failures. Necessary failures are inevitable growth pains and stepping stones for new development and improvement. But in bad cases, neither experience nor lessons can be obtained as they are simple repetitions of failures through negligence and misjudgment. Failures - when attempted with sincere efforts - should be tolerated. Bad and fatal mistakes and failures, however, should not be tolerated.

Greedy companies and lazy entrepreneurs who merely depend on government support and bailouts must pay the price. We must increase the odds of success by encouraging entrepreneurs to make attempts at new ventures and ideas without blindly removing the punishments for failure.

*The author is the business editor of JoongAng Sunday.

by Hong Byeong-gee