2:40pm

Mon June 6, 2011
Planet Money

The Failure Tour Of New York

Originally published on Mon May 7, 2012 12:36 pm

"I'm sure New York does failure better than anyone else because it does success better than anywhere else," Tim Harford says.

Harford, an economist and author, isn't just being kind. He argues in his new book, "Adapt," that success always starts with failure.

And so we've set out across Manhattan to look for some of those big ideas that didn't work out.

Out first stop is the main library. In the lobby is a classic example of how even things we consider successful were flops at the time: a 15th-century Bible printed by Johannes Gutenberg himself.

"There's a failure story here," Harford says. "This bible bankrupted him."

Gutenberg was a genius, but he wasn't much of a businessman. He borrowed money to print the bibles. How could you go wrong selling one of the most popular books of all time?

"He ran into debt. Got into an argument with a business partner, and that was it," Harford says.

It was a classic foreclosure situation. The lender sued Gutenberg, went to court, and confiscated the printing presses. Gutenberg's innovations in movable type would end up making other printers rich. Instead of working on massive Bibles, they could make a fortune printing short, easy papal indulgences for the Catholic Church. Basically, the cushy government contract of its day.

"We tend to discard this long, tangled history of failure that leads to these successes," Harford says. "Most successful businesses basically have train wrecks behind them."

So that's how one man's business flop changed the world. But what happens when big companies fail?

We head downtown to 233 Broadway — better known as the Woolworth Building.

"It's a truly amazing building," Harford says. "And of course the building is still here and Woolworth's stores aren't ."

In the late 1800's, Frank Woolworth was sort of a retail Gutenburg. His great idea: a store where you put merchandise on the shelves. No more clerks having to get your ball of twine for you.

Woolworth failed a few times with the concept. When he eventually figured it out, his competitors were quick to copy him

"That's the truth in a lot of market innovations: Somebody comes up with a good idea, everyone copies it," Harford says. "The old way of doing things, which doesn't work, gets wiped out. And thats' how success builds on failure . Its a selection strongly in favor of the ideas that are working."

For a while, Woolworth's was one of the largest retailers in the world. Then Walmart and other big box stores snuck up on them. By 1997, Woolworth's was closing its last U.S. stores. We could debate all day about what Woolworth's did wrong, but Harford argues that its failure was crucial.

"You have to get rid of these old ideas and old firms and replace them with something better," Harford says. "Otherwise, you don't get economic growth. And there is evidence that countries ... where the big corporations are being replaced by other big corporations more quickly, there's more economic growth."

Wall Street, as it happens is just a few blocks from the Woolworth building. So it's impossible not to ask the obvious question: Ho does Harford's theory of failure fit with the recent failure of Wall Street and the financial system?

The problem with the Wall Street crisis, Harford says, is that "it wasn't possible for failures to be isolated ... It wasn't this sweeping away of old ideas and replacing by new ideas... you just get the entire edifice collapsing at the same time."

The problem isn't that companies screwed up. It's that they couldn't fail without causing widespread economic chaos.

"And of course we have this classic phrase now, too big to fail," Harford says. "That really tells you what was wrong with Wall Street : We created institutions that couldn't fail safely."

Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

MELISSA BLOCK, host:

Most business advice books tend to focus on success. After all, no one wants a primer on how to fail. But it turns out that flops and disasters not only teach us something about economics, they're essential to a thriving economy.

Robert Smith from NPR's Planet Money team takes us on a short failure tour of New York.

ROBERT SMITH: Forget about those old lyrics: If you can make it here, you can make it anywhere. Economist Tim Harford says New York is the perfect place to learn how to fail.

Mr. TIM HARFORD (Economist/Author): I'm sure New York does failure better than anywhere else 'cause it does success better than anywhere else.

SMITH: Harford isn't just being kind. He argues in his new book called "Adapt" that success always starts with failure. So we've set out across Manhattan to look for some of those big ideas that didn't quite work out. Our first stop, the main library.

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

(Soundbite of laughter)

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

SMITH: In the lobby is a classic example of how even things we consider successful were flops at the time. We're looking at a 15th century Gutenberg Bible.

Mr. HARFORD: Printed by Johannes Gutenberg. And of course, there's a failure story here. This Bible bankrupted him.

SMITH: Gutenberg was a genius. He took the idea of movable type and he perfected it. But he was not a shrewd businessman. He borrowed money to print the Bibles. And Gutenberg thought: How could you go wrong selling one of the most popular books of all time?

Mr. HARFORD: He created this beautiful object. He ran into debt. And he got into an argument with a business partner, and that was it.

SMITH: The lender sued Guttenberg and confiscated the printing presses. Other printers would soon take Gutenberg's invention and make lots of money by printing shorter items, like papal indulgences, basically, the cushy government contract of the day.

Mr. HARFORD: We tend to discard this long tangled history of failure that leads to these successes. The most successful businesses basically have got train wrecks behind them.

SMITH: So that's how one man's business flop changed the world. But what happens when big companies fail? Outside, we hail a cab...

(Soundbite of a whistle)

SMITH: ...and head downtown.

So here we are at 233 Broadway, better known as the Woolworth Building, which was once the home and headquarters of the late, great five-and-dime department store Woolworth's.

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

SMITH: In the late 1800s, Frank Woolworth was sort of a retail Gutenberg. He also had a great idea, a store where you put merchandise out on the shelves, no more clerks having to go get your ball of twine for you. Woolworth failed a few times with the concept. But unlike Gutenberg, he figured it out, and so did his competitors.

Mr. HARFORD: 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.

SMITH: For a while, Woolworth's was one of the largest retailers in the world. Then Wal-Mart and the other big box stores snuck up on them. By 1997, Woolworth's was closing its last stores in the United States. We could debate all day about what the company did wrong, but Harford argues that its failure was crucial.

Mr. HARFORD: '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 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.

(Soundbite of traffic)

SMITH: So we're back out here on the street on Broadway, and we've been talking so far about the good parts of failure, see 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.

Mr. HARFORD: Oh, yeah. Wall Street, those guys. Yeah. They're kind of awkward for the thesis. OK. Let's go.

SMITH: We arrive at a beautiful skyscraper with a gothic spire. It's the American International Building, better known as the home of AIG. AIG insured many of the risky bets on housing back in 2008. Harford was writing his book when the financial collapse happened, and he realized that this was a new level of failure that he had not considered.

Mr. HARFORD: It wasn't possible for failures to be isolated .It wasn't just a case of Woolworth's being replaced by Wal-Mart. It wasn't this sweeping away of old ideas and replacing with new ideas. You just get the entire edifice collapsing at the same time.

SMITH: Wall Street's sin was not just that it screwed up, but that it didn't know how to fail in a safe, productive way. In fact, we came up with a classic phrase for a lot of these companies: too big to fail.

And Harford says that of all the failure lessons that New York has to offer, we do not want to be left with this one.

Robert Smith, NPR News, New York. Transcript provided by NPR, Copyright National Public Radio.

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