The importance of allowing failure

Always good to remember the importance of allowing firms to fail--which is, perhaps ironically, a vital component to overall success and prosperity. After more than a decade of weak economic growth the Japanese still haven't figured out the importance of allowing businesses to fail--so that those resources can be put to better, higher uses. The US maintains a global lead because it adopts pro-innovative policies. Worryingly, I feel that risk aversion, and the perceived need to "protect" people from failure--combined with reactionary political forces--are eroding this environment. Take Sarbanes-Oxley which treats executives as a criminal class and discourages risk taking. But the good news, as reported in a recent Rand study, is that we are still ahead of the rest of the world.

Rand said the U.S. will cement its lead in the global information technology revolution because its authorities provide "a hospitable environment to IT business development."

"U.S. businesses are focused on innovation, and Americans readily accept change," the report added.

The United States is ahead because it is willing to let uncompetitive industries fail, said the report.

"Unlike many other nations that concentrate on protecting existing businesses and institutions, the United States presses ahead with change even when it means 'creative destruction' of companies that drive its economy today in order to build a stronger economy tomorrow," said Richard O. Hundley, the lead author of the study.