Adapt: Why Success Always Starts with Failure

Article excerpt

Adapt: Why Success Always Starts with Failure by Tim Harford Farrar, Straus and Giroux/Picador * 2011/2012 * 320 pages * $27.00 hardcover; $17.00 paperback; $9.99 e-book

Reviewed by Richard W. Fulmer

Tim Harford's thought-provoking book argues that complex systems cannot be created - they must evolve - and that evolution is necessarily a messy, trial-and-error process. In nature, error often results in death. Failure in the marketplace, while harsh, is rarely fatal and often yields lessons from which success springs.

If so, failure should be expected and planned for. Lessons learned should be identified and incorporated into future efforts. Attempts to eliminate failure will themselves fail because of the myriad interconnections that exist in complex systems and because independent actors respond to such attempts in unpredictable ways.

Rather than trying to construct failsafe systems, Harford suggests constructing resilient structures and institutions that can fail yet continue to work. To do this, Harford recommends "decoupling" a system's components so that failures do not snowball. Using the example of falling domino exhibitions in which thousands of dominoes are artfully toppled, Harford relates how experience led exhibitors to place "safety gates" between dominoes at key points during setup so that, in the event of a mishap, only a few would fall.

Harford takes the concept of decoupling and applies it to, among other things, financial systems. Surprisingly, the author, an economist generally favorable to free markets, offers few market-oriented solutions even when they fairly leap off the page. For example, he notes that the legal structure of Lehman Brothers, which failed when the housing bubble burst, had been made intentionally complex to avoid taxes. Its "Byzantine" structure made bankruptcy chaotic and resulted in assets being frozen far longer than would otherwise have been necessary. Despite this, Harford does not suggest simplifying the nation's tax structure to reduce incentives to create such tangled webs.

He does mention the moral hazard of guaranteeing bank debts, which reduces bankers' incentives to invest wisely and all but eliminates depositors' incentives to ensure that the banks to which they entrust their money are well managed. However, he doesn't propose that government end such guarantees even though relying on a single insurer is an extreme form of coupling.

Adapt also fails to note that regulations requiring institutions to do the same things, in the same ways, at the same times are another way to couple complex financial systems and thus risk falling dominoes. …