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Why Our Central Planners Are Breeding Failure

Mistaking illusion for lasting success
Thursday, January 15, 2015, 11:50 AM

Success, we’re constantly told, breeds success. And success breeds stability. The way to avoid failure is to copy successful people and strategies. The way to continue succeeding is to do more of what has been successful.

This line of thinking is so intuitively compelling that we wonder what other basis for success can there be other than 'success'?

As counter-intuitive as it may sound, success rather reliably leads to failure and destabilization. Instead, it’s the close study of failure and the role of luck that leads to success.

In the macro-economic arena, I think it highly likely that the monetary and fiscal policies of the past six years that are conventionally viewed as successful will lead to spectacular political and financial failures in 2015 and 2016.

How can success breed failure?  It turns out there are a number of dynamics at work.

Survivorship Bias

Survivorship Bias is the natural tendency to look at the survivors for the keys to success rather than to examine those who didn’t survive, many of which disappear without a trace. If 100 restaurants are founded and five of the new eateries achieve rip-roaring success, business schools usually study the decisions and strategies of the five survivors, not the 95 failures which closed their doors and left no trail of decisions and strategies to study.

As David McRaney observes in his excellent account of survivorship bias, by focusing solely on survivors rather than those who failed, the causes of failure become invisible. And if the causes of failure are invisible, the critical factors that determine success also become invisible.

Even worse, we draw faulty conclusions from the decisions of the survivors, as we naturally assume their decisions led to success, when the success might have been the result of luck or a confluence of factors that cannot be reasonably duplicated.

We are often reassured by the financially successful that perseverance and the willingness to accept risk are the key factors in success.  But as McRaney explains, this is the equivalent of asking the one actor from a rural state who achieved Hollywood stardom for the key factors of his success, on the assumption that anyone else following the same path will reach stardom.

But magazines never track down the 100 other aspiring actors from the same region who went to Hollywood and persevered and took risks but who failed to become stars. Examining the few hundred miners who succeeded in finding enough gold in the Klondike in 1898 and returning with enough of their newfound wealth to make a difference in their life prospects while ignoring the experiences and decisions of the 100,000 who set off for the gold fields and the 30,000 who reached the Klondike but who returned home penniless (if they survived the harsh conditions) will yield a variety of false conclusions, for luck is never introduced as the deciding factor.

The narrative that success breeds success has no role for luck, which is by definition semi-random and therefore uncorrelated to the stratagems of the survivors. Here is McRaney’s summary of the role of luck:

In short, the advice business is a monopoly run by survivors. As the psychologist Daniel Kahneman writes in his book Thinking Fast and Slow, “A stupid decision that works out well becomes a brilliant decision in hindsight.” The things a great company like Microsoft or Google or Apple did right are like the (World War II) planes with bullet holes in the wings. The companies that burned all the way to the ground after taking massive damage fade from memory. Before you emulate the history of a famous company, Kahneman says, you should imagine going back in time when that company was just getting by and ask yourself if the outcome of its decisions were in any way predictable. If not, you are probably seeing patterns in hindsight where there was only chaos in the moment. He sums it up like so, “If you group successes together and look for what makes them similar, the only real answer will be luck.”

Drawing Over-Arching Conclusions from Single Examples

A similar form of bias appears when commentators attribute China’s great developmental success to its command economy, or Silicon Valley’s enduring role as a center of innovation to America’s military-industrial-academic-research complex and the U.S. culture’s broad acceptance of risk-taking.

Who can say with certainty that another model of development might have duplicated China’s growth record but avoided the endemic corruption, environmental destruction and widening wealth inequality that are the negative consequences of the command-economy model?  No one can say, as there are no other Chinas to refer to for comparison.

If duplicating Silicon Valley were just a matter of government support of research and close ties between corporations and universities, there would be dozens of Silicon Valley rivals, as billions of dollars have been expended globally to duplicate the Silicon Valley model. But Silicon Valley remains in a class of its own.  Clearly, Northern California’s engine of innovation cannot be distilled down to a simplistic model that can be duplicated by policies and investment.

The conventional conclusion that the major central banks—the Federal Reserve, the Bank of Japan, the European Central Bank and the Bank of China—succeeded in saving the global economy from depression in 2008-09 is another example of drawing over-arching conclusions about success from single examples.

Since each nation/region is unique, any claim that the policies of any one central bank can be applied to other nations/regions with equivalent success is a highly questionable assumption.  Since there is only one European Union, Japan, China and U.S.A., there are no opportunities to test the assumption that the central bank recipe used in 2008-09 can be applied with equal success in future financial crises in these very different economies.

Previous Policies Have Changed Conditions

One reason we cannot draw over-arching conclusions about the drastic monetary policies enacted in 2008-09 is that those policies have changed the financial-political landscape. As a result, what worked in 2008-09 may not succeed in the next financial crisis because those policies only worked in the specific set of conditions of that crisis. If the conditions have changed, then the strategies that were 'successful' in the previous set of conditions will not yield the same outcome.

For example, central banks lowered interest rates to near-zero in 2008-09 to spark borrowing and refinancing of existing debt. Now that rates are still near-zero, this policy and outcome cannot be duplicated.  Lessons drawn from successes that cannot be repeated are suspect.

Previously successful policies may fail in the next crisis due to diminishing returns: for example, policies that extend credit to marginal borrowers to bring demand forward (i.e. subprime auto loans) eventually reach all but the riskiest borrowers.  Extending those policies essentially guarantees rising defaults as people with no business borrowing money are given credit to maintain consumption.

As defaults soar, lenders record losses and sales decline, as consumption was already brought forward.

Due to diminishing returns, a policy that was successful at first fails when extended.

In effect, successful policies may be time-stamped; not only do they only work in specific circumstances, they only work for a limited length of time in those specific conditions. Beyond those conditions and timeline, the supposed factors of success no longer work.

Are the Outcomes of Monetary Policies Truly Predictable?

As noted above, any policy identified as the difference between success and failure must pass a basic test: When the policy is applied, is the outcome predictable?  For example, if central banks inject liquidity and buy assets (quantitative easing) in the next financial crisis, will those policies duplicate the results seen in 2008-14?

The current set of fiscal and monetary policies pursued by central banks and states are all based on lessons drawn from the Great Depression of the 1930s. The successful (if slow and uneven) “recovery” since the 2008-09 global financial meltdown is being touted as evidence that the key determinants of success drawn from the Great Depression are still valid: the Keynesian (or neo-Keynesian) policies of massive deficit spending by central states and extreme monetary easing policies by central banks.

Are the present-day conditions identical to those of the Great Depression? If not, then how can anyone conclude that the lessons drawn from that era will be valid in an entirely different set of conditions?

We need only consider Japan’s remarkably unsuccessful 25-year pursuit of these policies to wonder if the outcomes of these sacrosanct monetary and fiscal policies are truly predictable, or whether the key determinants of macro-economic success and failure have yet to be identified.

The Seeds of Failure Are Sown in the Initial Flush of Success

Even more troubling is the possibility that these monetary policies have sown the seeds of systemic failure in their pursuit of the extremes that yielded the initial flush of success.

That this initial success might be brief and transitory rather than enduring is rarely considered.  If this is the case—and the slowing global “recovery” suggests this is indeed so—then the success of these extreme policies is illusory, and the truly key determinants of success and failure remain elusive.

In Part 2: The 6 Reasons The Next Economic Rescue Will Fail, we examine why the current unstable "recovery" must topple despite the central planners' best efforts to sustain it. They simply don't have an accurate awareness of the true situation, nor have the right tools and skills to address it -- and so, in their ignorance and fear, are pulling levers that are inconsequential (at best) or will hasten the destabilization of the system.

Click here to access Part 2 of this report (free executive summary; enrollment required for full access)

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10 Comments

Phaedrus the younger's picture
Phaedrus the younger
Status: Bronze Member (Offline)
Joined: Aug 21 2013
Posts: 60
Hubris galore

Aside from hard work and talent, two big factors that I've observed first hand but are not talked about are luck and the generous support of mentors early in the careers of highly successful people.  There are a gracious minority that will acknowledge one or both factors but many act and speak like it was all them.

There's a whole industry based on self-actualization that has become a pseudo religion.  Not surprising since it's hard to argue against progressive taxation and the right to dynastic wealth if luck is a major factor in success...

treebeard's picture
treebeard
Status: Platinum Member (Offline)
Joined: Apr 18 2010
Posts: 580
Truth is a pathless land

Complex subject, the argument touches briefly on our ability to know.  Really to know anything.  False attribution by survivors is certainly something that we all have seen.  To have a true understanding of anything we do need to study the whole, agreed, success and failure. A somewhat irreverent story about the human condition that I heard goes something like this, "two maggots were dangling from a shovel, one fell off into a dead mouse the other into a barren crack in a sidewalk. Some weeks later the two run into each other, one half starved, the other sleek and fat. The half starved one asks his fat friend, "to what do you attribute your success?" to which his fat friend responds of course, "brains and personality brother, brains and personality!"

The creation of false dichotomies can cause us of course is to veer into nihilism though.  Either we have total control, or none at all. Either life outcomes are full of meaning or have no meaning at all.  Unfortunately because situations may defy "reason" at times that may lead us to project our own limitations onto the universe. My favorite quote about the nature of reality is by Krishnmurti, "I maintain the truth is a pathless land, you cannot approach it by any path whatsoever, by any religion or any sect.....  the moment you follow anyone else you cease to follow the truth."  But the world is knowable, as we are in the world, so is the world in us, otherwise nothing would be possible.  When we tire of tangling ourselves up with our own self inflicted limitations, answers come faster than we can manage to ask questions. We all know what is real, the question remains, do we have the gumption to look it in the eye?

Snydeman's picture
Snydeman
Status: Gold Member (Offline)
Joined: Feb 6 2013
Posts: 316
Interesting article...

Fascinating article, and the more I think about it, the more it rings true in my own mind. Business/Economics is a field that embraces success and ignores failure, whereas most science I am aware of embraces failure as the true path to success, and oftentimes the most spectacular failures lead to unintended but welcome successes. I wonder if this is why we are biologically prone to remembering our failures far more than our successes, and perhaps nature has provided us the built-in lesson that we should learn from failure more than we should trumpet our success? I'll leave that to more capable minds than mine, as I am no biologist.

 

One thing I couldn't help but think of, as I was reading the article, was that all higher-order intellect creatures in the natural world seem to garner more success by working co-operatively. Human beings - homo sapiens sapiens - are individually pretty weak creatures, but our brains and our ability to work together have enabled our stupendous evolutionary success. We are, and have always been, a communal species. The fact that capitalism embraces the individual and their accomplishments as the highest ideal in our modern society is not lost on me, especially since it runs counter to our biological natures. I wonder if economic professors ever analyze whether successful businesses are the ones where everyone is working together towards the benefit of the company? Or is success always attributed to the ONE visionary who started the company? I mean, yeah, Google was someone's brainchild, but ultimately, today, it is successful on the backs of the men and women who are working together to make the company what it is. It seems to me that successful business owners would understand that a happy, motivated, invested workforce is a major factor in success, but, again, this isn't my strongest area of knowledge...which is why I lurk and read so much here, and try to post so little.

Seems to me, too, that even here luck would reign. As a business owner, you have to be lucky enough to find the right people at the right moment in your life and theirs. Lucky enough to not have major competitors who could snatch your people away. Lucky enough to start your business at just the right moment, in just the right market, and at just the right price point, to actually make it off the ground. It's hard for most Americans to accept the fact that even the best hunters will get injured on the hunt, or fail to capture the prey, etc, which is why we have always done best when we hunt together as a team. If we deploy a dozen hunters, the law of averages says that someone's spear will find it's mark, and we'll all have food to eat that night. It seems like a pretty simple concept that capitalism has done its best to stamp out of our consciousness.

 

Lest I come off as high-and-mighty on this topic, I am trying hardest to make my family self-sustainable and not trying to build a community around me, so I need to listen to my own words!

Of course, that's pretty hard when everyone around me has been lulled by the words of the mainstream press, and no one is willing to stop drinking the kool-aid.

/sighs.

jennifersam07's picture
jennifersam07
Status: Silver Member (Offline)
Joined: Oct 14 2012
Posts: 109
Love this site

Google says that this website is the one I come to most often, right after the Scrabble Cheater website. Says a lot.

This thread is just what I've been thinking about as we just moved to a new state and I'm starting over with community building for our family. We ARE better in community, but you are what you think, to paraphrase Descartes, and if your neighbors' thinking is so misaligned with the truth how can you possibly form a community? Even the people in our household are living in parallel universes because of the virtual communities that are available. High school students, adult son living temporarily with us, returning college student here on break -- even my husband and I have different 'realities' as we choose content from 'on the line' (as my high school son says) and move in different physical worlds. The dinner table is the only intersection. 

charleshughsmith's picture
charleshughsmith
Status: Platinum Member (Offline)
Joined: Aug 15 2010
Posts: 619
excellent comments, thank you

What a terrific thread, which addresses a spectrum of profound yet very real-life follow-on topics. 

Here are a couple additional thoughts on the topics raised:

1. we naturally prefer to share our successes rather than our failures, yet we learn more from honest accounts of failure than yet more survivorship bias. 

2. it's very difficult to tease apart all the causal factors in failure. In my experience, they include character/personality limits, the limits of one's partners, unforeseen changes in macro-conditions, not valuing one's time/enterprise enough, not learning fast enough from previous mistakes--the list is almost endless. So the hard part is paring all the elements of failure down to a few key points that can inform how we manage our next project.

3. It's invaluable to have hard-working, honest, reliable partners--in marriage or business (or in many cases, both at the same time). The trick in my view (as an entrepreneur/small business owner)  is to identify what each partner is good at and let them run with that. Whatever neither partner is good at needs to be identified and either outsourced or tackled by whomever is best qualified by personality and experience to get good enough at it to get the enterprise from failing due to that one factor.

4. Psychologically, it's tough to forgive one's own failures, especially when they impact others. But it is essential to learn how to do so, because acceptance of failure is part of the learning process.

Learning from failure always looks easy from the outside and after the fact. But in the moment, it's often a struggle amidst semi-chaos. It's very difficult sometimes to identify what isn't working or what *can't work in the current situation.*  Letting go of unrealistic goals and plans is a skill in and of itself.

Terry L's picture
Terry L
Status: Member (Offline)
Joined: Oct 25 2009
Posts: 15
This is one of the most valuable articles...

This is one of the most valuable articles I've read, on PP or elsewhere - thank you so much, Charles!

I can see how organizations I'm most familiar with (NGOs), and the people in them, have fallen prey to the pitfalls you describe (survivorship bias, etc.). I notice that in recent times, the leaders of these organizations have been scratching their heads in bewilderment as to why past "successes" have not continued. After all, they're doing what "worked" before aren't they?

Elsewhere, I notice that claims as to how one can (supposedly) succeed in business, in relationships, etc., are a dime a dozen, but I've long wished for a compendium of stories of failures from which I might gain more valuable insights.

In any case, I much prefer a scientific approach (as Snydeman refers to) for discerning reality, whether in the physical world or in human affairs. Such an approach explicitly seeks a statistically adequate "sample size," to better avoid "drawing over-arching conclusions" from a single (or too limited) example. And in the absence of a statistically adequate sample size, anyone pursuing a scientific approach wisely understands that the inevitable conclusions that our minds naturally jump to are premature at best, and can so easily be off the mark. Of course, in our day-to-day world, it's often not possible to gain more data beyond one or a few data points; regardless, it serves us well to understand the possible limits to the validity of our conclusions, and to resist the internal pull and external push for (claims of) certainty.

Again, thank you Charles for sharing your insights! I hope you'll be writing more articles like this :)

Terry

 

imaginer's picture
imaginer
Status: Member (Offline)
Joined: Apr 15 2010
Posts: 14
Truth beyond the false Dialectic

End rentier capitalism.

Here is the model, Beyond left and right :
http://www.henrygeorge.org/isms.htm

http://schalkenbach.org/on-line-library/works-by-robert-v-andelson/henry-george-and-the-reconstruction-of-capitalism/

Solving the "Unsolvable"
http://masongaffney.org/

Let's avoid a civil and nuclear war, shall we?

On money, I agree with greenbackers who want a debt free currency, but prefer a quasi revolving board from all walks of life, transparent on the net to all.

Not the Treasury alone, too political and crony.

https://realcurrencies.wordpress.com/

On Libertarianism, refute this...fooled again by the usual suspects.
https://thedailyknell.wordpress.com/2012/03/11/old-rothschild-and-rockefeller-hands-controlled-the-libertarian-communist-dialectic/

Henry George was right, the Single Tax is the way.

https://en.wikipedia.org/wiki/Henry_George

https://realcurrencies.wordpress.com/2012/01/25/top-ten-lies-and-mistakes-of-austrian-economics/

(Most of our Gold has gone east, hence the wars.) That's is precisely why greenbacks are our answer.

 

Mark_BC's picture
Mark_BC
Status: Gold Member (Offline)
Joined: Apr 30 2010
Posts: 395
Another reason why economists

Another reason why economists push for economic growth-- so that the vast majority of new businesses can succeed. If someone decides to start a new small business and doesn't research the market or manage the business perfectly, then it will fail to its competition. In an environment of growth however, greater and greater sales will help keep that business afloat. Without growth, as many businesses will fail as succeed. Not good for politicians. 

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1369
The biggest problem government has...

The biggest problem government has is never admitting failure.  Much less learning from failure.  How do top sports teams win?  Minimize mistakes.

rabblebabble666's picture
rabblebabble666
Status: Member (Offline)
Joined: Jan 18 2015
Posts: 3
Speculative explanation for Global Economy Erattic Spells

This is a work of speculative fiction which might explain the Deep State control of Global Economy.

Just based on rapid population growth, by 1999 the population was 6 Bn, so by Wiki and other sources, 1716 super intelligent or 'gifted' humans with iQ 175+ would have been born worldwide. Due to different birth environments, 50% might not survive because of war, poverty, disease, etc. Then another 25% would not adapt socially or learn to hide their gift. That would still leave 429 skilled survivors over the last 100 years to prevent boredom by making mischief for the rest of the world.

I would posit many of the predatory capitalist robber-barons from 1850 to 1900 were such gifted humans.  Furthermore 1 or 2 probably started the Federal Reserve idea at the Nov 1910 Jekyl Island meeting which culminated in the Federal Reserve Act of Dec 1913. They or their puppets have been in control or guiding the Fed, IMF, World Bank, BIS, large public and private banks too big to fail or jail, ever since.

Because of communication difficulties these gifted humans (iQ > 175) probably have staff or paid 'front persons' with iQ 130-140, to explain things to us mortals. For example, a 180 iQ could explain a concept to a 140 iQ, who would not have thought of the idea, but can readily grasp it when hearing from the 180. Likewise, a corporate 140 lobbyist can explain a problem to a congressman who then can act in our best interests. There would have been born about 15,000 with iQ 160, with 3750 survivors; so a gifted human could have 3-5 minions to carry out orders.

Super intelligent Ai while held up as scary stalking horses, would not be allowed by the gifted humans. They might provide too much competition; why share the spoils from shadow control of the world economy.

These gifted humans would probably seek each other out socially to help avoid boredom and to some limited extent cooperate in their  long-term goals. From the bumpy road the world has travelled the last 110 years, one can surmise there are 3-5 factions among the gifted, and getting consensus on a project would be 10x times more difficult than herding cats. When a global project has been agreed upon, the implementation would be a lesser hurdle, but significant.

Regards, rabblebabble666

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