Welcome to the Failure Age!

By Adam Davidson


When you pull off Highway 101 and head into Sunnyvale, Calif., the first thing you notice is how boring innovation looks up close. This small Silicon Valley city, which abuts both Cupertino, the home of Apple, and Mountain View, the site of the Googleplex, is where Lockheed built the Poseidon nuclear missile. It’s where the forebear of NASA did some of its most important research and where a prototype for Pong debuted at a neighborhood bar. Countless ambitious start-ups — with names like Qvivr, Schoolfy, eCloset.me and PeerPal — appear in Sunnyvale every year. Aesthetically, though, the city is one enormous glass-and-stucco office park after another. Its dominant architectural feature, the five-story headquarters of Yahoo, a few minutes from Innovation Way, looks about as futuristic as a suburban hospital.

 
As an industry becomes more dynamic, its architecture, by necessity, often becomes less inspiring. These squat buildings have thick outer walls that allow for a minimal number of internal support beams, creating versatile open-floor plans for any kind of company — one processing silicon into solar-power arrays, say, or a start-up monitoring weed elimination in industrial agriculture. In Sunnyvale, companies generally don’t stay the same size. They expand quickly or go out of business, and then the office has to be ready for the next tenant. These buildings need to be the business equivalent of dorms: spaces designed to house important and tumultuous periods of people’s lives before being cleaned out and prepped for the next occupant.

 
Perhaps the best place to behold the Valley’s success as a platform for innovation is a 27,000-square-foot facility just down the block from Yahoo. This is the warehouse of Weird Stuff, a 21-person company that buys the office detritus that start-ups no longer want. One section of the space teems with hundreds of laptops and desktops; another is overloaded with C.P.U.s and orphaned cubicle partitions. “If founders are in a building that’s costing $50,000 a month, and they’ve lost their funding and have to be out by next Friday, we respond very quickly,” said Chuck Schuetz, the founder of Weird Stuff.

 
Weird Stuff also acquires goods from the start-ups that succeed, when they are ready to upgrade offices and need to offload their old equipment. “We get truckloads every day,” Schuetz told me. He said that he receives a lot of calls from government offices and large corporate-network operators who desperately need, for example, a 1981 Seagate ST506 hard drive in order to keep a crucial piece of equipment running. But much of his stuff is bought by new waves of start-ups in search of inexpensive keyboards or cubicle partitions. What doesn’t move is sold to scrap dealers. “This,” he said, gesturing to the giant scrap bin out back, “is where everything ends up.”
For decades, entrepreneurs and digital gurus of various repute have referred to this era, in a breathlessness bordering on proselytizing, as the age of innovation. But Weird Stuff is a reminder of another, unexpected truth about innovation: It is, by necessity, inextricably linked with failure. The path to any success is lined with disasters. Most of the products that do make it out of the lab fail spectacularly once they hit the market. Even successful products will ultimately fail when a better idea comes along. (One of Schuetz’s most remarkable finds is a portable eight-track player.) And those lucky innovations that are truly triumphant, the ones that transform markets and industries, create widespread failure among their competition.

 
An age of constant invention naturally begets one of constant failure. The life span of an innovation, in fact, has never been shorter. An African hand ax from 285,000 years ago, for instance, was essentially identical to those made some 250,000 years later. The Sumerians believed that the hoe was invented by a godlike figure named Enlil a few thousand years before Jesus, but a similar tool was being used a thousand years after his death. During the Middle Ages, amid major advances in agriculture, warfare and building technology, the failure loop closed to less than a century. During the Enlightenment and early Industrial Revolution, it was reduced to about a lifetime. By the 20th century, it could be measured in decades. Today, it is best measured in years and, for some products, even less. (Schuetz receives tons of smartphones that are only a season or two old.)

 
The closure of the failure loop has sent uncomfortable ripples through the economy. When a product or company is no longer valued in the marketplace, there are typically thousands of workers whose own market value diminishes, too. Our breakneck pace of innovation can be seen in stock-market volatility and other boardroom metrics, but it can also be measured in unemployment checks, in divorces and involuntary moves and in promising careers turned stagnant. Every derelict product that makes its way into Weird Stuff exists as part of a massive ecosystem of human lives — of engineers and manufacturers; sales people and marketing departments; logistics planners and truck drivers — that has shared in this process of failure.

 
Innovation is, after all, terrifying. Right now we’re going through changes that rip away the core logic of our economy. Will there be enough jobs to go around? Will they pay a living wage? Terror, however, can also be helpful. The only way to harness this new age of failure is to learn how to bounce back from disaster and create the societal institutions that help us do so. The real question is whether we’re up for the challenge.

 
After a tour of Weird Stuff, Schuetz mentioned a purple chair that he kept among the office furniture piled haphazardly in the back of his facility. Unbeknown to him, that chair actually provides a great way to understand the acceleration of innovation and failure that began 150 years ago. In ancient times, purple chairs were virtually priceless. Back then, all cloth dyes were made from natural products, like flower petals or crushed rocks; they either bled or faded and needed constant repair. One particular purple dye, which was culled from the glandular mucus of shellfish, was among the rarest and most prized colors. It was generally reserved for royalty. Nobody had surplus purple chairs piled up for $20 a pop.

 
But that all changed in 1856, with a discovery by an 18-year-old English chemist named William Henry Perkin. Tinkering in his home laboratory, Perkin was trying to synthesize an artificial form of quinine, an antimalarial agent. Although he botched his experiments, he happened to notice that one substance maintained a bright and unexpected purple color that didn’t run or fade. Perkin, it turned out, had discovered a way of making arguably the world’s most coveted color from incredibly cheap coal tar. He patented his invention — the first synthetic dye — created a company and sold shares to raise capital for a factory. Eventually his dye, and generations of dye that followed, so thoroughly democratized the color purple that it became the emblematic color of cheesy English rock bands, Prince albums and office chairs for those willing to dare a hue slightly more bold than black.

 
Perkin’s fortuitous failure, it’s safe to say, would have never occurred even a hundred years earlier. In pre-modern times, when starvation was common and there was little social insurance outside your clan, every individual bore the risk of any new idea. As a result, risks simply weren’t worth taking. If a clever idea for a crop rotation failed or an enhanced plow was ineffective, a farmer’s family might not get enough to eat. Children might die. Even if the innovation worked, any peasant who found himself with an abundance of crops would most likely soon find a representative of the local lord coming along to claim it. A similar process, one in which success was stolen and failure could be lethal, also ensured that carpenters, cobblers, bakers and the other skilled artisans would only innovate slowly, if at all. So most people adjusted accordingly by living near arable land, having as many children as possible (a good insurance policy) and playing it safe.

 
Our relationship with innovation finally began to change, however, during the Industrial Revolution. While individual inventors like James Watt and Eli Whitney tend to receive most of the credit, perhaps the most significant changes were not technological but rather legal and financial. The rise of stocks and bonds, patents and agricultural futures allowed a large number of people to broadly share the risks of possible failure and the rewards of potential success. If it weren’t for these tools, a tinkerer like Perkin would never have been messing around with an attempt at artificial quinine in the first place. And he wouldn’t have had any way to capitalize on his idea. Anyway, he probably would have been too consumed by tilling land and raising children.

 
The secret of the corporation’s success was that it generally did not focus on truly transformative innovations.

 
Perkin’s invention may have brought cheap purple (and, later, green and red) dyes to the masses, but it helped upend whatever was left of the existing global supply chain, with its small cottage-size dye houses and its artisanal crafts people who were working with lichen and bugs. For millenniums, the economy had been built around subsistence farming, small-batch artisanal work and highly localized markets. Inventions like Perkin’s — and the steam engine, the spinning jenny, the telegraph, the Bessemer steel-production process — destroyed the last vestiges of this way of life.

 
The original age of innovation may have ushered in an era of unforeseen productivity, but it was, for millions of people, absolutely terrifying. Over a generation or two, however, our society responded by developing a new set of institutions to lessen the pain of this new volatility, including unions, Social Security and the single greatest risk-mitigating institution ever: the corporation. During the late 19th century, a series of experiments in organizational structure culminated, in the 1920s, with the birth of General Motors, the first modern corporation. Its basic characteristics soon became ubiquitous. Ownership, which was once a job passed from father to son, was now divided among countless shareholders. Management, too, was divided, among a large group of professionals who directed units, or “subdivisions,” within it. The corporation, in essence, acted as a giant risk-sharing machine, amassing millions of investors’ capital and spreading it among a large number of projects, then sharing the returns broadly too. The corporation managed the risk so well, in fact, that it created an innovation known as the steady job. For the first time in history, the risks of innovation were not borne by the poorest. This resulted in what economists call the Great Compression, when the gap between the income of the rich and poor rapidly fell to its lowest margin.

 
The secret of the corporation’s success, however, was that it generally did not focus on truly transformative innovations. Most firms found that the surest way to grow was to perfect the manufacturing of the same products, year after year. G.M., U.S. Steel, Procter & Gamble, Kellogg’s, Coca-Cola and other iconic companies achieved their breakthrough insights in the pre-corporate era and spent the next several decades refining them, perhaps introducing a new product every decade or so. During the period between 1870 and 1920, cars, planes, electricity, telephones and radios were introduced. But over the next 50 years, as cars and planes got bigger and electricity and phones became more ubiquitous, the core technologies stayed fundamentally the same. (Though some notable exceptions include the television, nuclear power and disposable diapers.)

 
Celebrated corporate-research departments at Bell Labs, DuPont and Xerox may have employed scores of white-coated scientists, but their impact was blunted by the thick shell of bureaucracy around them. Bell Labs conceived some radical inventions, like the transistor, the laser and many of the programming languages in use today, but its parent company, AT&T, ignored many of them to focus on its basic telephone monopoly. Xerox scientists came up with the mouse, the visual operating system, laser printers and Ethernet, but they couldn’t interest their bosses back East, who were focused on protecting the copier business.

 
Corporate leaders weren’t stupid. They were simply making so much money that they didn’t see any reason to risk it all on lots of new ideas. This conservatism extended through the ranks. Economic stability allowed millions more people to forgo many of the risk-mitigation strategies that had been in place for millenniums. Family size plummeted. Many people moved away from arable land (Arizona!). Many young people, most notably young women, saw new forms of economic freedom when they were no longer tied to the routine of frequent childbirth. Failure was no longer the expectation; most people could predict, with reasonable assurance, what their lives and careers would look like decades into the future. Our institutions — unions, schools, corporate career tracks, pensions and retirement accounts — were all predicated on a stable and rosy future.

 
We now know, of course, that this golden moment was really a benevolent blip. In reality, the failure loop was closing far faster than we ever could have realized. The American corporate era quietly began to unravel in the 1960s. David Hounshell, a scholar of the history of American innovation, told me about a key moment in 1968, when DuPont introduced Qiana, a kind of nylon with a silklike feel, whose name was selected through a computer-generated list of meaningless five-letter words. DuPont had helped to create the modern method of product development, in which managers would identify a market need and simply inform the research department that it had to produce a solution by a specific date. Over the course of decades, this process was responsible for successful materials like Freon, Lucite, Orlon, Dacron and Mylar. In Qiana, DuPont hoped that it had the next Lycra.

 
But not long after the company introduced Qiana to the market, it was met by a flood of cheap Japanese products made from polyester. Qiana, which only came close to breaking even during one year of sales, eventually sustained operating losses of more than $200 million. Similar shudders were felt in corporate suites across America, as new global competitors — first from Europe, then from Asia — shook up the stable order of the automotive and steel industries. Global trade narrowed the failure loop from generations to a decade or less, far shorter than most people’s careers.
For American workers, the greatest challenge would come from computers. By the 1970s, the impact of computers was greatest in lower-skilled, lower-paid jobs. Factory workers competed with computer-run machines; secretaries and bookkeepers saw their jobs eliminated by desktop software. Over the last two decades, the destabilizing forces of computers and the Internet has spread to even the highest-paid professions. Corporations “were created to coordinate and organize communication among lots of different people,” says Chris Dixon, a partner at the venture-capital firm Andreessen Horowitz. “A lot of those organizations are being replaced by computer networks.” Dixon says that start-ups like Uber and Kickstarter are harbingers of a much larger shift, in which loose groupings of individuals will perform functions that were once the domain of larger corporations. “If you had to know one thing that will explain the next 20 years, that’s the key idea: We are moving toward a period of decentralization,” Dixon says.

 
Were we simply enduring a one-time shift into an age of computers, the adjustment might just require us to retrain and move onward. Instead, in a time of constant change, it’s hard for us to predict the skills that we will need in the future. Whereas the corporate era created a virtuous cycle of growing companies, better-paid workers and richer consumers, we’re now suffering through a cycle of destabilization, whereby each new technology makes it ever easier and faster to create the next one, which, of course, leads to more and more failure. It’s enough to make us feel like mollusk-gland hunters.
Much as William Henry Perkin’s generation ripped apart an old way of life, the innovation era is sundering the stability of the corporate age. Industries that once seemed resistant to change are only now entering the early stages of major disruption. A large percentage of the health-care industry, for example, includes the rote work of recording, storing and accessing medical records. But many companies are currently devising ways to digitize our medical documents more efficiently. Many economists believe that peer-to-peer lending, Bitcoin and other financial innovations will soon strike at the core of banking by making it easier to receive loans or seed money outside a traditional institution. Education is facing the threat of computer-based learning posed by Khan Academy, Coursera and other upstart companies. Government is changing, too. India recently introduced a site that allows anybody to see which government workers are showing up for their jobs on time (or at all) and which are shirking. Similarly, Houston recently developed a complex database that helps managers put an end to runaway overtime costs. These changes are still new, in part because so many large businesses benefit from the old system and use their capital to impede innovation. But the changes will inevitably become greater, and the results will be drastic. Those four industries — health care, finance, education and government — represent well more than half of the U.S. economy. The lives of tens of millions of people will change.

 
In the corporate era, most people borrowed their reputations from large institutions. Now, our own personal reputations will matter more.

 
Some professions, however, are already demonstrating ways to embrace failure. For example, there’s an uncharacteristic explosion of creativity among accountants. Yes, accountants: Groups like the Thriveal C.P.A. Network and the VeraSage Institute are leading that profession from its roots in near-total risk aversion to something approaching the opposite. Computing may have commoditized much of the industry’s everyday work, but some enterprising accountants are learning how to use some of their biggest assets — the trust of their clients and access to financial data — to provide deep insights into a company’s business. They’re identifying which activities are most profitable, which ones are wasteful and when the former become the latter. Accounting once was entirely backward-looking and, because no one would pay for an audit for fun, dependent on government regulation. It was a cost. Now real-time networked software can make it forward-looking and a source of profit. It’s worth remembering, though, that this process never ends: As soon as accountants discover a new sort of service to provide their customers, some software innovator will be seeking ways to automate it, which means those accountants will work to constantly come up with even newer ideas. The failure loop will continue to close.

 
Lawyers, too, are trying to transform computers from a threat into a value-adding tool. For centuries the legal profession has made a great deal of money from drawing up contracts or patent applications that inevitably sit in drawers, unexamined. Software can insert boilerplate language more cheaply now. But some computer-minded lawyers have found real value in those cabinets filled with old contracts and patent filings. They use data-sniffing programs and their own legal expertise to cull through millions of patent applications or contracts to build never-before-seen complex models of the business landscape and sell it to their clients.

 
The manufacturing industry is going through the early stages of its own change. Until quite recently, it cost tens of millions of dollars to build a manufacturing plant. Today, 3-D printing and cloud manufacturing, a process in which entrepreneurs pay relatively little to access other companies’ machines during downtime, have drastically lowered the barrier to entry for new companies. Many imagine this will revitalize the business of making things in America. Successful factories, like accounting firms, need to focus on special new products that no one in Asia has yet figured out how to mass produce. Something similar is happening in agriculture, where commodity grains are tended by computer-run tractors as farming entrepreneurs seek more value in heritage, organic, local and other specialty crops. This has been manifested in the stunning proliferation of apple varieties in our stores over the past couple of years.

 
Every other major shift in economic order has made an enormous impact on the nature of personal and family life, and this one probably will, too. Rather than undertake one career for our entire working lives, with minimal failure allowed, many of us will be forced to experiment with several careers, frequently changing course as the market demands — and not always succeeding in our new efforts. In the corporate era, most people borrowed their reputations from the large institutions they affiliated themselves with: their employers, perhaps, or their universities. Our own personal reputations will now matter more, and they will be far more self-made. As career trajectories and earnings become increasingly volatile, gender roles will fragment further, and many families will spend some time in which the mother is a primary breadwinner and the father is underemployed and at home with the children. It will be harder to explain what you do for a living to acquaintances. The advice of mentors, whose wisdom is ascribed to a passing age, will mean less and less.

 
To succeed in the innovation era, says Daron Acemoglu, a prominent M.I.T. economist, we will need, above all, to build a new set of institutions, something like the societal equivalent of those office parks in Sunnyvale, that help us stay flexible in the midst of turbulent lives. We’ll need modern insurance and financial products that encourage us to pursue entrepreneurial ideas or the education needed for a career change. And we’ll need incentives that encourage us to take these risks; we won’t take them if we fear paying the full cost of failure. Acemoglu says we will need a far stronger safety net, because a society that encourages risk will intrinsically be wealthier over all.

 
History is filled with examples of societal innovation, like the United States Constitution and the eight-hour workday, that have made many people better off. These beneficial changes tend to come, Acemoglu told me, when large swaths of the population rally together to demand them. He says it’s too early to fully understand exactly what sorts of governing innovations we need today, because the new economic system is still emerging and questions about it remain: How many people will be displaced by robots and mobile apps? How many new jobs will be created? We can’t build the right social institutions until we know the precise problem we’re solving. “I don’t think we are quite there yet,” he told me.

 
Generally, those with power and wealth resist any significant shift in the existing institutions. Robber barons fought many of the changes of the Progressive Era, and Wall Street fought the reforms of the 1930s. Today, the political system seems incapable of wholesale reinvention. But Acemoglu said that could change in an instant if enough people demand it. In 1900, after all, it was impossible to predict the rise of the modern corporation, labor unions, Social Security and other transformative institutions that shifted gains from the wealthy to workers.

 
We are a strange species, at once risk-averse and thrill-seeking, terrified of failure but eager for new adventure. If we discover ways to share those risks and those rewards, then we could conceivably arrive somewhere better. The pre-modern era was all risk and no reward. The corporate era had modest rewards and minimal risks. If we conquer our fear of failure, we can, just maybe, have both.

 
Source: The New York Times / Nov. 12, 2014

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