Wriston, Walter B.
The men and women who founded our country were at once adventurers who took personal risks of the most extreme kind and pragmatists who wrote a Constitution based on the tested theory that men are not gods. No assumptions were made that elected leaders would all be selfless persons devoted to the public interest. Rather, the rock on which our structure rests is a Constitution that diffuses power, lest one person or group grow too powerful. Alexander Hamilton put it succinctly when he said: "If men were angels no government would be necessary." The system they devised based on this assumption about human nature has stood the test of time. Our government has proved to be one of the most enduring in history.
While the constitutional framework set limits on power, the driving force of our society is the conviction that risk taking and individual responsibility are the ways to advance our mutual fortunes. Our Founding Fathers were themselves political adventurers who did not hesitate to sign a document pledging "our lives, our fortunes, and our sacred honor" in pursuit of a brighter future against overwhelming odds. They would have been more than a little surprised to learn that what
|they were really fighting for was a totally predictable, risk-free society.|
Today, however, the idea is abroad in the land that the descendants of these bold adventurers should all be sheltered from risk and uncertainty as part of our national heritage. We seem to have raised a generation of advocates, writers, and bureaucrats to whom the word "risk" is an acceptable term only when used in connection with promoting a state lottery. Emerson's counsel"always do what you are afraid to do"is now rejected as too upsetting, and one should steer the safe, noncontroversial course. One has only to look at the gray stagnation of planned societies where this idea is far advanced to wonder how such a system can continue to attract so much intellectual support. But it does.
It can be argued that if the desire to avoid risk above all else becomes the predominant objective of American society, it may in the end destroy not only our economic system but our form of government along with it. At bottom, democracy itself rests on an act of faith, on a belief in individual responsibility and the superiority of the free marketplace, both intellectual and economic, over anything that might be devised for us by a committee of bureaucrats disguised as guardian angels. There is real reason to fear that those who do not share that faith have, in their efforts to build a risk-free society, not only drained the spirit of our people but already seriously impaired the viability of the most productive economic system the world has ever seen.
This is a relatively new problem for Americans. The whole of this country was opened up by people who were-no less than the Founding Fathers-at once adventurers and patriots. My grandmother, in company with hundreds more, went west in a Conestoga wagon that by today's standards was unsafe at any speed. The environmental problems were enormous. They used buffalo dung to fuel their campfires. Half of the wagon train in which my grandmother traveled was massacred by Indians. But many more followed in their tracks along trails that no government agency today, at a city, state, or federal
|level, would think of certifying as safe for travelers. In fact, the pioneers would probably not even be allowed to settle down at the end of their journey. The sparkling, exciting city of San Francisco was built on a set of hills that could test the footing of a mountain goat. If that were not bad enough, it lies along the San Andreas earthquake fault, which has already destroyed it once. No modern urban planner could possibly approve the building of San Francisco today. The risk would be considered too great.|
The unremitting atmosphere of protective custody which now seems to surround us is producing a new kind of national mood. The American spirit of optimism and enterprise is being overwhelmed by a malaise that was best described by the English journalist Henry Fairlie, who wrote:
If the American people for the first time no longer believe that life will be better for their children, it is at least in part because they are beginning to think that there will be no food which their children will be able to eat without dying like rats of cancer, no form of transport that will be considered safe enough to get them from here to there, and in fact nothing that their children may safely do except sit like Narcissus by a river bank and gaze at their wan and delicate forms as they throw the last speck of Granola to the fish.
This is a far cry from the spirit of enterprise that turned a raw continent into a great nation. Of course, there have always been those among us who bewail all forms of risk: political, economic, or personal. They are the ones who have never understood the Biblical injunction "For whosoever will save his life shall lose it." But in those days people of little faith did not have a nationwide, instant electronic forum for their timid views, or the power to enforce them upon others.
This growing thirst for an impossible physical and economic security has a direct bearing on whether or not we will maintain our spiritual and political freedom. The relevance of
|risk to liberty is direct and clear. For in the end, it always turns out that the only way to avoid risk is to leap into the arms of an all-knowing government. George Gilder put it best when he wrote that "risk and uncertainty are seen to be the problem, and government the solution in the fail-safe quest for a managed economy of steady and predictable long-term growth."|
If you carry this logic to its bitter end, it all gets reduced to the motto under the picture of Mussolini that was plastered throughout Italy at the height of his power. It said: "He Will Decide." The responsibility no longer belonged to the individual. The leader would decide.
The pattern is always the same. A bureaucracy is put in place to coerce the people into doing something for "their own good." The bureaucracy then assumes a life of its own and the coercion continues as the bureaucracy's primary task long after the original purpose has been forgotten.
The Securities and Exchange Commission was created in response to a felt need to protect the investor against fraud. It was a worthy objective, but little by little its role was expanded until it attempted to dictate everything, from how a board of directors should govern a company to how lawyers should exercise their professional judgment. That kind of excess of zeal is not new. The ultimate in what now seems to be the trend in corporate governance was achieved by the City Bank of New York in 1844 when it had nine employees and fifteen directors who assisted in the day-to-day operations. If today's Citibank is obliged to revive that ratio, it is going to end up with one hundred thousand directors for its sixty-three thousand employees.
Our American economic system, like our political system, is untidy-it offends those people who love tidy, predictable societies. We make a lot of mistakes in this country, we have a lot of failures. Some people see only the failures; they cannot seem to grasp the fact that the failures are the price we pay for the successes. It's as though they wanted to have "up" without "down," or "hot" without "cold."
We read in our newspapers, and even in our business magazines, solemn words about "risky investments" and "risky loans," from writers who do not seem to realize that these phrases are as redundant as talking about a one-story bungalow. All investments and all loans are risky because they are based on educated guesses about the future, rather than certain knowledge of what will happen. Despite the most sophisticated market research, no one really knows if the public will buy a product or use a service that we are about to produce. The result might be a failure like the Edsel, with a four-hundred-million-dollar price tag, or it might be Peter Goldmark's long-playing record, which is in almost everyone's home. It could be the decision of a Joe Wilson, risking all the resources of his small company to make a copier later called Xerox, and doing it in the face of a careful study which showed that it would be a bad substitute for the familiar carbon paper.
The odds against success of any kind in our society are formidable. Some three hundred thousand businesses are started each year in the United States and only one-third of them survive as long as five years. Proponents of a safe, stagnant, boring tomorrow view this as a wasteful process, to say nothing of its being irrational. On the contrary, it is the secret of economic growth, because no one knows which venture in an endless stream of innovation and enterprise will succeed.
Our Founding Fathers understood this principle. Their industrial policy was simple and straightforward. It was to promote entrepreneurship by federally granted patents, or in the words of the Constitution: "The Congress shall have the power to promote the progress of science and useful arts by securing for ... authors and inventors the exclusive right to their respective writings and discoveries."
They were motivated by the notion that people who do creative work should be rewarded for it-because it would encourage creativity. This section of the Constitution was put into practice by the act of 1790 that created a patent board, consisting of the Secretary of State, the Secretary of War, and
|the Attorney General. It was a prestigious group: Thomas Jefferson, Henry Knox, and Edmund Randolph. As he watched the flow of ideas, Jefferson later said, the patent law gave "a spring to invention beyond my conception."|
Abraham Lincoln, who himself obtained a patent, later observed that "the patent system added the fuel of interest to the fire of genius."
Our government servants who administered the Patent Office did not always have the vision of the entrepreneurs who burdened them with new ideas. Henry Ellsworth, the commissioner of patents in 1844, opined that the flood of inventions seemed "to presage the arrival of that period when further improvements must end." Later, a director of the Patent Office urged President McKinley to abolish the office, since "everything that can be invented has been invented."
Since the first patent was granted on July 31, 1790, to one Samuel Hopkins for a method of making Pot Ashes, well over four million patents have been granted.
Although I cannot build a model for you today within a twelve-inch square, as used to be required, I would submit that we have before us a living model of a perpetual-motion machine in America, and that those who learn how to manage and encourage it will survive and those who can't or won't will not. The machine is not physical but social. The Darwinian theory of change and renewal, or extinction as the alternative, is as true of corporate life as of biological life. The constant change in the names and rankings of the companies in Forbes 500 is a contemporary scoreboard of those companies that adapt to a new world and those that do not.
Large companies often build expanding bureaucracies which, like all bureaucracies, need to grow to protect the bureaucrat's turf. Eventually most bureaucracies come to view new ideas and products with alarm. It has been said that the first priority of every bureaucracy becomes the protection of its own members. The layers of management, and the growing length of memos answering other memos, and the decline of face-to-face conversation, all work to curb innovation. And
|without innovation, companies die over time. One of the central tasks of management, therefore, is to overcome or thin out the underbrush, and to keep alive and well the spirit of entrepreneurship. This spirit can invade both products and marketing. Many successful products were invented before there was any demand for them. The parachute, for example, appeared about three hundred years before the airplane.|
Among the discoveries that no one anticipated needing until they suddenly arrived were X-rays, radio and television, photography, sound recording, Einstein's relativity theory, transistors, lasers ... the list is almost endless. The telephone was not something the public clamored for at the time. In 1879, Sir William Preece, the chief engineer of the British Post Office, testified in the House of Commons that the telephone had little future in Britain. "There are conditions in America which necessitate the use of such instruments more than here," he said. "Here, we have a superabundance of messengers. The absence of servants has compelled Americans to adopt communications systems."
Looking back, it is clear that these judgments are partly funny and partly tragic, but most companies are still making similar decisions about tomorrow's markets.
It is no accident that of the roughly twenty million new jobs created in the U.S. in the last decade, all but about one million were created in new or small entrepreneurial businesses. The explosion of today's technology and marketing is not entirely unlike the explosion of mechanical devices in the late nineteenth century and will no doubt have just as profound an effect.
Our bookshelves today are piled high with books warning us that the pace of change has become too much for human beings to tolerate, that it is not just risk that people fear but the future itself. We are being overwhelmed, we're told, by new technology. When we see what the computer has done and is doing to the world, and consider that it was invented in 1945, this argument may seem plausible. But go back a hundred years to 1846 and the argument falls apart.
That was the year Brigham Young led the Mormons out of Illinois on the way to Utah-and coincidentally the year that saw the invention of the sewing machine and the steel moldboard plow. Historians have called the period that began then and lasted until the outbreak of World War I the heroic age of invention. From the sewing machine in 1846 to the radio vacuum tube in 1911, a major new invention appeared on the average of every fifteen to eighteen months, and was followed almost immediately by a new industry based on the invention. That's what the last half of the nineteenth century was like, but there were not many voices then crying, Stop the world-I want to get off.
There were a few, of course. Not long after Lee De Forest invented the vacuum tube amplifier, he was arrested for stock fraud. He'd been going around saying that his invention would be able to transmit the human voice across the Atlantic. At his trial, the prosecuting attorney declared: "Based on his absurd and deliberately misleading statement, the public, your Honor, has been persuaded to purchase stock in his company.
The jury acquitted De Forest, but the judge admonished him to forget his crackpot inventions and go "get a common, garden-type job and stick to it."
You cannot save something that has not been born, and the saviors are rarely equipped to be the mothers or fathers. The model for perpetual motion is the marriage of management with entrepreneurship. This requires the willingness to listen, to take risks, to realize that some new products or services are customer driven, and some are supply driven. Aluminum, for example, was supply driven. Aluminum pots and pans were not produced in large volume until almost fifty years after the invention, and more decades passed before the airframe manufacturers would call on aluminum-makers to supply many parts. It was, for years, a substance looking for a market. On the other hand, when the world began running out of silkworms, DuPont quickly invented nylon to keep women supplied with stockings.
Then there are some things invented for one purpose that end up doing something else. The phonograph is a case in point. When the telephone was invented, voices could not be transmitted very far, so the idea of a repeating station presented itself. Thomas Edison invented the phonograph as a repeating station. He believed that very few people would be able to afford a telephone and that their messages could be recorded in a central place where one could come and hear them as one would go to a post office to collect mail. He also believed that the most profitable use of the phonograph would be by lawyers recording their clients' last wills and testaments. For this, and doubtless other reasons, it took almost fifteen years to recognize that the phonograph might have a potential for home entertainment.
In what he later admitted to be his greatest mistake, Edison also opposed the use of alternating current-possibly because he already had a large investment in the direct current generators that he had invented. Even Homer sometimes nods.
On a more mundane plane, a whole business was conceived by a man watching college students throwing pie tins to each other instead of returning them to Frisbee Pie Company in Bridgeport. This man, Morrison, took the idea to the Wham-O Company, which made and marketed them by the millions. The Frisbee Pie Company is no more, but the WhamO product lives on. It's not exactly a high-tech piece of hardware-some may not judge it to be socially useful-but it has created jobs and profits for those who saw its commercial prospects.
When we think about how to measure growth and momentum, we have to acknowledge that some markets are oversupplied-like steel, which is now being produced by eighty-five countries-and some markets are just emerging, like that for one-megabit silicon chips. Some countries try to preserve industries when there is gross overcapacity and some let the market work as new jobs take the place of old. How, then, do we stay in the survivors' column? In my view, we do it by creating a climate in which innovation can grow, and that
|means planning for the longer-term change, applauding change, not fighting it.|
When we perceived, some years ago, that if consumers were paid a fair return on their savings there was no way a brick-and-mortar branch network could earn any money for bank stockholders, we invested heavily in technology for our Citicard machines. We were told by experts in other financial institutions, by financial analysts, and, of course, by the media that (a) older people would not use them, (b) younger people would not use them, (c) men would not use them, and (d) women would not use them. As it turned out, none of the above was true, and Citibank alone now handles seventy million transactions a year over its electronic network. We created a customer and built a profitable consumer business when others were getting out of the market.
Most good ideas come from customers who want something new, or want what you sell packaged in a better way, or want it faster at a cheaper price. But there also things the customer does not know he wants, like Frisbees or X-rays, which have to come from the innovators.
Let's go back a moment to Economics 101. We were taught in those days that there are various ways to earn a living. Work, and you get wages. Own some real estate, and you get rent. Have some money, and you can deposit it with your friendly neighborhood banker and collect interest. Notice that we have not mentioned profit.
If wages come from work, rent from real estate, and interest from savings-where do profits come from? The answer is that profits come from risk. The essential difference between the bureaucrat and the entrepreneur is the willingness to take risks. But without the risk-takers, the bureaucrats will ultimately have nothing to administer or regulate.
Obviously, there are unacceptable risks. But the fact that risk is a four-letter word does not mean that we should ban it from our vocabulary. It is the engine that makes the perpetual motion machine work.
The great economist Joseph Schumpeter addressed this
|problem back in 1942. He imagined a world in which Henry Ellsworth, the patent commissioner of 1844, finally turned out to be right. We arrived at "that period when further improvement must end" or when "everything that can be invented has been invented." Here's what Schumpeter predicted:|
A more or less stationary state would ensue. Capitalism, being essentially an evolutionary process, would become atrophic. There would be nothing left for entrepreneurs to do. They would find themselves in much the same situation as generals would in a society perfectly sure of permanent peace .... The management of industry and trade would become a matter of current administration, and the personnel would unavoidably acquire the characteristics of a bureaucracy.
The people who insist on seeing only the failures have still another debilitating effect on our society: they frequently manage to make us feel guilty even about our successes.
Malaria, for thousands of years the number one killer of human beings, was finally brought under control after World War II by DDT. But instead of hearing about the tens of millions of human lives that have been saved over the past forty years, we are told about the damage to our natural environment. Concern for the environment is obviously justified, but the highly publicized demonstrations, complete with rock stars and movie actresses, would have us believe that man, and particularly his technology, is single-handedly polluting what would otherwise be a pure and benign nature, something like Disneyland on a nice day in September. Michael Novak has reminded us that this just is not so. He writes:
Nature was raw and cruel to nature long before human beings intervened. It may be doubted whether human beings have ever done one-tenth of the polluting to nature that nature has done to itself. There is infinitely more methane gas-poisonous in one respect and damaging to the environment-generated by the
|swamps of Florida and other parts of the United States than by all the automobile pollution of all the places on this planet. In our superhuman efforts to be nice and feel guilty, we sometimes try to take all the credit for pollution improperly.|
Be nice, feel guilty, and play safe. If there was ever a prescription for producing a dismal future, that has to be it. It is a sure prescription for the demise of our way of life.
It is almost impossible to exaggerate the importance to the general welfare of the willingness of individuals to take a personal risk. The worst thing that can happen to a society, as to an individual, is to become terrified of uncertainty. Uncertainty is an invitation to innovate, to create; uncertainty is the blank page in the author's typewriter, the granite block before a sculptor, the capital in the hands of an investor, or the problem challenging the inventive mind of a scientist or an engineer. In short, uncertainty is the opportunity to make the world a better place.
Despite this, everything in our national life today seems designed to encourage our natural caution. The tax structure discourages the innovators, penalizes the successful, and preserves the inefficient. Even many medicines in common use around the world to prevent human suffering are denied to Americans on the slender grounds that an overdosed mouse has contracted a tumor. This is not prudence. Prudence is one of the intellectual virtues, and there is very little intelligence to be found in all this. It is institutionalized timidity, and I submit that it does not represent the will of the vast majority of the American people.
If we observe the world around us, Americans as individuals seek out risk. Every child who plays football, or hockey, or any other contact sport, risks injury. There is no shortage of test pilots for new aircraft, nor of candidates for any of the other hazardous jobs in our society, including the job of President of the United States. If we perceive that life is too easy, we put sand traps and other obstacles on the golf course and
|create artificial hazards where none exist. In short, risk is a necessary part of life and one that belongs on our list of natural rights.|
Let those who seek a perpetual safe harbor continue to do so. Let them renounce risk for themselves, if they choose. What no one has a right to do is renounce it for all the rest of us, or to pursue the chimerical goal of a risk-free society for some by eliminating the rewards of risk for everyone.
The society that promises no risks, and whose leaders use the word "risk" only as a pejorative, may be able to protect life, but there will be no liberty, and very little pursuit of happiness. You will look in vain in the Federalist Papers, the Declaration of Independence, or the Constitution for promises of a safe, easy, risk-free life. Indeed, when Woodrow Wilson called for a world safe for democracy, it was left to Gilbert Chesterton to put that sentiment in perspective. "Impossible," he said. "Democracy is a dangerous trade."
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|THE INDIVIDUAL AND SOCIETY|
|THE BUSINESS/GOVERNMENT CONNECTION|
|OBSERVATIONS FROM THE GLOBAL ATTIC|