When an aggressive online commentator kept asking Megan McArdle why she was interested in writing about failure, she knew the answer immediately.

“Write what you know,” she joked with the audience at the Hammer Museum.

McArdle, business and economics editor of The Atlantic, argued that “the hidden strength of American society is how good we are at failure.”

B-school to blogging

McArdle’s got a chance to know failure personally when, after getting her MBA at the University of Chicago in 2001, she found herself in a rough job market. “Of course, now people are looking back enviously,” she admitted. Her start date for a job with a consulting firm had been pushed back several months, landing McArdle back at her parents’ house. After 9/11, she began working with a company handling rebuilding near Ground Zero. “I was an executive copy girl,” she said. “I did whatever needed to be done to keep things moving.” Eventually, the consulting firm told McArdle there was no job at all. After searching around for work, she found she had little to do but blog. “I had a lot of anger,” she said. “I was 29 and living in my parents’ spare bedroom, and it’s is exactly as lame as it sounds.” But her blog got her the attention of The Economist, which offered her a gig.

“Failure freed me in a lot of ways,” she said. “I didn’t have anything left. I didn’t have other opportunities so I pursued the one I wanted.”

More spaghetti, please

Many who’ve experience failure, McArdle said, take a similar attitude towards it. She cited psychologist Dan Gilbert as noting in his Stumpling on Happiness that many people cite personal disasters – getting left at the altar, getting fired in a public and humiliating way – as “the best thing that ever happened to me.”

McArdle cited a story about Thomas Edison that, although possibly apocryphal, illustrates the benefits of failure. As Edison worked on trying to make a commercially viable light bulb, he invented thousands of products, none of which worked. When a reporter asked him what it felt like to have failed, he replied instead that he had discovered thousands of things that didn’t make a good light bulb. “That sounds really motivational speaker-y, but discovering what doesn’t work is how you figure out what does,” she said.

Children already know how to do this, as McArdle showed. One famed experiment asked groups of people to build, with masking tape and 25 strands of spaghetti, the tallest possible structure for supporting an egg. Engineers, McArdle said, predictably do well. MBAs “spend all their time arguing about who’s going to be in charge of building.” And it’s the kindergartners who score surprisingly high marks. “They don’t know about rules yet,” she said. “They are the only people who ask for more spaghetti.” Through trial and error, the children build structures that work because they aren’t afraid to fail.

Our minds, McArdle noted, are in fact a product of failure through evolution. “What nature does with its failures is it kills them…You try a bunch of stuff and you kill everything that doesn’t work,” she said.

BP fail

Even if we like failure in hindsight, we don’t like it when we’re confronted with it, McArdle said. Like gamblers, when faced with a concrete loss, we’ll always aim for the win, even if the odds are riskier and the loss potentially greater. The stakes get pretty high, as McArdle noted in Q&A. “This is not going to make me popular, but you can make an argument that the BP failure was what we wanted,” she said. “I don’t know that I believe this argument…but we didn’t want to pay more for gasoline so BP could make all its oil rigs safer.” Extending the gambling metaphor, McArdle said, if we’d been told there was a five percent chance of the spill, and then asked whether BP should safeguard its rigs, “We might have said, ‘Yeah, don’t bother.’”

And as McArdle learned from experience, failure makes everyone else uncomfortable. When talking to classmates about not having a job, she found her classmates angry at her. “You go to school because you’re good at following rules, and you check the boxes, and good things are supposed to happen to you,” she said. “When that doesn’t happen, it’s like someone telling you gravity doesn’t work anymore.…That was terrifying for them.”

No one knows

Our efforts to create systems to avoid failure can backfire by failing catastrophically. A national identification card system, for instance, could be designed to protect against terrorists, McArdle said. But once it’s compromised – whether by hacking or by old-fashioned bribery – it fails in a way that is difficult to contain.

The better option is a system that fails well and prevents catastrophic failure. McArdle noted that economist Joseph Schumpeter had the idea to let companies that fail go out of business instead of propping them up. “This is something the U.S. is good at doing, GM aside,” McArdle said. It’s why Americans are eager to start their own businesses, particularly compared to Europeans. “In Europe, if you’re the head of a business that fails, you’re kind of put out to pasture. You’re not going to starve. But you’re not going to be given another position of authority,” she said. Some U.S. industries, particularly technology, like to see past failures on a resume because those entrepreneurs are likely to do better the next time. (So are the successful ones, but, McArdle added, as William Goldman said about movies, “No one knows.”)

Even the biggest companies have failed, McArdle noted, citing the example of New Coke. Despite three massive and positive market surveys, New Coke lasted 121 days and nearly took down the company. But the project, McArdle said, did end up rekindling everyone’s love for good old Coke.

Learning to love bankruptcy

What institution handles failure well? “The American bankruptcy system is not a much-loved institution, but it should be,” she said, calling it the most generous in the world. The U.S. is the only country that lets those in debt say, “That $100,000 I borrowed? Not gonna pay it. So here’s $795 I have in my checking account, and everyone have a nice day,” McArdle said. The system allows those who have made mistake to get easy access to a court, sort out debts, and start again. It allows corporations to reorganize instead of liquidate their assets, crucial, she said, to preserve knowledge, jobs and capital. And it promotes entrepreneurship, especially in those states that shield their housing assets from seizure. As McArdle put it, a businessman going through bankruptcy might hesitate to try again if it means “his kids on the street.”

The Federal Deposit Insurance Corporation works in a similar way, she said. “They can take a bank that’s failing, move in Friday afternoon, and on Monday morning, it’s open for business. There’s not even a hiccup. We’ve basically ended the bank run,” McArdle said. Of course, she noted in Q&A, our financial system is far from good at failure. Citing the example of the Securities and Exchange Commission in 2004, she said, “They didn’t think contagion could happen in the modern financial market. That was 100 percent wrong.”

As McArdle noted in Q&A, the bankruptcy system could still be expanded to cover states, making for an unpredictable and dangerous system. “When a sovereign goes bankrupt, it is catastrophic,” she said. “I wish there was a way for California to declare bankruptcy.” She also discussed systems that don’t handle failure as well as they could – from the criminal justice system that continues to punish felons who have done their time by restricting jobs and housing, to not entirely successful education and vocational training systems.

The way to fail

For better failure, McArdle reemphasized that systems shouldn’t aim to be failure-proof. To do this, they should recognize that trying more means failing more, and they should spot failure early. Any thing that doesn’t work should be thrown out, and without blame. “We have a powerful instinct for justice and it does us a disservice,” McArdle said. And finally, she said, failure shouldn’t be painful. “Bankruptcy is painful,” she said. “it shouldn’t be so pain-free that people aren’t worried at all. But it should be short and sharp.”

Watch the video here.
See more photos here.
Read Megan McArdle’s In The Green Room Q&A here.

*Photos by Aaron Salcido.