A Healthy Economy Needs Risk, Loss, and Failure

The US and Europe stand on the brink of possible recession that will bring job loss and misery. Even if a downturn is narrowly avoided, high inflation and falling asset values have already destroyed wealth and made everyone poorer.

Pandemics happen, and so do market downturns. But some of the pain the world faces today stems from policymakers’ attempts to avoid economic loss in the first place. For the past decade, central banks and governments pursued policies that aimed to eliminate downside risk and ensure stable, predictable growth. But that’s impossible. The next recession should remind us that better policies cultivate resilience to economic setbacks in institutions and individuals instead of trying to avoid loss entirely.

The fallacy that stable, predictable growth is possible isn’t new. Politicians like to promise it, and it’s human nature to delude ourselves into believing we can get something for nothing—growth without the risk of loss. Even smart people fall for financial scammers like Bernie Madoff. But recently the belief that economies can grow without risk became more pervasive and began to guide our policies. Much like in a financial scam, this blind faith won’t end well.