Nothing Fails Like Capitalism

WeWork recently slinked into bankruptcy the boring, old-fashioned way, after years of decline following a spectacular flameout by the overhyped office-space “co-working” company in 2019. This failure, combined with the collapse of other venture capital favorites such as Theranos and FTX—whose respective founders were recently convicted of massive fraud—has some people declaring that it demonstrates the failure of capitalism.

But a failure like WeWork is actually proof that capitalism is working. The very size and suddenness of its collapse is a demonstration of capitalism’s self-correcting mechanisms. Nothing fails like capitalism, and that’s the secret of its success.

Failure Is Always an Option

The overhyping of WeWork was definitely a failure by many individual people. Its founder, Adam Neumann, relied on personal charisma and manic energy to cover basic flaws in his business model. Venture capitalists who should have known better were mesmerized into writing billion-dollar checks on a hunch.

The main blame probably lies with Masayoshi Son, founder of the venture capital firm SoftBank. Son has been spectacularly successful before, particularly with an early investment in the e-commerce company Alibaba, China’s answer to Amazon. It was Son who invested $4.4 billion in WeWork after only a short tour, and according to Neumann, the decision was not based on finances or figures but on “our energy and spirituality.”

Incidentally, if you’re looking for a warning sign for fraudulent ventures, it’s not capitalism. It’s a loudly proclaimed allegiance to every social cause except capitalism. Just as FTX’s Sam Bankman-Fried cultivated an image as the “altruist billionaire,” Adam Neumann loudly proclaimed, “Our company is about we and about collaboration. Together, we can build a community that can change the world.” He also made a big deal about the company’s commitment to environmentalist causes and delayed releasing paperwork for its IPO while his ecologically conscious wife tracked down the recycled paper to print it on.

Masayoshi Son also continued to throw good money after bad, propping up WeWork during its collapse, buying out its other venture capital backers and promising undeserved billions in a “golden parachute” for Neumann.

But if Son blew $11 billion on a bad investment, at least it was mostly his own money—he is the largest shareholder of SoftBank—and the money of other wealthy investors who had made huge profits with Son in the past. And they may still do so again, though Son’s reputation will never quite recover.

Yet notice what brought it all crashing down. Capitalism means entrepreneurs and financiers can risk their money on unproven ideas—but it also means they eventually have to produce results. WeWork failed when it was preparing its initial public offering for sale to the general public on the stock market, and it had to produce documents detailing its strategy and its finances. Potential buyers didn’t like what they saw.

It wasn’t so much that WeWork was losing money, which is expected in the early stages of a high-growth venture. It was the fact that it had no plan for how it was ever going to make a profit. Once investors started to have doubts, they began to balk at Neumann’s erratic behavior and hard-partying lifestyle, including widely reported drug use. The “charismatic founder” who had mesmerized investors in the wild world of venture capital scared them off from a launch into the more sober realm of the stock market.

WeWork was famously given an estimated value of $47 billion, which has since crashed to zero. But that doesn’t mean that nearly $50 billion in actual wealth has been destroyed. That valuation was never real. It was all just a projection—a hope rather than a reality. Going up for sale on the stock market would have made it a reality. But the numbers just didn’t add up, and as that became obvious, the fantasy of a $50 billion company evaporated.

This highlights one of the things capitalism is best at: failing. There is nothing better than having companies face the test of the stock market—as opposed to a multi-billionaire venture capitalist’s gut feelings—and making a startup begin all over again from the fundamentals.

And aren’t we all supposed to embrace failure these days? Aren’t we reminded that failure is always an option and that we have to try many different things and constantly push the boundaries to find new innovations? Capitalism has always been good at trying new things, and failing, and then moving on to more successful attempts.

It’s Not a Bug, It’s a Feature

The thing about all those bromides preaching that failure is necessary for success is that they’re true. The fact that venture capitalists try many ventures that don’t pan out is not a failure of capitalism. It’s one of its features. This is true even if some of the failures are predictable and even obvious, at least in hindsight.

Partly this is a good thing because a fool and his money are soon parted. Capitalists who become overconfident based on their past successes will make bad investments, and soon they will have less capital to misuse. But this freewheeling attitude toward new ventures is also necessary because sometimes a dubious enterprise manages to defy the doubts and pay off.

Was WeWork losing money? Well, so was Amazon for most of its early years, when people used to quip that the company was a vast wealth transfer from Wall Street to the American consumer, blowing through billions of dollars of investors’ money year after year just so we could get used to shopping online.

Did WeWork have a charismatic but mercurial CEO? Well, so did Apple, which briefly got rid of Steve Jobs but found it couldn’t do without his vision. (And so does Tesla, which may still turn out to be a problem.) People can’t always tell ahead of time what is a stupid business idea and what is a brilliant one, and who is the next great innovator versus who is a con artist. Over the long run, it’s good to have an economic system that spreads its bets around and values dynamism and experimentation over caution.

Moreover, the basic business idea behind WeWork was not necessarily a bad one, which is why it took another four years to fail, even after the implosion of its public offering. The idea of “co-working” was to provide office space for small companies and startups, pooling them together in a larger space that had all the amenities usually available only for a large company. It was not a bad idea.

The company failed under Neumann partly because he delivered rapid expansion by overpaying for buildings while undercutting everybody else’s prices. This strategy was effective at crowding out competitors, but it could never become profitable. Yet ultimately WeWork failed for reasons that could not have been easily predicted. It was the COVID pandemic, the year after Neumann’s ouster, that finished off “co-working.” We all went home to co-work with the cat—and a lot of us never came back. The pandemic led to a long-term decrease in demand for office space in general, not just for speculative co-working startups. Downtown office buildings are now sitting empty and being converted into colleges or back into housing—which, come to think of it, has the potential to revitalize downtowns in a way that is an urbanist’s dream.

When Failure Is Not an Option

There is a cognitive bias in how we evaluate capitalism. The bias is that we see all the failures in the capitalist economy because we are allowed to see them. It is precisely because capitalism allows ventures to fail that we see these flamboyant crack-ups as they crumble to nothing.

By contrast, under the alternatives to capitalism—various forms of state-managed economy—failed programs continue for years or decades and are constantly being propped up. Back in the 1990s, for example, philanthropist Walter Annenberg raised a billion dollars, half from his own foundation, for a massive effort to improve public schools. It didn't make a dent, but the chairman of its futile $50 million Chicago effort, an up-and-coming young politician named Barack Obama, failed upward to the presidency.

Or take California’s high-speed rail boondoggle, which was slated to take $128 billion to connect Los Angeles to San Francisco. When political interference and mismanagement made that goal unfeasible, the whole project wasn’t allowed to crash to nothing. Instead, the state is still planning to spend $35 billion to build a rail line from Merced to Bakersfield. If you have no idea where those two cities are, and I don’t see why you should, that tells you what a monumental waste this is.

And these examples are not counting the record of even more rigid command-and-control systems, where failures often are not noticed until people are starving to death—and even then, they take years to correct.

Nothing fails like capitalism. It may have its spectacular flameouts, but at least its failures are allowed to fail—and the endless string of private experiments on strange new ideas is an engine of progress.