Free to Fail
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Free to Fail

Creative Destruction Revisited

Hugh van der Mandele and Arjen C. van Witteloostuijn

This challenging book tackles one of the most fundamental questions in economics: Why are commercial organizations more efficient than organizations in the public domain?
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Chapter 6: Causes of organizational failure

Creative Destruction Revisited

Hugh van der Mandele and Arjen C. van Witteloostuijn


This book is about the causes and consequences of organizational failure. By failing organizations, we mean organizations that, if they survive at all, survive for reasons that have nothing to do with their contribution to society. Such a contribution can consist of either transforming less scarce resources into more scarce products and services, or of performing a service to the community, the value of which exceeds the cost of keeping the organization alive. However, many organizations fail to do so. Oftentimes, these organizations die, and are no longer active; but quite often, failing organizations linger on for years and decades without any prospect of recovery. In this chapter, we will briefly review the key causes of such failure that circulate in the academic literature. In Chapter 1, we already referred to an obvious candidate of macroeconomic causes of organizational failure, a Keynesian quantitative drop in demand hitting the whole economy. In contrast, Schumpeterian causes are rooted in structural issues, particularly changes in technology, in the scarcities of both inputs and outputs, and in the ‘rules of the game’. We will describe these external causes of organizational failure in the first part of this chapter.

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