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December 07, 2014

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peter Corbett

Fundamental flaw in your opening:

However, there's an assumption here - that the environment is stable, so that firms that are maximally adapted to their environment yesterday will be maximally adapted today.

The WHOLE POINT of Darwinian thought is that the environment is NOT stable, so life-forms (companies, in this case) have eitehr to be constantly evolving to cope - or wither and die.

So, since that, most elementary, basic, and fundamental bedrocks on which Darwin's profound Theory is based has not been appreciated, the rest that follows cannot be worth reading.

0/10 - go back to 'O'level Biology - I accept GCSE is banal in comparison.

An Alien Visitor

Competition begets monopoly begets competition.

The way this article poses the problem means that it is not instability but a stable environment that creates problems, so a stable environment is large monopolistic firms dominating and reducing competition.

And when you have competition the tendency is to eliminate competition. And when you have stability this leads to instability. A vicious circle.

But you don't even pose the right problem in this regard. Yes, you can have firms producing at maximum efficiency but what if they are producing shit no one really needs at maximum efficiency, while things people really need are not being delivered anywhere to the required level or standard? And what happens outside the sphere of firms producing stuff for a profit? E.g. No firm as far as I can tell regards it as inefficient that I have to spend 2 hours on the bus everyday going to and from work, but inefficient it is. No firm as far as I can tell regards the car as inefficient but it is.

So please don't give me such bollocks as competition leads to an optimum allocation of resources. Please just don't.

e

Thank you Chris, your links always offer an interesting trail around a given topic. They amount to an aid to understanding. You’re saying, I think, there’s much to be said for not killing off the opposition entirely. Given that the natural world’s ‘miracle’ of evolution is underpinned by diversity – gargantuan levels I believe – for me today's blog begs the question, just how dominant is crude Darwinian thought in economics?

Frances Coppola

The Darwinian analogy is interesting. The history of evolution shows that the struggle for survival actually creates repeated cycles of dominance which in the latter stages involves mass extinction of less successful species, and ends in a crash which wipes out the dominant species,usually because it is unable to adapt to rapid exogenous change. Apply that sort of thinking to business, and you do not have a stable equilibrium. You have repeated boom-bust cycles driven by monopolistic behaviour which is ultimately unsustainable because it feeds on itself. Put simply, Darwinian evolution and the game of Monopoly are the same thing.

Brett

He gives the example of a cobweb cycle. Low wages will select in favour of labour-intensive firms, but this will lead to higher labour demand and rising wages which select against labour intensive firms. Thus we get a boom-bust cycle of inflation and deflation.

Isn't technology and capital the way out of that cycle? All you need is for some firms to latch on to labor-saving technology in a rising wage period, and then survive through the next downturn.

Instead, it is perhaps to defend the real world in which market forces don't select very strongly.

I'd say it's more that negative selection dominates positive selection (i.e. it's more important that weak firms are allowed to be culled than strong firms are planned for - shotgun a bunch of new companies out there and let them get weeded out).

chris

@Peter - sorry, I wasn't clear. I was attributing the assumption of a stable environment not to Darwinism, but to the Econ 101 view that advocates competition.

Luis Enrique

Yep, there is a related line of thought that a certain amount of monopoly power is required to motivate innovation

I like the idea about not killing off unfit types in case the environment changes in their favour. Are there policy implications? Can't immediately think. Subsidising loss making firms sounds like a bad idea

Roy Lonergan

Chris

There's another problem the Darwinian analogy on top of Peter's one. You are, I think, positing that economic Darwinism can get a sub-optimal result in period 2 if firms have adopted to period 1 conditions. The problem is that actual evolution doesn't have that sort of hindsight. It doesn't have any goals or any view of progress. It's simply variations in a selection space. Peter is wrong in that it doesn't need any change of environment to operate. The same environment will operate on random mutations: for example on average we are less intelligent than out parents but more intelligent than our grandparents - even in the same environment.

An interesting question then is what sort of mutations do firms show and how does the economic environment act on them? And how would a smart firm react to the existence of a selection space?

Roy

Roy Lonergan

Luis

In biology it sort of boils down to a question of the most efficient use of energy/resources. Move that back to economics and it may be that there is an efficient strategy that keeps some variations away from "best" in period 1 so that the variable bit May be effective in period 2.

Or is that just called a robust strategy?

Roy

rogerh

Trying to squeeze the maximum out of a system tends to introduce instability. But systems such as the fire department, the military, A&E departments and power supplies must have some degree of slack in their systems otherwise step changes in circumstance cannot be adequately handled. To consider this 'slack' as inefficiency and to eliminate too much of it is to miss the point. We now know banks must be added to the list (we could have guessed it!).

Herein lies the difficult job, banking CEOs were pushed by competition and greed into squeezing the max and saying 'go hang' to stability. The maths says you can crank up the system gain beyond safe limits until some little perterbation comes along - when all hell breaks loose. That is what makes is hard to decide where the limits are - stability testing anyone? Another and possibly more reliable approach is diversity - especially when the system details cannot or will not be understood.

rogerh

perturbation even

An Alien Visitor

All evolutionary processes work within a given environment. The analogy is, change the environment and you get different results. This is the answer to greedy bankers for example, they can only operate if the environment allows it - don't allow it!

Metatone

@Luis Enrique

I think the first priority has to be addressing the rise of ever more tightly coupled networks. Rather than subsidy, this is more about reinstating regulations which were viewed as inefficient, but created discontinuities in the network. From this point of view, arbitrary divisions like that between "retail" and "investment" banking are probably worth another look.

On the question of subsidy, I think there are a few obvious things to consider. Philosophically I think society is getting to the point where we can talk about individual subsidy - or a basic income. If each individual and/or family can survive irrespective of the state of the job market, perhaps we're in a better position to deal with the punctuated equilibrium?

Another approach from history is to consider sectoral, rather than firm level subsidies. In effect, Germany and S. Korea both subsidise various parts of the manufacturing (with a heavy emphasis on exports). There are downsides to this, yet at the same time, if we're supposed to take the caterwauling about current account and balance of payments issues seriously, there's something here to be considered.

There's the added resilience factor that if local industry is maintained, it can pick up some of the slack when trade terms go bad.

Of course the counter-argument is that in Britain we've seen the classic error - government picked the wrong sector: we've been subsidising finance since the early 80s and it has led to more instability not less. However, if we could develop an economics of the system that isn't in thrall to the financial sector, we might be able to break out of that trap.

Still, the other obvious sectors are energy and water supplies. If you could improve domestic generation or usage, you could probably improve balance of payments. Also, once you are energy/water independent, you open up a greater range of exchange rate policies. If you have enough energy you can substitute many raw materials. This could be another buffer contributing to greater resilience.

rogerh

The cobweb effect is seen in agricultural markets, risks of boom/bust are held down by futures contracts - less profit but more assured. But mainly extend over 1 season - so risk is limited on either side. To extend the idea over say 5 years for banking profits say brings changes in financial environment into play - too risky and too much of a strait-jacket for most.

@Metanone, the classic error of depending on finance - that was the post industrial mantra/easy option peddled by clever people everywhere. Worked for a while and what other options were (and are) there? Another hard question.

@Alien, back to the classic punchbowl effect, even if we knew how we probably wouldn't take the electoral pain - until the market delivered it anyway.

An Alien Visitor

"back to the classic punchbowl effect, even if we knew how we probably wouldn't take the electoral pain - until the market delivered it anyway."

You have completely lost me with this but judging by your previous comments I will assume you are providing some form of sycophantic service to the filthy rich and it's hangers on.

Nanostring

That's such BS! There are many life forms that have evolved for survival in varied conditions... And then, bringing up the financial crisis: that was not survival of the fittest, rather it was the financial management class rigging the process to maximize bonuses and compensation at the expense of the survival ability of their corresponding firms. The problem is that the system survived, through a massive government bailout, not that it got destroyed. It didn't.

Seb

"You might think this trade-off can be mitigated by good management: if managers can see shocks coming they can adapt in advance. In the real world though, this might not be possible; as Ormerod and Rosewell pointed out in 2006, "firms have very limited capacities to acquire knowledge about the true impact of their strategies" - a claim corroborated by the banking crisis.

The point of all this is not necessarily to argue for state direction of the economy. If bosses can't know much, nor perhaps can governments: "

The thing is that although managers (and government) may not be able to predict timing, size and direction of future shocks they can, surely, ensure against a range of possibilities but might have little (or at least not enough) incentive to do so. And this is something that government can do something about.

Stevenclarkesblog.wordpress.com

To what degree do pre-existing firms adapt to a changed environment, or do new firms emerge in a new environment they are better fitted to?

(i.e. to stretch the evolution analogy a little too far- is there a lot of Lamarckian evolution, with firms changing drastically to fit a changed environment, as giraffes were supposed to have stretched their necks the more they reached high leaves?!)

Kaleberg

Anyone who has studied Darwin's theory knows that it says nothing about optimality. It's about the ability to survive and reproduce. It doesn't matter how poorly this is done, as long as it is not done so poorly that no organism of the kind leaves any descendents. Even in a competitive environment, you expect to see a gamut of species, all getting by.

Darwin's theory not only doesn't guarantee optimality, it doesn't even explain everything. If it doesn't make a selective difference, then it isn't subject to selection. There are lots of things that are just so or because that's how great^N grandma did it or are a side effect or an artifact of history or development.

It's the creationists who tend to argue about optimal organisms, as an organism less than optimal is seen an insult to its creator.

If you transfer this to economics, you expect to find all sorts of sticky things, like corporations and industries well past their sell date, but not subject to sufficient selective pressure for change. You expect to find neutral drift, where things change, but it doesn't matter. What you don't expect to find is optimality.

(There's another problem with economics and its pursuit of the optimal. Economists assume that every game is "king of the hill" for a simple convex hulled hill. In reality, the "landscape", as evolutionary biologists call, is much more complicated. Hill climbing doesn't always get you to the summit.)

Kaleberg

Also, where does this Darwinian "competition" thing come from? Some organisms compete, but most evolve to cooperate. If you are a eukaryote, like most of us, your cells are complexes of multiple cooperating organisms. If your mitochondria and your nuclei start competing, you'd probably die. If you out-competed your mother, you wouldn't have been born.

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