Natural selection in companies

Johann Hari describes the theory (fact) of evolution through natural selection as “the greatest insight of any human being so far.“ This sort of claim has always struck me - and I suspect most economists - as a gross exaggeration. The notion that competition can drive selection is mundane; it happens in economics all the time. Indeed, both Darwin and Wallace* were both inspired by Malthus. In his autobiography Darwin wrote:

I happened to read for amusement Malthus on Population, and being well prepared to appreciate the struggle for existence which everywhere goes on from long-continued observation of the habits of animals and plants, it at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones to be destroyed. The result of this would be the formation of new species. Here, then, I had at last got a theory by which to work.

And in his, Wallace wrote:

One day something brought to my recollection Malthus’s “Principles of Population,” which I had read about twelve years before. I thought of his clear exposition of “the positive checks to increase”—disease, accidents, war, and famine—which keep down the population of savage races to so much lower an average than that of civilized peoples. It then occurred to me that these causes or their equivalents are continually acting in the case of animals also…Vaguely thinking over the enormous and constant destruction which this implied, it occurred to me to ask the question, Why do some die and some live? And the answer was clearly, that on the whole the best fitted live.

I suspect many hold Darwinism in the awe they do precisely because they are not economists. They don’t appreciate that order can emerge from “blind” processes, without conscious design.
What’s more, it’s not sufficiently appreciated just how close the similarities are between natural selection in biology and the way the market selects among companies. I have three analogies in mind:
1. It’s survival of the fittest, not growth of the fittest. Just a species might be well adapted to its environment and yet remain few in number because of, say, limits upon its food source, so a firm might be quite efficient, but stay small. To take just one example, Aga Rangemaster has for years been excellent at what it does, and yet it is only just big enough to get into the FTSE 350. In this superlative review, Alex Coad writes:

Whilst there is ample evidence suggesting that low productivity helps to predict exit, productivity levels are not very helpful at predicting growth rates. Put differently, it appears that selection only operates via elimination of the least productive firms or establishments, while the mechanism of selection via differential growth does not appear to be functioning well…many of the more productive firms may not actually seek to grow, or may be unable to grow.

2. Size is no predictor of success.  Big species can die out if their once-abundant food source becomes scarcer - as the dinosaurs discovered. The same is true of companies. John Kay, drawing on work (pdf) by Leslie Hannah, has written: “In the long run, most large companies fail…The view that scale is an insurance against decline is not a complete misconception.”
3. Selection is blind. Paul Ormerod estimates (pdf) that the distribution of the death of US firms looks very much like the distribution of the extinction of species - it’s a power law, with a few periods accounting for the majority of deaths.
This has a profound implication. Species, of course, cannot foresee that they’ll become extinct and cannot consciously do anything to avoid it. Maybe the same is true of firms.
* I like to think of Wallace as the begetter of the theory of natural selection, as this would mean that the two biggest ideas in the natural sciences - the other being Newtonian physics - both originated half an hour down the road from where I’m writing.

Comments

[dearieme]

Historians of these matters opine that neither Wallace nor Darwin was the first scientist to formulate the idea.

[kinglear]

The assumption would be that companies CAN do something about decline. However, the blind belief in their own PR has, before now, brought many to their knees - most recently Northern Rock

[kinglear]

The assumption would be that companies CAN do something about decline. However, the blind belief in their own PR has, before now, brought many to their knees - most recently Northern Rock

[Blissex]

«blind belief in their own PR has, before now, brought many to their knees - most recently Northern Rock»

Well, while some corporate surpremos do drink their own Kool-aid, those few I could have some candid conversation with seemed to me thoroughly cynical and sounded as if they knew that maximizing their income and minimizing their risks means behaving AS IF they believed their own PR.

After all it can be said that the watchword in corporate management circles is "tunneling", and nowhere more so than in bonus/option fueled compensation at banks.

In particular in the UK, just about the only legal responsibility of directors (except finance directors) is to BELIEVE that they are acting in the company interest, and that the belief be justified, well founded or even merely reasonable is not required at all AFAIK.

Demonstrating a huge amount of belief in one's own PR irrespective of circumstances or evidence therefore becomes pretty essential :-).

[ajay]

Your metaphor is unclear: in 1) you say that small company = species small in numbers (due to habitat limits for example) and in 2) you say that large company = species whose members are physically large (but, necessarily, few in number).

I think, also, you are being too hasty in dismissing the size of Darwin's insight. The point is not that it was terribly obvious in retrospect. TH Huxley is supposed to have exclaimed "How very stupid of me not to have thought of that!" when he heard the theory. The point is that no one had thought of it before.

It also has tremendous explanatory power - unlike, well, any economic theory.

Companies can merge and change rapidly, and can have several disparate activities - there's no natural equivalent of something like the French missiles-and-magazines group Lagardere.

But your biggest mistake is your omission of conscious thought from your comparison. Companies are run by people, who are able to plan for the future. Evolution has no ability to do so.

[Larry Teabag]

There's definitely something in what you say. But...

[I suspect many hold Darwinism in the awe they do precisely because they are not economists.]

Economists have less claim to the "order out of chaos" phenomenon than scientists, not only biologists, but also cosmologists. However much you may talk it down, economics depends on conscious beings striving to establish some sort of order - namely one in which they are successful. Science doesn't.

[The notion that competition can drive selection is mundane;]

It isn't that competion *can* drive selection - all but the toughest creationist nut will acknowledge this. It is mundane. What's awe-inspiring is that this phenomenon - alone - is enough to account for the entirety of life on earth, in all it's variety and complexity. (Both of which infinitely outstrip anything you'll see in economics.)

A final point about great insights: there is an extent to which the initial thought behind evolution was pretty obvious, as your Wallace quote suggests. But you could make the same argument about Descartes, Copernicus, and maybe Newton. But it's only really obvious when you approach the question from the correct angle, which may be clear now, after the fact, but wasn't at the time. And then they had to follow the initial idea to its natural conclusion - diametrically against all established wisdom - finally arriving at something which is very far from obvious indeed.

[David Duff]

No, it's still a theory not a fact, and Malthus's notions of population seem to have gone somwhat awry in the real world where populations in the west are falling, not because wars, famines and so on, but because of prosperity! Poor old Darwin, with friends like Malthus who needs evangelical enemies?

[Larry Teabag]

[populations in the west are falling, not because wars, famines and so on, but because of prosperity!]

It would be more accurate to say that populations are falling because of birth control.

[ajay]

"No, it's still a theory..."

I do not think that word means what you think it means, David.

[David Duff]

Well, I know what I mean by it. A theory is a hypothesis which seeks to explain a phenomena but which lacks scientific tests to prove or disprove it. Sums up Darwin's *theory* pretty well, I'd say.

[ajay]

David, no, that's not what a theory is at all. A theory is a _testable_ model that explains various observed phenomena. Heliocentrism and the viral theory of disease are testable...

An _untested_ model is a "hypothesis". (An untestable model is a bad hypothesis.)

For example:

Phenomenon: my garage has caught fire.
Hypothesis 1: perhaps it was that old heater I had in there.
Hypothesis 2: perhaps it was invisible magic dragons.
Testing hypothesis 1: let's look and see where the fire started. H1 predicts that we will find that the fire started around the heater. If it started around the heater, H1 is looking good. If it started somewhere else, H1 is disproved.
Testing hypothesis 2: er, you can't, there's no test for invisible magic dragons.

It's OK to be ignorant of science, but just don't get into arguments about science if you are.

[David Duff]

Well, naughty, old Darwin, proposing a "theory" which so far no one has been able to test, or falsify, because it makes no predictions and which no one has seen in action because no new phylla or taxa have appeared before us. Perhaps we should pass quickly by the fact that Darwin was unable, himself, to see a method by which natural selection took place and it was only after reading Malthus's nonsense about populations expanding to exceed the available food supply that he thought he had the clincher to his 'theory/hypothesis' (you choose). The fact that Malthus's notion is wrong is but the least of his embarrassments. Darwin's 'theory/hypothesis' explains variations within species, but every breeding horse-trader that ever lived knew that long before he did!

Calling people ignorant is a habit much indulged by members of the, er, scientific community. It is, I think, a bad one, but on the whole I am content for it to continue because it adds to the gaiety of nations when what they proclaimed so loudly and with such certainty last year, they have to un-say next year!

[David Duff]

Well, naughty, old Darwin, proposing a "theory" which so far no one has been able to test, or falsify, because it makes no predictions and which no one has seen in action because no new phylla or taxa have appeared before us. Perhaps we should pass quickly by the fact that Darwin was unable, himself, to see a method by which natural selection took place and it was only after reading Malthus's nonsense about populations expanding to exceed the available food supply that he thought he had the clincher to his 'theory/hypothesis' (you choose). The fact that Malthus's notion is wrong is but the least of his embarrassments. Darwin's 'theory/hypothesis' explains variations within species, but every breeding horse-trader that ever lived knew that long before he did!

Calling people ignorant is a habit much indulged by members of the, er, scientific community. It is, I think, a bad one, but on the whole I am content for it to continue because it adds to the gaiety of nations when that which they proclaimed so loudly and with such certainty last year, they have to un-say next year!

[ajay]

Oh dear, David. Oh dear oh dear oh dear.

http://wiki.cotch.net/index.php/Evolution_doesn%27t_make_predictions

Read, mark, learn and inwardly digest. It's a big complex world out there.

[ajay]

Also, the next time you think you have come up with an argument against evolution, please check here first to find the counter-argument.

http://www.talkorigins.org/origins/faqs-qa.html

[Ryan]

Extremely interesting, thought provoking and mind-engaging for a 24-yr-old just starting his career... thank you.

[Philip Thomas]

Though Darwin wasn't the first with the idea, it's a pretty huge additional insight to see that Malthus' limits to growth would lead not just to death, not just to competition, but selection for survivability. To further identify that selection as being capable of explaining the diversity of life on Earth when you lack accurate knowledge of the Earth's lifespan or an available explanation of how organisms vary and how that variation is heritable is a pretty tremendous mental jump. I believe it was Marx that said that theories go through three stages: first they are ridiculed, secondly they are accepted, thirdly they are obvious.

Whilst the models of economics can often be applied to biological systems (I used to do just that in behavioural ecology), to apply natural selection to economics can be perilous. A key difference is the potential of horizontal transmission of characters (e.g. from company to company) rather than vertically (e.g. from father to son). What is being replicated there? What are the units of selection? The company? Its stores, branches or factories? I wouldn't recommend natural selection as a great model for economics to borrow from biology, though the theories of memetics, social learning and cultural evolution may be more appropriate.