By viewing economics as a cousin of biology, it is easier to see how small causes can have big effects and to grasp the limits of human knowledgeby Bob Rowthorn / June 19, 2005 / Leave a comment
Why Most Things Fail by Paul Ormerod (Faber, £12.99)
In a series of books written over the past decade, Paul Ormerod has criticised orthodox economics for being too mechanistic and divorced from reality and has argued the case for a new approach. As one might expect from a successful business consultant, these books have eye-catching titles—The Death of Economics, Butterfly Economics and now Why Most Things Fail. Their unifying theme is that economics is in thrall to a 19th-century model based on physics when it should really be looking to biology for inspiration. This would make economics focus on what really matters: complexity, ignorance, rivalry, failure and evolution.
In Why Most Things Fail, Ormerod concentrates on failure and extinction in biology and economics. In the biological sphere, mutations lead to species that out-compete other species which eventually become extinct or retreat to some marginal niche. Extraneous events such as climate change may lead to the same outcome because some species are better able to survive in the new environment than others. Ormerod argues that failure and extinction are also pervasive in the economic sphere. Mutations and external events play a role in business life just as they do in biology. The counterparts to biological mutations are new technologies, new forms of organisation and new types of product.
Drawing on the work of Leslie Hannah, Ormerod shows how extinctions are far more common in the economic sphere than is generally realised. Even giant “blue chip” companies are not secure. Of the top 100 industrial companies in the world in 1912, only 19 were still in the top 100 by 1995. Some 29 had gone bankrupt and another 19 had been taken over. Ormerod also reveals some interesting parallels between the extinction of species and of firms. Both follow a “power law” which gives rise to a particular historical pattern of extinction rates. Long periods of comparative calm, during which few extinctions occur, are interspersed with short bursts of frenetic activity in which vast numbers of species or firms are wiped out.
In the biological sphere, most mutations are harmful and reduce the ability of the organism to survive. Some mutations linger on, but many are driven out entirely by competition from incumbent genes. Many potentially beneficial mutations are also driven out by competition before they have time to establish themselves, or before a complementary mutation occurs which allows them to…