Standing on the Sun. Christopher Meyer
are tested every day, in diverse environments. NeuroSky CEO Stanley Yang tells us that the empowering, consensus-seeking approach he must employ in Japan would be regarded as wimpy by his team in China and would lose him his employees' respect. What is considered crony capitalism in Israel is legalized as lobbying in the United States. As the landscape of commerce changes, some of these local variants will prove to be valuable genotypes—differences that confer a fitness advantage. Some elements that formerly seemed secondary, or even hampering, may take on central importance.
We should quickly add, too, that we don't expect any single form of capitalism to prevail globally. The mutations will continue, and variation will persist. We return to this theme in chapter 8 as we address the expectation of convergence we've encountered in some quarters. Yes, it's true in genomes as well as social systems that some really good ideas—say, the way the cells of all vertebrates convert food to chemical energy—can become universal. But it's not a contradiction to say that some ideas will prove fit only in some locales. If you took Anthro 101 you likely learned about the sickle cell, which brings with it improved resistance to malaria and therefore is selected for in geographies where malaria is common. Thus it became a common component of the human genome in Africa's lowlands. In another environment or in another time, it serves no good purpose; quite the opposite, sickle cell anemia is a terrible disease. Hence over time the gene becomes less prevalent in the pool.
By analogy, there can be rules that confer advantages in some business environments and not others. Risk aversion, for example, might be an attribute associated with high performance in the heavy industries of the Industrial Revolution. In a steel or chemical plant, a slipup can kill people.10 In another industry more dependent on constant innovation and on manipulating only bits, risk-aversion DNA could be hobbling. We can't help noting what seems to be a persistent cultural variation in attitudes toward risk in the U.S. auto industry versus the software industry, and it makes sense: the consequences of “crashes” in the two industries are quite different.
And consider what happens when these risk attitudes collide, as in software for medical devices. New attitudes breed at the intersections. Such recombinations are an example of the yeasty, distributed process by which the overall system changes, one rule at a time.
It's an important and fundamental point that the rules of capitalism are selected, not derived from first principles. Whether intentionally, by the World Trade Organization, the U.S. Congress, or international financial regulators, or unwittingly, by the choices made by customers, investors, and executives, the rules continually change and coevolve. A case of fraud induces enforcement of the Sarbanes-Oxley Act, which in turn, as a matter of self-protection, may drive greater collaboration in the accounting profession. And when capitalism finds itself in a new environment, the choices change, because they are made by people having different criteria, living in different circumstances. What is privacy? How should digital property be protected? What corporate behavior should be regulated, and what constitutes monopoly power? What are the rights of different stakeholders in society? There are many possibilities for the answers, just as there are many layouts for an ad.
Perhaps we prefer to think that we decide these questions by rational political debate or judicial processes. But these are only two of the tests of fitness among the interlocking feedback loops of coevolution. And more often than not, they follow practice rather than lead it.
Feedback and Dynamics
Having reviewed the essential concepts of environment, coevolution, breeding, fitness, and selection, we should now turn our focus to feedback. The effect of what happened yesterday on what will happen tomorrow is a powerful force in any ecology, biological or economic. Performance reviews don't only describe what happened in the past; they affect how individuals will behave in the future. Market acceptance is a form of feedback that determines what will get made.
The powerful operation of feedback has not been, in the past, a force recognized in economists' models.11 The academic scribblings of most of the twentieth century have assumed that systems remain static and have focused on creating the methods for optimizing within them.
We are in a moment now, however, when the underlying ideas of economics are in flux, and the focus has moved to understanding changes in dynamic systems. It's been a gradual encroachment of ideas, to recall Keynes's language, but it has already managed to influence the thinking of practical managers. One fundamental work was Brian Arthur's Increasing Returns and Path Dependence in the Economy. Arthur described a particular positive feedback loop and the dynamics of increasing returns in network businesses, and the phenomenon of lock-in became self-evident to technology executives, if controversial among economists (a classic case of an idea working fine in practice but not in theory). The idea of first-mover advantage, not an unknown thought in business of the 1980s but rarely relevant (and often subordinated to the fast follower strategy), grew in importance.
No doubt it is true that static analysis wasn't always as inadequate as it is today; the world changes faster now. Inventor Ray Kurzweil maintains that the rate of technological change doubles every decade. But the criticism of it has deeper, older roots than you might imagine. As early as the 1890s, Thorstein Veblen used the term evolutionary economics. He introduced it in an 1898 article called “Why Is Economics Not an Evolutionary Science?” that combines the mid-nineteenth-century thinking of Marx with that of Darwin. Its first line: “M. G. de Lapouge recently said, ‘Anthropology is destined to revolutionise the political and the social sciences as radically as bacteriology has revolutionised the science of medicine.’ Insofar as he speaks of economics, the eminent anthropologist is not alone in his conviction that the science stands in need of rehabilitation.”
We leave most of the history of these ideas for a different kind of book—namely, Eric Beinhocker's Origin of Wealth, which gives a full account. Briefly, though, as the twentieth century wore on, economics was influenced far less by evolutionary science than by engineering. It became a discipline focused on questions of optimizing prices, processes, and resource allocation in a world assumed to be in stable equilibrium. If you've studied economics—and probably even if you haven't—you've been introduced to a picture of a supply curve and a demand curve meeting at a market-clearing point defined by a price and a quantity. You might have spent the next semester studying what happened when you perturbed this equilibrium—say, by raising or lowering price. Your exam probably asked you to calculate the new equilibrium, given something called the price elasticity of demand.12
As Beinhocker writes, “The notion that the economy has a balancing point to which it naturally progresses is a theme that stretches back well before Smith … and remains a core concept of Traditional Economics today.” Analysis comparing such stable situations, called comparative statics, certainly can be useful—to estimate, for example, whether your current price is the profit-maximizing one, assuming that the costs of suppliers, the prices of competitors, and the availability of substitutes stay the same. Michael Porter's Five Forces model deals with this kind of thinking. Many managers, however, embraced that model as a kind of “Comparative Statics for Dummies,” enabling strategic thinking without the heavy lifting of equilibrium economics.
In the real world, when a business changes the pricing of its offering, for example, that action creates ripple effects. It puts other changes in motion—for example, in the prices offered by competitors and makers of complementary goods, in customers' expectations, and in the availability of inputs. Those reactions in turn create their own ripples. In real life, the water never returns to a glassy calm—the equivalent of that notional new equilibrium you calculated. Instead, the ripples and reactions continue forever. Sometimes, those changes create such disequilibrium that a market ceases to exist. Comparative statics would treat, say, digital modems as a substitute good for analog modems, but the field offers no help in understanding innovation and change—not to mention the ripple, or tsunami, of the digitization of the economy.
Robert Lucas at Carnegie Mellon deserves much of the credit for introducing another way of thinking. Around 1970, he began explorations in two new directions. First, he proposed that in principle, macroeconomics should be describable by building up a picture of the economy from the set of microeconomic decisions. That is to say,