Comments on: Economic Darwinism During Recessions

By: Sterling Performance mobile edition

Sterling Performance mobile edition — Wed, 14 Jan 2009 21:40:50 +0000

[...] — which claims that organisations that are best able to adapt are the ones most likely to survive, particularly in a recessionary climate. In an FT piece by Jonathan Guthrie, he applies Darwinian theory to the current economic crisis. [...]

By: tired fools :: economic darwinism :: November :: 2008

tired fools :: economic darwinism :: November :: 2008 — Sun, 30 Nov 2008 01:38:41 +0000

[...] in principle. i was interested to find, then, that looking at the japanese crisis of the 1990s, a paper that purported to examine economic darwinism: This paper investigates whether the natural selection [...]

By: Jim Robins

Jim Robins — Sun, 10 Feb 2008 10:53:37 +0000

This idea also has origins in Marshall and it was fundamental to Schumpeter’s early work on capitalism (originally his doctoral research, later published in the 1920′s).

It does not necessarily require a principle of survivorship, however – at least, not survival of organizations. Schumpeter argued that people learn through habit and custom to behave in ways that approximate rationality. In part, this was a response to the Austrian view that tended to emphasize individual rationality. It is a more sociological view of survival – patterns of individual and group behavior that provide better outcomes tend to survive over time.

It may work only at a very local scale. Aggregating beyond the group that shares a set of customs to a larger society creates a host of logical problems. Quite a bit was written on the problem of aggregating decisions by political scientists in the 1950′s-1960′s in an attempt to understand the mathematical possibilities for participatory democracy.

The logic of getting from local or micro processes to processes that take place at the level of the society or economy is difficult. I wonder if we are still taking the invisible hand far too much for granted?

By: Peter Klein

Peter Klein — Wed, 05 Sep 2007 23:53:14 +0000

Steve, I agree completely, particularly with point #4. Efficiency requires that assets be allocated to their highest valued uses, which does not at all imply maintaining the status quo. That is the basic problem with firm survival as a performance metric. Nonetheless, the survival of particular _strategies_ or organizational structures provides valuable information about the specific mechanisms by which value is created through asset ownership and changes in ownership patterns.

By: spostrel

spostrel — Wed, 05 Sep 2007 23:36:10 +0000

1. Survival is the wrong metric to look at. What is wanted is some sense of the “biomass” accounted for by the firm. If two firms survive, but one grows to 100 times the size of the other, that’s fairly meaningful but missed by the survival metric. On the other hand, if one firm exits while another “survives” at very low size and value-creation, it’s not clear that the difference is meaningful.

2. You have to worry about niches and market segments. If two firms are in the same “industry” but never compete for the same transactions, then inferences from differential survival are inappropriate.

3. Riskiness of strategies is pretty important. A higher expected-value strategy may lead to more exit than a lower expected-value strategy.

4. Exit may result from higher opportunity costs. A set of assets with better alternative uses is more likely to be withdrawn from a focal use if that focal use becomes more competitive or otherwise less favorable. The losers stick around and the winners move on to greener pastures. You need a multi-market perspective to understand this.

5. Both the numerators and denominators of TFP need to be measured and interpreted very carefully. High revenue per input unit could be a sign of market power that disappears during big recessions. Quantity measures of output must be quality corrected. And input quality is pretty difficult to pin down, although dual methods can be used to deal with this to some extent.

These kinds of studies are interesting, but I’m not sure the data are strong enough to overcome even modestly informative priors.

By: Paolo MARITI

Paolo MARITI — Mon, 03 Sep 2007 09:34:21 +0000

The “survival of the fittest” is a long run process. I think that a four-years period, no matter how large the data sample, is too short to draw any reasonably robust conclusion. Some factors (e.g.,as suggested by Okada et al, aberrant banking practices) may take place in the meantime, without the full development of other compensating ones. Banks cannot keep forever to finance ineffcient firms.

By: Fred Thompson

Fred Thompson — Mon, 03 Sep 2007 05:35:56 +0000

See also Permanently Failing Organizations by Marshall W. Meyer and Lynne G. Zucker (Sage, 1989), which vigorously disputes the efficacy of selection mechanisms on empirical grounds.