Why Most Things Fail: Evolution, Extinction and Economics - Hardcover

Ormerod, Paul

Hardcover

ISBN 10: 0375424059 ISBN 13: 9780375424052

Publisher: Pantheon, 2006

Synopsis

With the same originality and astuteness that marked his widely praised Butterfly Economics, Paul Ormerod now examines the “Iron Law of Failure” as it applies to business and government–and explains what can be done about it.

“Failure is all around us,” asserts Ormerod. For every General Electric–still going strong after more than one hundred years–there are dozens of businesses like Central Leather, which was one of the world’s largest companies in 1912 but was liquidated in 1952. Ormerod debunks conventional economic theory–that the world economy ticks along in perfect equilibrium according to the best-laid plans of business and government–and delves into the reasons for the failure of brands, entire companies, and public policies. Inspired by recent advances in evolutionary theory and biology, Ormerod illuminates the ways in which companies and policy-setting sectors of government behave much like living organisms: unless they evolve, they die. But he also makes clear how desirable social and economic outcomes may be achieved when individuals, companies and governments adapt in response to the actual behavior and requirements of their customers and constituents.

Why Most Things Fail is a fascinating and provocative study of a truth all too seldom acknowledged.

About this title

About the Author

Paul Ormerod was the head of the Economic Assessment Unit at The Economist and the director of economics at the Henley Centre for Forecasting in England. He has taught economics at the universities of London and Manchester, and was a founder of the consulting firm Volterra. He lives in London.

Reviews

Businesses collapse just as surely as people do, yet economics textbooks and financial reporters stubbornly concentrate on success rather than failure. Ormerod (Butterfly Economics) argues this outlook is fundamentally flawed; failure, he says, is "the distinguishing feature of corporate life," and he uses it to link economic models with models of biological evolution, which he presents as a string of extinctions rather than survival of the fittest. Despite this parallel, his focus is on economic theory and what he sees as its inadequate accounting of uncertainty (defined as the impossibility of knowing how policies or business strategies will work) and how it breeds failure. He writes about complex concepts such as power-law behavior, game theory and bounded rationality, but makes them accessible to the lay reader with lengthy but readable explanations that forsake jargon for contemporary cultural references. (Though people who are already familiar with the debates he brings up will doubtless get more out of the book) Yet for all his persuasive examples, the book never crystallizes into a whole, so while readers may find many parts provocative, they are likely to finish it still lacking a complete understanding of failure as Ormerod sees it.
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.

Economist Ormerod addresses "what is probably the most fundamental feature of both biological and human social and economic systems: failure. Species fail and become extinct, brands fail, companies fail, public policies fail." It is fortunate that everything does not fail at once. With an emphasis on reality and not theory, he offers three themes: a documentation of failure, the subtle patterns he finds in the apparent disorder of failure, and the causes of failure. Ormerod concludes that innovation is the guiding principle that companies use to try to overcome the uncertainty surrounding their decisions. Management responds with constant action, testing new ideas, new brands, and new products because they cannot know with absolute certainty why an individual brand fails, and almost all brands eventually fail. The focus on innovation, developing new strategies for individual survival, is also important for consumers and citizens. This is challenging reading and not recommended for the casual reader. Mary Whaley
Copyright © American Library Association. All rights reserved

Excerpt. © Reprinted by permission. All rights reserved.

The Edwardian Explosion

The period from around 1880 to 1910 saw the emergence of radically diVerent ways of organizing and carrying out economic activity. The consequences both for economic well-being and the wider sphere of political economy were dramatic, so we will begin by exploring the developments during this period in some detail.

The eminent biologist Stephen Jay Gould coined the phrase 'the Cambrian explosion' for the period some 550 million years ago when, suddenly, dramatic new life forms surged into being. After an immense length of time during which life had existed in only its simplest forms, far more complicated creatures came into existence. Most prospered for a while and then failed. But the legacy was the path of evolution which has led eventually to humanity.

Similarly, in the economic world, the decades around 1900 saw massive companies emerge for the first time, bringing entirely new management problems in terms of co-ordinating and organizing the operations of these vast entities. In British social history, this is known as the Edwardian period, after Queen Victoria's son who himself reigned in the opening decade of the twentieth century, a period when the British Empire dominated the world. So perhaps I might be permitted a trace of nostalgia in describing the events of this period, so important to the future development of capitalism, as the 'Edwardian explosion'.

During these few decades, we can see forms of organizing economic activity fall by the wayside as firms struggled to understand and adapt to the rapidly changing environment. Yet, at the same time, the survivors from this turbulent age were successful on a scale entirely without precedent. The modern world of huge multinational companies, so familiar to us now, was essentially created during this period. Globalization is a hot topic in the early twenty-first century, but its foundations were laid a century before.

The single most useful and productive legal invention in the past few centuries has been that of the commercial firm. Individuals have banded together and pooled their resources in the pursuit of business since time immemorial, but the massive economic expansion of the past two hundred years is based on the modern concept of the company. Financed by outside shareholders and facing limited liability, this new way of organizing the production of goods and services has transformed the world. The firm is the Tyrannosaurus rex of economic activity, a hugely successful species that sweeps all before it.

We can identify two features of the company which make it qualitatively diVerent to all previously existing ways of conducting business. Each is important in its own right, but combined their joint impact is greater than the sum of the individual components. Both had been invented prior to the final quarter of the nineteenth century. But it was during this period that the overall conditions became right for a dramatic transformation of the economic environment based on them.

The first feature is the idea of attracting outside investors into the venture. By itself, this is not particularly new. Wealthy individuals have always been willing to put money into the ideas of talented and resourceful people known to them. Much of the world's great art and music, for example, was financed by private donations from the rich. What is diVerent about the modern firm is that the investment is essentially anonymous. Shareholders do not need to know personally the entrepreneurs in order to part with their money. Of course, with start-up companies or small firms looking for finance to expand, a prudent investor will insist on finding out a great deal about the individuals concerned, while a fund manager looking to move a big block of shares between, say, Microsoft and GM may well think quite hard about the key individuals on the boards of these giant companies. But there has been a massive expansion in the amount of information available to investors about what is on oVer. Companies can and do solicit new funds from individuals who are completely unknown to them at the time, and this new form of organization increases dramatically the potential funding for any individual enterprise.

The second feature, or evolutionary step as we might think of it, is the invention of limited liability. Individuals no longer need risk personal bankruptcy when they organize a commercial venture. Indeed, one may feel that this particular quality has recently taken an evolutionary step too far. Managers, facing no personal risk whatsoever, reap spectacular rewards for failure- failure with other people's money. A form of corporate theft has been perpetrated in many cases.

But this latter is a very recent phenomenon, and the contribution of the concept of limited liability has been hugely positive. All business decisions involve risk. The degree of risk may vary enormously, but no one knows for certain what will happen once a decision is taken. The limit placed on liabilities facilitated an explosion of innovation and entrepreneurial activity. Individuals were released from the constraint of, quite literally, having to bet the family ranch on a new business venture.

Of course, out in the thickets of the commercial world, diVerent species, diVerent forms of corporate organization survive, each with its own niche. Some can be very successful. Goldman Sachs, for example, has been one of the most profitable, dynamic and innovative financial institutions in the world in recent decades. And for most of this time, it was an antiquated partnership, fashioned on the same organizational principles as those of the bankers who financed Europe's monarchs in medieval times. In both cases, the potential rewards were huge. On the downside, however, the entire personal wealth of each individual partner was, in principle, at risk every single day.

The dominant life form for more than a century, however, has been that of the limited liability company. Like the dinosaurs, this took time to reach its full evolutionary potential. The massive dinosaurs that ruled the world did not spring up entirely from nothing. In the same way, the concepts of anonymous outside investors and limited liability were not invented in the final quarter of the nineteenth century. But, suddenly, underpinned by these concepts, the conditions became right for a massive step forward in the evolution of firms. Companies grew stupendously, to sizes that were entirely without precedent in human history. At the turn of the nineteenth century, large corporations were being built on an enormous scale, mainly due to a massive wave of mergers and acquisitions. By the first decade of the twentieth century, for example, US Steel employed more than 200,000 workers, a number simply beyond the imagination of previous generations.

US Steel was admittedly by far the largest company in the world at that time. Its total assets in 1917, for example, were no less than $2,449 million. Translating this into modern prices is not straightforward because so many things have changed since then, but an approximation would be a value of some $400 billion. For comparison, the value of Microsoft is currently around $300 billion. So US Steel was big by any standards.

But many other American companies had assets of over $100 million, with eleven more companies in exactly the same industrial sector as US Steel-'primary metal industries' in the dry jargon of economic statistics. The industry of 'transportation equipment' had been made up of locomotive and ship manufacturers until the beginning of the twentieth century, but as early as 1917 the largest firm in this sector was already the new Ford Motor Company, with assets of $165 million. In third place in this list was another familiar name, that of General Motors. Elsewhere in the economy, giant corporations had sprung into existence. The food sector, for example, was headed by Armour and Co. and by Swift and Co., each with assets of over $300 million. Both of these became extinct as independent firms in the 1970s and 1980s, respectively. Du Pont and Union Carbide were the largest producers of chemicals, and Standard Oil of New Jersey the biggest oil company, with assets of over $500 million.

The success of the large company, far more eYcient and productive than anything that had gone before, was instrumental in consolidating the political success of capitalism, itself a relatively new form of economic life, which had evolved gradually from its feeble initial stirrings in the Europe of the sixteenth and seventeenth centuries.

Living standards had been improving gradually during the nineteenth century. There is a bitter and intense debate, seeming to stem as much from ideology as from objective scholarly dispute, about whether average living standards rose or fell in the early decades of the Industrial Revolution, up until around 1840. But all are agreed that from around that time life improved. The number of hours worked per week were reduced, health began to improve along with life expectancy as people could aVord to buy more food and hence consume more calories, and more and more products appeared in the shops which came within the reach of ordinary people.

Nonetheless, life was undoubtedly still pretty grim for most people. Again, comparisons across such a long period of time are diYcult to make, since the whole structure of the economy and the mix of goods and services which are now available have altered dramatically. Most of the purchases made today are of products which simply did not exist a century or more ago. Air travel is an obvious example, but the inventiveness of capitalism knows no bounds. As I write these words, I read in the newspaper of a German savaged alm...

Edition details

• Publisher: Pantheon
• Publication date: 2006
• Language: English
• ISBN 10: 0375424059
• ISBN 13: 9780375424052
• Binding: Hardcover
• Edition number: 1
• Number of pages: 272