Charles Darwin the economist

Natural selection explains more about economics than Adam Smith's invisible hand.

With good reason, most contemporary economists regard Adam Smith as the founder of their discipline. But I would instead accord that honor to Charles Darwin, the pioneering naturalist.

Although Darwin had no formal training in economics, he studied the works of early economists carefully, and the plants and animals that were his focus were embroiled in competitive struggles much like the ones we see in the marketplace. His observations forged an understanding of competition that is subtly but profoundly different from Smith's. The celebrated invisible hand theory that Smith developed holds that unfettered markets will ultimately channel self-interest to serve the common good. But this idea is really just an interesting special case of Darwin's more general theory.

Smith did not claim that markets always channel greed in socially productive ways. For him, the remarkable thing was that they often appeared to. Although his account of how that happens lacks the generality that many of his most enthusiastic modern disciples ascribe to it, it will endure as one of mankind's most impressive intellectual achievements.

Consider his description of product design improvements or cost-reducing innovations. The entrepreneurs who introduce them hope to steal sales from rivals. They often succeed spectacularly in the short term, which pressures rivals to mimic the innovations. The ultimate beneficiaries of this competition, Smith explained, are not businesses but consumers, who enjoy ever better products at ever lower prices.

In Darwin's theory, natural selection favors traits and behaviors that promote individual reproductive success. Many of the examples he observed were closely analogous to Smith's account of product design improvements. But Darwin also recognized that individual and group interests often conflict sharply and that, in those cases, individual interests generally trump group interests.

The evolution of keen eyesight among hawks is an example of the former type. A mutation that led to slightly improved vision benefited the individual in which it first occurred. By enabling that individual to catch more prey and feed more offspring, it spread quickly. Similar mutations accreted, with the result that virtually all modern hawks have astonishingly acute vision by human standards. Like Smith's product design improvements, these mutations no longer confer relative advantage to individual hawks, but their ultimate effect was to make hawks more effective as a species.

In many other cases, however, mutations that promote individual reproductive success prove costly to the larger group. A vivid case in point is the prodigious antlers of the bull elk. Like males of most other vertebrate species, these animals take more than one mate if they can. But if some succeed, others are left with none, making them the ultimate losers in Darwinian terms. It was thus inevitable that bulls would fight bitterly for access to females, and also inevitable that natural selection would spawn an arms race in the antlers that promoted success in those battles. But while the massive antlers of surviving bulls, which often span more than 4 feet and weigh more than 40 pounds, help them prevail in battles for mates, they are a serious handicap when bulls are chased into densely wooded areas by predators.

Because it is relative antler size that matters in battle, bulls would have good reasons to favor a proposal to trim each animal's antlers by half. The outcome of every fight would be the same as before, and each bull would be far better able to escape from wolves. Yet bulls are stuck with their handicap because any individual bull with smaller antlers would never win a mate.

In short, Darwin's understanding of competition makes clear that there can be no presumption that the process promotes the common good. Often it does. But success in Darwinian terms typically depends heavily on relative performance, and attempts to occupy scarce slots atop any hierarchy inevitably provoke wasteful, mutually offsetting arms races.

It's an important point, since the modern conservative's case for minimal government rests on the presumption that competition always promotes society's welfare. But our best understanding of how competition actually functions, as Darwin's work makes clear, supports no such presumption.

It’s Not a Business It’s an Ecosystem

I’ve owned a small business for over 25 years and in that time I’ve changed, my business has certainly changed, tools and tactics have changed and, in typical small business fashion, I believe I’ve handily adapted to the ebb and flow and lived to go at it another day.

When you grind away, adding this and that, and taking advantage of each little shift in strategy as single events, it pretty much feels like gradual change, hardly noticeable at times.

However, as I step back and take in the entire journey that’s been the last few years I can see that the aggregate amount of change in the way I go to work has altered the very existence of what I’ve called my business.

Today I don’t go to work in a business so much as I cultivate an ecosystem.

Now, I don’t write that to sound like some grand or pompous bit of consultant jargon, I write it as a realization of what I think it takes to survive and grow in this day and age.

It is no longer enough to make a great product or service, promote it and read the P and L to see if you made any headway.

Several factors come in to play in this notion of building an ecosystem over building a business:

• Our markets have never had more access to real time information, yet never had less time or attention to consume our messages
• Social behavior has become a business expectation and means of communication rather than a business tactic
• Almost every service, solution, product or idea can be acquired for free, the market now only pays for an experience

Given those factors, I believe that even the simplest business ecosystem must include:

• A strategic emphasis on building a collaboration community around prospects, customers, suppliers, partners and competitors
• A commitment to the publishing of concepts, ideas and methodologies in every size, shape and format
• The packaging of content in both free and premium models that leverage a market’s desired consumption devices
• The development of products that support services and services that support products
• A leadership brand that can build and tell stories and a commitment to get in front of audiences
• The building of personalized hubs of communities in the social spaces where our markets hang out
• The construction of a formal network of partners that provide every product and service our markets need
• The Fusion of online and offline tactics as a way to create more convenient, yet highly personal engagement

And, hanging somewhere above the ecosystem, much like the atmosphere, is the overarching need for a simple, inspirational, purpose driven vision that drives the system and runs through every story, hire, decision, message and brand asset.

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.

Darwin observed that species or (businesses)  survived changing environments by making adaptations to their new realities. Each adaptation required experimentation (modified DNA sequences) to create new traits- Darwin and the work of evolutionary biologists to understand how corporations can act to survive and thrive in rapidly changing environments and conditions of great uncertainty.

Here are three key lessons of Adaptive Leadership, drawn from the work of Darwin and applicable to every business today.

Find Small Variations that Create Advantage

DNA changes can radically alter a species' capacity to thrive, but the actual amount of DNA that changes at any time is minuscule. More than 96% of our DNA is identical to that of a chimpanzee--a change of less than 4% in our ancestors' genetic code was all it took to become human.

Similarly, after more than 200 years, the U.S. still has a structure of governance, values and a way of life that closely reflect those of the Founding Fathers. The Constitution has been tweaked but not radically changed. Southwest Airlines,  does only a few distinct things differently from other airlines, yet it has been profitable for 36 straight years in a treacherous industry.

Your challenge, as you adapt to meet the future, is to make the best possible use of the wisdom your organization has acquired. Do so by engaging your people in the arduous task of examining all that you value, separating out what is essential and leaving behind what no longer works.

The reason we reproduce sexually rather than by cloning is to create a wonderful variety of people so that natural selection can pick and choose according to what works and what doesn't. Cloning is simpler, but it creates no variations to learn from. Sexual reproduction creates endless micro-adaptations.

Is your organization cloning its business model when it enters new or changed markets, or is it creating deliberate micro-adaptations to meet local needs and preferences?

Best Buy, decreed broad principles and norms for all of its stores, but it allowed each of them to create individualized displays and product offerings to fit its local customers' interests and needs. The stores ran small experiments one year to learn what should be done full-scale the next. The stores were not clones; they were micro-adaptations, each doing its own experiments to figure out what should be the next big thing.

Find Your Ecological Niche

 

Darwin understood there was no such thing as change for change's sake. The secret to surviving and thriving was to match the adaptation to the context.

What that means for you is that your organization must have a critical mix of diagnostic and matchmaking skills. The ability to read your internal capabilities and the external marketplace and to match them to products and services is essential.

Someone at Sony surely had the idea of developing a digital music player, but Sony wasn't a hospitable host for such a new product (maybe it was too immersed in Walkmans and Discmans). The iPod was created in the more fertile environment of a new-generation company ready to tap into a younger consumer base. A generation earlier, IBM's commitment to mainframes caused it to fall way behind in the personal computer market.

Those were internal capabilities problems. On the external side, Rheingold came out with a light beer called Gablinger's in 1967, but it was total flop because Rheingold failed to understand that its mostly male market wanted a light beer that emphasized taste more than its calorie reduction. Nearly a decade later, Miller learned the lesson and used virtually the same brewing recipe but with a marketing emphasis on taste. And the rest is history.

The challenge of enabling organizations to adapt is hardly new, but adapting to today's reality is completely new. Some organizations will survive and thrive, and some will perish. Following Darwin's lessons won't make the situation any less risky, but it will improve the chance that your business will be around to enjoy the future, whatever it brings.

May the force of change be with you.

Puerto Ricos Struggle for its Existence

Today, Puerto Rico struggle for its existence, becomes more apparent than ever. Every day that goes by a new crisis pops up for our survival shows up. There are many important variable for this observation. 1. Population growth to use Thomas Malthus doctrine that population has grows geometrical, Meaning 2, 4, 8, 16.  2. Food reproduction grows in an arithmetic process. 1, 2, 3, 4 and lastly our exportation of Human capital or brain drain. Based on the Census data, although birthrate have been reduced since 1990. Population growth rate is still 2.5% faster, at this rate Puerto Rico will not have enough food to sustain themselves for more than a few week. Why, because total production of agricultural has been stagnated for the last 20 years. People will also hey but crime has increased and people are dying more every year, but it only has a arithmetic effect not a geometric effect, therefore they will not cancel out population growth. To use the words of the naturalist Charles Darwin “The struggle for existence inevitably follows organic being tend to increase. Every being, which during natural lifetime produces several eggs or seeds, must suffer destruction during some period of its life, and during some period of its life, and during some season or occasional year, otherwise, on the principal of geometrical increase, its numbers would quickly become so inordinately that no country can support the product”, and here is where Puerto Rico is at today. Population growth has exploded during the last 50 years while food reproduction has declined. Our data has shown that Puerto Rico will not be able to survive three weeks to sustain itself locally without an importing food from outside countries, if this is to occur. But let’s take look at it for a famine or crises situation, Puerto Rico this week was hit by a category 1 hurricane (Irene), winds up to 75 miles an hour. Within 48 hours over 50% of the islands population close to 800,000 customers were without electricity and 15% without water and the Executive Director (AEE) Miguel A. Cordero, indicated that we will not have full capacity within two to three weeks. Three weeks, Why, because again our thinking again is not biological not organic, its mechanical, why does it take three weeks to be at full capacity in the 21^st? Because the word efficiencies is not in the vocabulary, Inefficiencies yes. Having electrical cable underground is efficiency. Having them above ground is not.

Inefficiencies = pollution

Inefficiencies = mechanical thinking in a biological environment

Inefficiency = 3 weeks to get at full capacity = non productivity = lose of Money

This bring me to my third point, Natural selection. Natural Selection, is the process of variations to adapt to its environment, by being the most adaptive to survive and to adapt so that your genetic code or DNA can continue to survive, compete and pass on to the next generation. If infrastructures, i.e. utility, water, and roads are part of some of the important variants for countries to be competitive, does Puerto Rico find itself in the process of extinction in the whole global game of competition, but more so in the struggle for its existence in the 21^st century. As some of the leading economist of the island have said, Puerto Rico only has a few years to reposition itself to compete. I go even farther, we have only a few years for our struggle of our existence, because Natural selection, although nonrandom, is violent and will not wait for weakest to adapt globally. The question for Puerto Rico has to be: Do we adapt and evolve? Do we work as ants colonies, were ants individually are not efficient, but as a million of ants “smart swarm” together create the most efficient systems in the world to compete and evolve. They have been doing it for more than 350 million years, lets learn from them. Do we invest with a sense of urgency in variations to adapt, i.e. utility, water, and roads? Do we look at creating a competitive business ecosystem, an environment of competitiveness? Do we move away from the entitlement or social incentive economy? Natural Selection does not believe in entitlement economy to compete. Puerto Rico has answered these fundamental questions globally in specific  industries; Miss Universe pageants, Major league baseball players, boxing, and the rum capital of the world, no entitlements were used, only Natural Selection made them the best in their industries. Now, why not to a bigger audience. Puerto Rico; we can do it!    

Article soon to be released in the Hartford Business Journal

Juan Morales, MBA, Author:  What businesses can learn from a competitive ecosystem: How Darwin, ants, coquis, beehives, clusters help us connect and create a better business ecosystem (A primer) sold though Amazon.com

Why Ants?

a view inside an ant hill (a complete efficient ecosystem)

Why ants?

There’re in abundance, fire ants are in my backyard, and their cheaper to study.  Because ants have been in existence for more than 350 million years and through mutational natural selection, in their DNA that has improved their efficiency to compete relentless. No other animal or insect with the exception of bees have created such an efficient process through competition and efficiencies. There are no entitlement programs or as I would call it no artificial selection for competition. The business ecosystem is almost a zero sum game. The simple fact that it’s not a fully zero sum game.    

Why a business ecosystem?

Because business as ants compete in their specific niches through the process of natural selection. Evolution, relentless competition, co evolution in the specific DNA markets. Look at the airline industry Delta and American Airlines will coexist to make sure that their customer arrives at the destination. Meaning one airline will help the other to make sure the customer arrives at its destination.

What business ecosystem or cluster of the insurance industry?

Well I went to school and lived in Hartford Connecticut for about 25 years, and Hartford is still considered the insurance capital of the world. Actually in walking distance you can visit seven insurance businesses that compete relentlessly in their specific market niche. Hartford has 7% of its workforce that work for these specific ant mounds or clusters that compose of over 65,000 employees throughout the state. It has the highest concentration of actuary’s in la USA per concentration of population. Actuaries are their core competencies for their business DNA.

What is your goal?

My goal is to help change the mechanical thinking that our economy is planned rather than evolving, organic sporadic order, where companies find their true genetic DNA advantage through improvements of in natural Selection. Meaning companies can achieve always better efficiencies while improving their natural selection of relentless and efficient competition. For example, Pollution = Inefficiency, companies that pollute should always considerer closed loop systems to eliminate inefficiencies. In Holland companies use closed loop systems to eliminate pollution by creating efficiencies. Ants over millions of years have created efficiencies by creating the most efficient body structure, communication system as a whole. Ants are not efficient as individuals, but as swarm working together, they can build ant mounds that can structure in comparison to the Great Wall of China.

                If entrepreneurs can think in this process and believe that they are part of an evolving business ecosystem, the dynamics of that environment will improve the overall communities in which the compete and live. I.e. Silicon Valley is another great example of fascinating dynamic business ecosystem where each business coevolves in the process of relentless competition until shake outs occur within their business ecosystem.

So, how can we use the Darwinian approach to create a new strategy for survival in the Business Ecosystem?

                              


There has been a lot of talk recently about businesses having to fight to survive, but is this really the right approach in this current economic climate? Is it ever the right approach whatever the economic climate?

Fighting to survive

Often ‘fighting to survive’ is understood as working in the same way as usual, only harder. Working harder, selling more, but without fundamental change to the way in which this is done. And, in the current economic climate, whilst trying to do all this on a cost-cutting budget.
Sadly for many businesses this doesn’t work and the approach actually damages the business rather than helping it. Fighting to survive, without change, releases very little, if any, untapped potential within the business.
The Darwinian Approach explains why this is the case.
The weakest businesses in a marketplace struggle to survive. Even without a changing environment, we still see natural selection in action: the weakest businesses die or are killed by predators/competitors.
An unchanging business in a changing environment dies. Businesses operate in an always changing environment. Most of the time businesses can get away with slow evolution, or in a strong market, not evolving at all. However, when a market changes rapidly it often isn’t enough to do that. Nor is it enough to just fight by doing the same things as the business has always done.

So, how can we use the Darwinian approach to create a new strategy for survival?

1. Survival of the fittest: building a strong business. A business is the sum of its parts: its people; its processes; its product/services; its culture; its financial position; its marketing; its customers etc.. The business needs to be strong to survive. Some are already strong; but all can be stronger.
2. Design your business for evolution and change. A strong business is always growing, always developing and always moving forwards – in every area. If a business isn’t doing this, it’s going backwards. This is often about the culture of the corporation, and about the leadership who drives the movement. There does need to be someone in the centre who has the authority and ability to sponsor change – without that there is no permission for the organisation to change. It is about designing and building an organisation with the cabability to change. If this isn’t happening already, change is possible: it won’t be an easy journey but it is vital for survival.
3. Understand the changing environment. Awareness of what is going on around you and enough distance and awareness to make intelligent decisions about how it will effect your business is critical. It requires looking ahead and around, then taking space to think, consider and understand. Only then can you respond.
4. Respond: strategy and implementation. Strategy can be developed only from taking a holistic view internally and externally and deciding on a waypoint (it’s not a destination as you never actually stop journeying). Implementation comes from understanding the implications of that strategy and planning your journey, being ready to react and revise along the way. Without effective implementation there is no movement or change.

In the present economic climate, as markets change in unprecedented ways, adaptation of businesses to the environment is vital. Without adaptation, re-positioning, understanding the changing environment and reacting accordingly, businesses will struggle to survive. Business evolution is paramount.

Where to Start on creating a Business Ecosystem? 4 easy steps

Ecosystem Strategy

1. You must be better at rivals in building new ecosystems, not just

building better products. Develop game changing re-imaginations

of business networks and processes that position you to WIN!

2. New business ecosystems exist to “bring innovations to

customers…an entirely original outcome or new set of benefits

available to customers [that are] demonstrably better than what it

supplants.”

3. Determining what is contained in the scope of the ecosystem is a

strategic decision. What must be included in the “end-to-end

economic community?”

4. “Competitive advantage in the new world stems from knowing

when and how to build ecosystems, and from being able to steer

them to lasting growth and continuous improvement.”