The theme of the book by Paul Ormerod revolves around three aspects, they being, firstly, the pervasive nature of failure, secondly, the patterns between biological extinction of species and firm failures, and thirdly the way one can deal with this failure.
Is the failure pervasive ?
A look at the history of firms shows clear evidence that the life time of a company is not really long. Hannah, a noted researcher analyzed all the firms the top firms between 1912 – 1995 and observed that only 13% of the firms survived. Sometimes technological revolution makes brings this vast extinction, to name a few, printing technology in Venice brought to death 80% of the firms which started operating in the printing space, the early industrial revolution from 1900-1920 saw only 99% of the firms leading to failure.
Can we turn to any economics for answers which claims to a science which explains a lot about business aspects ?
Risk and uncertainty are inherent in any market transaction , where risk refers to the probability of a event happening for example a coin when tossed would have probability of heads as 0.5 etc,. Uncertainty essentially translates to the point that one does not even know the probability of happening of the event at all , for example, the event of meteor hitting earth( meteor might never hit earth at all).
The most important consequences of noting uncertainty is that Supply and Demand curves as taught to us in Economics101 courses are no longer simple curves which can be drawn and their intersection is the equilibrium point. In reality one can hardly predict the demand for a price point leave alone for all the price points. The classic formula MC=MP, Marginal cost = Marginal Price can no longer guide us in arriving a decision for pricing a product. There is always the curse of dimensionality that the aggregation of effects of all the factors that change the demand and supply of the product is simply beyond our comprehension. Strong theories, like Philips Curve inverts suddenly between some time periods which makes one doubt the useful ness of economics in practical life.
Can Public Policy help in reducing the death rate of firms or for that any matter any aspect of society which needs improvement ? Here too, there have been umpteen cases where public policy has been of no avail. Unemployment rates have behaved in a random manner, social mobility has occurred in a random fashion irrespective of the public policy, Inequality with in the countries, measured by Gini’s coefficient has also behaved in a random manner. Segregation of people belonging to various castes/ races among cities is another example which has not changed irrespective of the intent of the government. Robert Schelling was the first one to conduct a thorough analysis on the segregation prevalent in the cities and claimed that it is the weak causes that cause a highly visible segregation and no amount of public policy has been able to reduce the segregation of various races / castes in various states.
The second part of the book talks about the similarity between biological extinction and firm extinction. The biological extinction has followed 2 patterns,one being that the number of firms becoming extinct has not followed any pattern, second being that size is inversely proportional to frequency squared where size is the % of the species becoming extinct per million years. The same kind of similarity is also evident in Hannah data which makes author draw parallel between extinction , evolution of species to that of firms . The author then goes on to say that a mix of endogenous and exogenous factors are responsible for the extinction and evolution and ends up saying that the book is all about one statement – " Intent does not equate Outcome". In his words,
"Humans, whether acting as individuals or in a collective fashion in a firm or government, face massive inherent uncertainty about the effect of their actions. Whether it is the great characters of tragedy or giant corporations such as Microsoft the future remains covered in a deep veil to all. Species, People, firms, governments are all complex entities that must survive dynamic environments which evolve over time, Their ability to understand such environments is inherently limited. These limits cannot be understood by smarter analysis. Its better to face the reality that there is an inherent uncertainty "
In other words, is there nothing much that can be done to get over this problem? The third part of the book tries to answer this question. The author is of opinion that by adopting a strategy of creative destruction , where constant innovation creates new firm with new business model is the best way to live in this uncertain world.
My Takeaways from the book:
1. Power law evident among firm extinction and biological species
2. Segregation example among various cities
3. Chinks in various economic theories