Fallout: The Financial Crisis

No natural selection in business

Marketplace Staff Feb 12, 2009
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Fallout: The Financial Crisis

No natural selection in business

Marketplace Staff Feb 12, 2009
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TEXT OF STORY

KAI RYSSDAL: Today is Charles Darwin’s 200th birthday. He is, of course, the English scientist who came up with the theory of evolution. Over the years, that theory’s been applied to all sorts of fields beyond just science and biology. If ever there was a place the phrase “survival of the fittest” applies you’d think it’d be Wall Street. But commentator Natasha Loder says recent events show us that selection in business is far from natural.


Natasha Loder: When the economy is strong it is easy to kid ourselves that the market is Darwinian. In other words, that the least fit companies go out of business leaving only the strongest. But in times like these, it is much easier to see why this isn’t how our world works.

If nature were to run its course in markets right now we’d see a mass extinction. But because many businesses serve vital social functions, we are not letting this happen. We need the banks to survive, so we are bailing them out. Ditto Fannie Mae and Freddie Mac, or AIG.

Artificial selection is what humans do. We regulate everything from how much capital banks must have, to how companies treat their employees. Sure, there is some natural selection going on out there — Microsoft killed Netscape using its power as the dominant breeder. And of course there are more companies out there than can survive. But the big companies with political leverage are getting the bailouts. Is this really the invisible hand at work?

Markets are more like unruly gardens than the wild forest full of nature red in tooth and claw. And we are always trimming, weeding and fertilizing this garden so it grows the way it suits us. It’s just the same inside companies. What goes on is artificial, more like the domestication of cattle than anything natural. Companies decide what kind of employees they want, whether they are selecting for ruthlessness or brilliance. If you want to change a company, you buy a stud CEO, cross breed him with all the suitable specimens on staff, and send the rest off to slaughter.

It might sound brutal, but that doesn’t make it Darwinian. Darwinian is having bank bosses fight to the death for their bonuses armed only with letter openers. Listen. I’m not saying bad companies never get weeded out, just that what goes on is nothing like natural selection. Should we let more companies fail? Darwin might think so. In the long term, propping up companies has got to be bad for efficiency. But nobody is really looking at the long term right now.

KAI RYSSDAL: Natasha Loder is the science and technology correspondent for The Economist magazine.

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