The Evolution of Economics: Lessons from Darwin

In the world of business, the study of economics often takes a back seat, with many practitioners failing to integrate economic principles into their daily operations. One reason for this disconnect is the inaccurate portrayal of commerce as a closed equilibrium system, a misconception borrowed from physics. In reality, commerce is a dynamic, adaptive, and open system in constant flux.

Instead of drawing inspiration from physics, economics would benefit from looking to the principles of evolutionary biology. Early economists like Thomas Malthus understood the concept of the “struggle for existence” long before Darwin’s theory of natural selection. Darwin himself credited Malthus with shaping his ideas on survival of the fittest.

Just as natural selection drives evolution in biology, the same process occurs in commerce. Firms with even the slightest advantage have a better chance of survival and growth, while those with unfavorable traits face extinction. This concept of “natural selection” applies to products, not just firms, highlighting the evolutionary nature of commerce.

Products, in essence, replicate and evolve in response to consumer demands, much like genes in biology. To sustain profitability, firms must offer unique and valuable products that create a competitive advantage. The sustainability of profits hinges on the rate of diffusion of these unique attributes to competing products.

The Firm Is a Commercial Organism

Just as organisms require energy to survive, firms must generate profits to sustain themselves. Without a surplus of value creation, firms risk dissolution in a competitive market. The idea of “survival of the fittest” applies to firms earning excess profits, as they are better adapted to their niche and have higher chances of growth.

Investors, therefore, should seek out companies with strong competitive advantages, as these firms are more likely to withstand competition and create lasting value. Apple’s proprietary iOS system is a prime example of a durable competitive advantage that has enabled the company to consistently earn high returns on capital employed.

The Preme-Product-Firm Hierarchy: A New Model

At the heart of commerce lies the product, which serves as the DNA of a firm. Products are composed of subunits called “premes,” which represent the unit of evolutionary analysis in the business world. Premes are the building blocks of a product’s value proposition and drive the differentiation that sustains profitability.

For firms to maintain excess profits, they must possess unique premetic material that sets them apart from competitors. Competitive advantages, such as brands or economies of scale, help prevent the diffusion of these unique attributes and support sustained profitability.

By understanding the evolutionary nature of commerce and focusing on the product and its premes, businesses can adapt to changing market dynamics and thrive in competitive landscapes.

Key Takeaway

In conclusion, economics can learn valuable lessons from evolutionary theory, shedding its physics envy to embrace a more dynamic and adaptive approach to commerce. By recognizing the evolutionary forces at play in business, firms can position themselves for long-term success and profitability.