What can Darwin’s finches tell us about the downturn?
Newspaper articles paint the markets in metaphors like “difficult climate” and “harsh landscape” –but these clichéd phrases have a kernel of truth. Thinking about markets as natural environments reveals that selective forces are at work. But it also predicts when they work. In the natural world, as the story of Darwin’s finches tells us, selection acts in times of crisis: drought, famine, and disease. For our markets, that time is now.
(Aside: I confess that relating the economic crisis to Darwin is a symptom of an academic bad habit: namely, mapping every phenomenon onto the intellectual giant of one’s field. Somewhere there is a psychologist blogging about Freud and the economy).
When does natural selection act? This question motivates two modern naturalists, Peter and Rosemary Grant, who studied Darwin’s finches over several decades on the Galapagos islands, and whose work is chronicled in Jonathan Weiner’s The Beak of the Finch.
During the wet seasons, it was hard to see how a finch’s beak made any difference to its fitness.
“[F]inches with long thin beaks and short fat parrot-like beaks [were] all hopping on the same lava, eating identical bird food… All those beaks were cracking the same birdseed.” [p.52]
A long line of ornithologists had concluded that the beak of the finch was unimportant.
But despite this, Peter and Rosemary Grant kept returning to the islands, and kept measuring beaks. In 1977, the rainy season brought no rain. Weiner describes what the naturalists’ witnessed:
“They found fewer than two hundred finches alive on the island. Just one finch in seven had made it through the drought… The average beak before the drought was 10.68 millimeters long and 9.42 deep. The average beak of the fortis that survived was 11.07 millimeters long and 9.96 deep… The birds were not simply magnified by the drought: they were reformed and revised. They were changed by their dead. Their beaks were carved by their losses.” [p.78]
The drought was the crucible that shaped the species. And it wasn’t simply size, but dimension (longer and deeper beaks, versus wider) that separated the survivors from the dead.
In the same way, the benefits of new technologies are often masked during good times. Firms with both new and old technologies remain solidly profitable, happily hopping along. Like ornithologists watching finches in the wet season, some analysts have questioned whether technological innovation even matters. Robert Solow summed up this paradox by quipping “You can see the computer age everywhere but in the productivity statistics.”
But when hard times hit, innovators survive. More importantly, they flourish when the business cycle swings up again. Work by Erik Brynjolfsson and others has shown strong positive evidence for technology’s impact on productivity, most markedly over five-to-seven year periods – the resonant frequency of the business cycle. But like Darwin’s finches, the survivors are not just those who have more technology investments, but those who get the dimensions right.
Downturns are not only good for innovation, they are necessary. While innovation may occur in times of plenty, crises allow the right innovations (hybrid cars) to outcompete the wrong ones (SUVs). This assumes that crises are allowed to run their course (the case against bailouts), but that there are at least some survivors (the case for them).
As a data guy, I’m cautiously optimistic that firms who have invested in analytics, who have quietly innovated in understanding their business data, will emerge as winners on the other side of this downturn. As a contemporary of Darwin’s said, “That which does not kill us makes us stronger.”
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Interesting riff — what you describe is similar to Schumpeter’s concept of creative destruction, per the following excerpt:
http://transcriptions.english.ucsb.edu/archive/courses/liu/english25/materials/schumpeter.html
There may be natural selection but probably not evolution. Crisis in the markets and their selection processes would propel evolution if innovators could perpetuate themselves, that is, if they could pass their fitness onto other innovators. However companies are made by humans, and these keep making the same mistakes all over again with no penalty on their reproductive success….