The Capitalist Evolution

Bionomics: The Inevitability of Capitalism, by Michael Rothschild, New York: Henry Holt and Co., 423 pages, $24.95

In 1890, British economist Alfred Marshall published his major work, Principles of Economics. In it, Marshall constructed an analytic system known as "equilibrium economics," which used complex mathematical formulae to track the changes in a nation's economy. Marshall, noted his student, John Maynard Keynes, had constructed "a whole Copernican system, by which all the elements of the economic universe are kept in their places by mutual counterpoise and interaction."

Ever since Marshall's day, most economists have seen their discipline as a "hard" science, governed by laws as rigid and exacting as Newtonian physics and observed by mathematical tools as precise as electron microscopes. This mechanistic view of economics has filtered down to mass culture. Whenever a journalist writes that the Federal Reserve Board chairman has decided to "fine tune" the economy by altering interest rates or the money supply, the writer is using a mechanical metaphor, considering the economy as easily repairable as an engine or a leaky faucet.

But suppose that economics is not as precise as physics? What if the mathematical tools economists use are not the most accurate way to measure how economies grow, change, and adapt?

That's the thesis of Michael Rothschild, a management consultant based in San Francisco. Economics, he argues, resembles biology, not physics. Capitalism is not, in his view, an economic "system," but something that simply exists, as much a part of life as the wind and the rain. Capitalism is "the inevitable, natural state of human economic affairs. Being for or against a natural phenomenon is a waste of time and mental energy." Replacing capitalism with socialism or another artificial system of massive government economic intervention would be as damaging as replacing the Brazilian rain forest with a zoo.

Rothschild has read a great deal about biology and presents the results of his research in a lucid and entertaining manner. (If Rothschild ever wanted to abandon his consulting career, he could probably make his living as a science writer.) He is best at describing various natural systems that mimic capitalism. For example, Rothschild spends several chapters analyzing the work of Bernd Heinrich, a zoologist at the University of Vermont who has analyzed the "economics" of beehives. After observing bees, Heinrich concluded that the way they conduct their affairs would please any CEO. Substituting calories for dollars, a beehive's activities roughly resemble the practices of a small corporation; bees gather calories with as much energy as corporations try to maximize profit.

Rothschild also shows that corporations behave in "biological" ways. For example, most biologists believe that evolution occurs in a manner known as "punctuated equilibrium." Rather than gradual, constant change, animals evolve in fits and spurts. Similarly, businesses do not evolve gradually; new types of corporate structures emerge suddenly, and new forms of business do not entirely displace the old. In the grocery store trade, for example, some family-owned stores continued to survive when the supermarket emerged, and many supermarkets still thrive with the advent of the warehouse store, even though food warehouses and super-warehouses are able to charge substantially lower prices for the products they sell.

More important, corporations, like organisms, have a "learning curve." Just as smarter animals learn from experience in order to endure, so do corporations learn from their mistakes to produce better quality goods at lower prices. On average, the price of products (measured in constant dollars) falls by 20 percent as the experience of producing the product doubles. The "learning curve" is a major reason why prophets of economic doom are largely wrong, and Rothschild's discussion of the curve is the most extensive that I've read.

But why do Rothschild's comparisons between economics and biology matter? In part, because Rothschild's ideas are fresh. Both supporters and foes of capitalism have tended to use the same arguments for generations. But Rothschild is a pathfinder. He suffers from the problems of all trailblazers; it's hard to convince the reader that the similarities between economics and biology are as sure and certain as he makes them out to be. Yet his defenses of capitalism are unconventional and imaginative.

For example, one chapter discusses the concept of "spontaneous order." But rather than repeating F.A. Hayek on this subject, Rothschild discusses how computer programmers at Xerox's Silicon Valley facilities designed a program known as SPAWN that created a "marketplace" to ensure that Xerox's computers could be used in the most efficient manner possible. SPAWN software allows Xerox mainframes to "bid" on each assignment, with the highest bids coming from computers with the most time available. Because less than 10 percent of each computer's time is spent bidding, SPAWN is a more efficient way to allocate work than a byte-chomping central controller.

In the last third of the book, Rothschild turns into a policy analyst, using the "bionomic" perspective to analyze current affairs. In most cases, Rothschild favors decentralist, market-oriented approaches to the problems of our time. He likes public-school choice and dislikes bureaucracy. These chapters are the least interesting because they summarize yesterday's news. There is nothing new about them; the intellectual curiosity that propels the book is absent.

Except for the last 75 pages, Bionomics is a broad, sweeping work that largely succeeds in explaining the morality and necessity of capitalism in a manner that the sophisticated noneconomist can understand. It's the first large-scale analysis of capitalism since George Gilder wrote Wealth and Poverty over a decade ago. Readers who like Gilder (or Hayek) will find Bionomics very much to their taste, but Rothschild's work should also appeal to those readers who simply enjoy large, sweeping books about how the world works. Most economists prefer to dole out knowledge in tiny portions, like nouvelle cuisine or minimalist fiction. Rothschild's book is the nonfiction equivalent of a hearty five course feast or a Victorian novel. If he continues in his career of producing sweeping syntheses, he will find the large and grateful audience James Burke or Douglas Hofstadter have found—readers hungry for knowledge and tired of surviving on severely restricted diets.

Martin Morse Wooster is the Washington editor of REASON.