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A TCI Book Review

Bionomics: The Inevitability of Capitalism

Michael Rothschild
Henry Holt, New York, 1990

"Capitalism, or the market economy, or the free-enterprise system - whatever you choose to label it - was not planned. Like life on earth, it did not need to be. Capitalism just happened, and it will keep on happening. Quite spontaneously. Capitalism flourishes whenever it is not supressed, because it is a naturally occurring phenomenon. It is the way human society organizes itself for survival in a world of limited resources.

A capitalist economy can best be comprehended as a living ecosystem. Key phenomena observed in nature - competition, specialization, cooperation, exploitation, learning, growth, and several others - are also central to business life. Moreover, the evolution of the global ecosystem and the emergence of modern industrial society are studded with striking parallels.

Briefly stated, information is the essence of both systems. In the biologic environment, genetic information, recorded in the DNA molecule, is the basis of all life. In the economic environment, technological information, captured in books, blueprints, scientific journals, databases, and the know-how of millions of individuals, is the ultimate source of all economic life. " (p.xi)

Drawing an extensive analogy between biology and economics, Rothschild argues that capitalism is the natural state for an economic system. This is so because the most profound parallel between biology and economics is that they are both systems for organizing and retaining knowledge: genetic information in the case of biology, and 'production, distribution and consumption knowledge' in the case of economics. The economy is a learning system, and evolves according to certain rules that are remarkably similar to those that would apply to a species or ecosystem. Like an ecosystem, the economy is self-organizing, and requires no central direction or control. Just as the genetic code stores the data that governs the growth, development and reproduction of a species, so too do the compilation of records, processes, plans, etc. that are the information-storage mechanisms for a company or industry perform the same function for the economy.

Rothschild discusses the concept of the 'learning' or 'experience curve' in some depth. This, he maintains, is a fundamental concept largely ignored by traditional economic theory (which is obsessed with mathematical models of stationary equilibrium, and thus ignores the dynamics of the real world). The application of the experience curve is the analogue to the evolutionary process in the natural world, in that this is what allows products and services to be offered increasingly at lower real cost, and ever more finely attuned to the needs of the marketplace. (And, just like the concept of the 'survival of the fittest' in evolutionary theory, it is those products and services that better meet a need and at a lower price, that will be the ones that survive in the marketplace.)

Alternative economic systems (such as Marxism) that flout this 'natural law of economics' will prove to be untenable in the long term (note that this book was written on the brink of the collapse of the Soviet Union).

Some basic policy directions that are implied by the 'bionomics approach':

Taxes should be levied on consumption, not investment: Rothschild contends that, when all the 'politically adroit camouflage' is stripped away, the U.S. federal tax system is based primarily on the taxation of household savings, and not on the taxation of household consumption. The 'bionomics' question therefore is: does consumption or saving make one better off? (p. 144) Rothschild maintains that it is savings (that are in turn invested) that contribute to the growth and development of an economy, by allowing new enterprises that meet market needs (business organisms that are able to exploit a market niche) to flourish. The taxation of savings stifles this economic growth and development, and is akin to robbing the source of energy that keeps an ecosystem going (like cutting back the amount of sunlight that reaches a particular environment would reduce the number of species that would be able to thrive, although Rothschild doesn't use that example).

Corpocracy and bureaucracy are parasitic developments that sap the vitality of a business organism: Corpocracies (the senior group of executives within a company that ignores the interests of the shareholders in favor of their own personal gain) and bureaucracies (the equivalent in the public sector) are like parasites feeding on the energy of a system, but not contributing to the vitality of that system. In extreme cases, such parasitic behavior can 'kill the host' - again not a good thing from a business perspective. Rothschild argues that both corpocracies and bureaucracies should be limited.

Poverty can be reduced by making educational opportunities available equally to all: His analysis in this area is somewhat more convoluted, and is as follows:

  • Differences in income in America stem largely from differences in wages (only the top 10% derive any significant income from investments)
  • Wages are not simply payment for raw labor - they reflect workers' investment in human capital (i.e. themselves)
  • "Without a stream of future income paying dividends on that educational investment, most people would not bother to acquire advanced skills" (p.240)
  • on average, even as a person invests more years in education, the percentage return stays about the same (several studies have shown that this is about 15%)
  • Thus, paradoxically, income redistribution schemes (progressive taxes, transfer payments, etc.) make dollar income streams more equal by making the percentage returns on investment in human capital less equal
  • In an increasingly technological society that depends upon an investment in human capital, this amounts to stupid policy
  • As an alternative, relative penalties should not be imposed on the investment in education; rather, educational opportunities should be made accessible to all, and any disincentive to investments in education removed

The underlying approach to bionomics is to find the economic incentives to encourage socially desirable behaviors (reducing poverty, eliminating homelessness, environmental responsibility, etc.) and then letting the self-organizing free market determine the ways in which the business ecosystem will encourage those behaviors. This approach tends to favor incentives and pricing mechanisms over rules and regulations (which require large bureaucracies to administer, and are thus not ultimately an efficient organization mechanism - see the previous discussion item on 'parasitism').





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