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Too Big to Fail?

September 16, 2011

Dinosaurs were the largest animals on the face of the Earth. For example, some Titanosaurs, which lived during the Late Jurassic through the Late Cretaceous (156 - 66 million years ago), weighed a hundred metric tons.

The bottom fell out of the dinosaur futures market at the Cretaceous–Tertiary extinction event, which marked the end of the Titanosaurs and all non-avian dinosaurs. Did nature dream up a bail-out plan for the dinosaurs because they were too big to fail? After all, they had successfully dominated the Earth for many millions of years.

Nature isn't all that kind. It functions by the strict evolutionary principle of natural selection that may seem harsh at a given time, but they work very well in the long run. Humans owe their existence to the same process that allowed the dinosaurs to become extinct. The dinosaurs were replaced by more adaptable species.
Bambiraptor feinbergi skeletonNot the Bambi that I knew as a child!

Fossil cast of a Bambiraptor feinbergi skeleton.

(Processed version of an original photograph by 'Ninjatacoshell' via Wikimedia Commons).
In a recent issue of Science,[1] Daniel J. Rankin of the Institute of Evolutionary Biology and Environmental Studies, University of Zürich (Zürich, Switzerland), and the Swiss Institute of Bioinformatics (Lausanne, Switzerland), reviews the book, "Adapt - Why Success Always Starts with Failure," by Tim Harford (Farrar, Straus and Giroux, New York, 2011).[2]

A lot of common sense about the recent financial bailout is condensed in this quotation that Rankin cites from Harford's book.
"The ideal candidate to receive government support seems to be a company that is very big and very unsuccessful. This is the perfect formula for sustained failure."

There are definite parallels between evolutionary biology and economics, the most important is that each concerns agents who try to maximize their fitness. The biological fitness would be the ability to survive to reproduce, and the economic fitness would be maximal utility. Since experts have a hard time reaching a consensus on the best economic policy, Harford's thesis is that all economic strategies should compete with each other in order to determine which strategy is the fittest.

Harford claims that the Edisonian trial and error approach is the only way to make progress when issues are too complex for analysis. Although Harford advocates such a competition of ideas and strategies to separate the weak and strong, he admits that the agents that compete in his economic arena should be able to survive their failed strategy.

Harford further advocates the use of prize competitions as one approach to generating science for the public good. The Longitude Prize, a prize competition established by the British government to aid navigation, was the first such competition. It was logically structured to allow a storied tier of monetary awards to encourage participation.

The Ansari X Prize for sub-orbital human spaceflight is a recent example of a successful competition. Ten million dollars were awarded to the winner, SpaceShipOne, but it's estimated that the prize generated $100 million in new technology. Harford advocates a multi-billion dollar prize for an HIV vaccine, but he doesn't realize that that's probably less than the money a pharmaceutical company stands to make through its invention.

Thorstein Veblen (a.k.a., Torsten Veblen) was an evolutionary economist in the late nineteenth, and early twentieth, century. He's best known for writing his 1899 book, The Theory of the Leisure Class,[3] and coining the term, conspicuous consumption. Conspicuous consumption is the purchase of lavishly expensive, or ephemeral and impractical, goods and services simply as a way of displaying income or wealth.

Conspicuous consumption is much like a peacock's feathers. It takes a lot of energy for a peacock to maintain such a display to attract a mate, but he's advertising the fact that he's strong enough to pull it off.

Thorstein (Torsten) VeblenThorstein (Torsten) Veblen

Veblen's "The Theory of the Leisure Class" introduced the term, "conspicuous consumption."

(Via Wikimedia Commons).

Corporations with sumptuous headquarters buildings and lavishly ornate boardrooms are a form of conspicuous consumption. They advertise that those corporations can afford such things, since they are doing very well. Companies that count pencils, lock supply cabinets and eliminate employee perquisites such as free coffee and food at meetings, are essentially advertising that they aren't doing so well.

If you're working for a pencil counter, it's time to polish your resume.

References:

  1. Daniel J. Rankin, "Economics - A Darwinian Approach," Science, vol. 333, no. 6042 (July 29, 2011), p. 526.
  2. Adapt - Why Success Always Starts with Failure by Tim Harford (Farrar, Straus and Giroux, New York, 2011), 320 pp. (ISBN 978-0374100964, via Amazon).
  3. Thorstein Veblen, "The Theory of the Leisure Class," 723 kb PDF File, via Pennsylvania State University.

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Linked Keywords: Dinosaur; Earth; Titanosaurs; Late Jurassic; Late Cretaceous; metric ton; futures exchange; futures market; Cretaceous–Tertiary extinction event; avian; nature; Emergency Economic Stabilization Act of 2008; bail-out plan; evolutionary principle; natural selection; human; extinct; Wikimedia Commons; Science; Institute of Evolutionary Biology and Environmental Studies; University of Zürich; Zürich, Switzerland; Swiss Institute of Bioinformatics; Lausanne, Switzerland; common sense; evolutionary biology; economics; biological fitness; utility; Edisonian; trial and error; Longitude Prize; United Kingdom; Ansari X Prize; SpaceShipOne; HIV vaccine; pharmaceutical company; Thorstein Veblen; nineteenth century; twentieth century; The Theory of the Leisure Class; conspicuous consumption; peafowl; peacock; feathers; energy; corporation; perquisite; coffee; Adapt - Why Success Always Starts with Failure; Tim Harford.

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