32 of 33 people found the following review helpful:
3.0 out of 5 stars
Stimulating? Yes; Analytically Defensible? Poor, June 26, 2006
Paul Ormerod's "Why Most Things Fail: Evolution, Extinction and Economics," begins with the observation that failure is everywhere but is not the subject of standard analysis by the economics profession. Since the advent of the modern corporation, 22% of the top 100 companies at any given time drop from the elite rankings in the next decade, 10% of all companies fail each year (granted, mostly the newbies), and 50% of globally successful companies go extinct within the lifetime of a modern human. Why?
Ormerod brings a journalist's and economic historian's perspective to the question. He snorts at general equilibrium theory as being fundamentally at odds with how the real economy works. Standard supply curves? NO. Demand curves? NO. Setting price at marginal costs? NO. Perfect competition? NO. Perfect information? NO. Eventually rising marginal costs with greater production? RARELY.
I'm not surprised that professional economists would find this book lacking. Yet for most of us that have only taken Economics 101 or mostly get our economics from pop economists on news and business programs, Ormerod raises important questions and brings forth important ideas. There is indeed much that the conventional economics community has gotten wrong or has been too simplistic about. This book is a very good re-entry into economics if you have been away for a while.
Ormerod's major thesis -- and what caught my eye in getting the book in the first place -- is that there are many parallels between biological evolution and the behavior and extinction of firms. For this, Ormerod especially points to both systems as being characterized by much uncertainty and complexity. No argument there.
In knocking down the pins of conventional textbook answers, Ormerod covers topics such as game theory, bounded rationality, probablity theory and power laws, invoking names and characters such as Von Neumann, Hayek, Stiglitz and others along the way. His thesis also allows him to explore the question of exogenous and endogenous causes with some freshness.
Strangely, though, he is virtually silent on the real commonality between economic and biological systems -- namely the central importance of information -- and gets into a very strange and indefensible analysis of punctuated equilibria and extinctions for species spanning 550 million years in comparison to visual correlations that create an "immediate impression of similarity" with graphs of firm extinctions over the past 83 years. As Ormerod states, "The relationship that describes the connection between the frequency and size of extinctions in biological species is the same as that which describes the extinctions of companies. The timescales differ dramatically, but frequency and size are connected identically in both."
Hogwash.
Ormerod gravely mis-matches samples, causality and power curves. Indeed, similar power curves can be constructed for Web site popularity or term frequencies in the English language (among many others), which surely have nothing to do with "truths" about the extinctions of economic firms. Also, given Ormerod's thesis, he could have gotten some additional interesting mileage from Iansiti and Levien's business ecosystem theory of The Keystone Advantage.
There is certainly insight that uncertainty makes it difficult to foolproof against the future and is one reason why things fail, also certainly compounded by complexity. I also think Ormerod is able to make a pretty good case for how acquiring knowledge can help buffer against these factors.
So, I give this book 5 stars for readability and provoking thought; indeed, it has gotten me to get re-acquainted with recent economics literature. But I can only give it 1 to 2 stars for its logical side due to its mis-labored analogies and poor analysis. BTW, for an intro to more serious discussions about the relationships of evolution and economics, see writers such as Nelson and Winter, Galor, Mokyr, or Ziman, among others, or the listings at IDEAS: Papers on Economics and Evolution from the Max Planck Institute.
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15 of 16 people found the following review helpful:
3.0 out of 5 stars
More an attack on economics than a new economics, January 2, 2007
Paul Oremerod bills the book as a theory for why everything fails. This high concept book (aimed at the audience of similar high concept books like Blink and Freakonomics) unfortunately fails to deliver on it's promise of a grand unifying theme. What is presented is an attack on classical economics. Well deserved, and well delivered from an insider in the profession, but not a coherent explanation of why things don't work.
Whining aside, the book won't kill you, it's an easy read, and you'll learn something (quite a bit!) from it. For that, it does deserve a spot on my bookshelf.
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12 of 13 people found the following review helpful:
3.0 out of 5 stars
Good book that lost its theme, September 23, 2006
I'd like to recommend this book, but I can only recommend the first half of it. I'm a fan of solid economics writing and clear systemic argument. This book begins with both and builds a case for understanding something both obvious and stunning-- businesses fail at such a high rate that they look a great deal like biological systems suffering waves of extinction events. I greatly enjoyed Ormerod's "Butterfly Economics" but after a solid beginning this book lost focus.
One very good item here is the Iron Law of Failure. He writes, "Failure is pervasive. Failure is everywhere, across time, across place and across different aspects of life; 99.99% of all biological species that have ever existed are now extinct. More than 10% of all the companies in America disappear each year." Failure happens when companies don't evolve and change to meet new challenges, competitors or brands. What happens after failures is also a key component of the book and one I wish he would have dealt with more deeply. The ideas of creative destruction and adaptive evolution are found in the latter half of the book but they seem less developed. And while the existance of an Iron Law (I liked the term) is no doubt true, is it necessary for the growth of prosperity? Do we all do better, live longer, etc., because of competition and destruction?
He's a great writer and wonderful thinker but this is only a fair book.
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