Natural Selection, Economics and Investing
An inquiry into the relation between these after reading Darwin and Adam Smith.
My sense is that, although there might be a possibility of independent mindedness being genetic, it may be in one’s power to force original outcomes. Originality can be obtained from possessing unique inputs when producing. If one fills their mind with commodity knowledge, getting insights of a special nature seems absurdly unlikely. I therefore believe that exploring territories regarded as useless, for the purpose of investing, should turn out to be a profitable enterprise.
Munger believed that ignoring the interconnectedness between disciplines is an unwise practice. Two elements play a role in this: (i) the man-with-a-hammer tendency can only be avoided by being capable of performing different kinds of analyses (ii) widely spread tools are ineffective for competing in the pricing mechanism. Mental models whose juice has been extracted to the last drop should not provide any competitive advantage. There may exist an element of exhaustible utility to things alike. Eventually, frameworks become useful to know but futile to utilize. Exploration, then, becomes a requirement.
There is a hypothesis I’ve been seemingly entertaining, one which was recently suggested to my consciousness. If we deconstruct everything, we will arrive at systems, all of which empower different processes in pursuit of a specific objective. For Nature has been acting billions of years, I suspect it offers a repertoire of exquisitely sound systems. My suspicion is that many of the systems Man employs for society will tend towards those already created by Nature. I have several reasons to believe that, for instance, the pricing mechanism resembles Natural Selection.
In this essay, my intention is to investigate the validity of the claims made in the foregoing paragraphs. The Origin of Species contains several verticals whose exploitation I suspect will be profitable. When writing, I try to get rid of prior assumptions and be fully aware of biases, to the best of my capacity at least. It would be directly opposing the truth if I were to be subject to the latter. To Munger’s “wisdom acquisition is a moral duty,” I’d add, “truth seeking is a moral duty.”
In case you find it useful, here’s the PDF version:
Excess Returns and Contrarianism
The most extraordinary payoffs come from betting on truths people have missed. Prior to articulating his theory, Darwin had mastered naturalism and biology literature. Charles knew the other side’s arguments better than themselves. Although he recurrently pointed out that we know very little about the origin of species, his sense was that the theory that better explained evolution was Natural Selection. In contrast, all naturalists believed in the independent creation of species.
Arriving at such a conclusion was detrimental to Darwin’s peers and people’s religious beliefs. But a commitment to the truth made him push the theory forward. Both elements caused Natural Selection to not be widely praised at its time, and for Darwin to be censored, to some extent. Notwithstanding this, human’s understanding of the origin of species had never advanced in so rapid a fashion. Intellectually, Natural Selection or Survival of the Fittest may have generated one of the largest payoffs ever experienced.
“Although much remains obscure, and will long remain obscure, I can entertain no doubt, after the most deliberate study and dis- passionate judgment of which I am capable, that the view which most naturalists until recently entertained, and which I formerly entertained—namely, that each species has been independently created—is erroneous.”
I suspect the dimensions a payoff can acquire depend on the truthfulness of the backed argument and the likelihood of truth being the case. In most spheres where Man operates, truths are the things with which the largest number of people agree. Recognizing this helps detach all ideas from their abstract veil of divinity. As a preliminary approximation, I would posit that the probability of something being true tends to rise as more people agree with it; the obverse statement would also be valid, namely that the probability of an idea being true declines as more people disagree with it. It cannot be overstated how wise crowds frequently are. After careful deliberation, I’m inclined to believe that the farther from the current truth we find an idea and bring it to society, the larger its potential payoff.
“As a record of a former state of things, I have retained in the foregoing paragraphs, and elsewhere, several sentences which imply that naturalists believe in the separate creation of each species; and I have been much censured for having thus expressed myself. But undoubtedly this was the general belief when the first edition of the present work appeared. I formerly spoke to very many naturalists on the subject of evolution, and never once met with any sympathetic agreement. It is probable that some did then believe in evolution, but they were either silent, or expressed themselves so ambiguously that it was not easy to understand their meaning. Now things are wholly changed, and almost every naturalist admits the great principle of evolution.”
Exceptional Qualities from Great Thinkers
I have read numerous incredible minds. Brilliance abounds among them, but I found there is an element that sets some of them apart from the rest. They can operate in caverns wherein no light resides. Embracing ignorance seems to be a pre-requisite for building new knowledge. For, by definition, new knowledge is to be found outside of current frontiers, a great thinker necessarily needs to be comfortable with navigating unknown waters. I’d even be inclined to believe that comfort needs to be further found in unknowable waters. Darwin constructed upon foundations which he vividly ignored and recognized to do so.
In ‘Investing in the Unknown and Unknowable’, Richard Zeckhauser articulates the existence of unknown and unknowable (UU) events. The essay narrates the conceptual evolution of financial theory and the ultimate wall it encountered. Risk was introduced after academics recognized that the future may have different states of nature, all of which possess certain chances of occurring. Uncertainty then arose when it was noticed that the probabilities of these scenarios were unknown. However, modern portfolio theory hit a wall in the world of ignorance, whereby not only the probabilities are unknown, but also the possible states of nature.
It strikes me as curious to observe that, on occasions, the root of something may be ignored and one can still arrive at truths. The law of correlation implies that some variations are accompanied by others. For instance, breeders believed that “long limbs are almost always accompanied by an elongated head,” and it has been observed that “winged seeds are never found in fruits that do not open.”
“Variability is governed by many unknown laws, of which correlated growth is probably the most important”
“Our ignorance of the laws of variation is profound”
Inferences can be made where the core is ignored. Known and knowable surrounding elements may be of some utility to hypothesize respecting an unknown matter. I suspect such hypotheses can only be made if one accepts the unknown, and maybe unknowable, nature of this core. The lack thereof would, I believe, prevent the mind from arriving at potential answers.
“If we ask ourselves why this or that species is rare, we answer that something is unfavorable in its condition of life; but what something is we can hardly tell”
Great thinkers lay down the counter side arguments in their most prepared form, reflecting how carefully they have thought about them. These Masters have deeply internalized their ignorance and the existence of seemingly unknowable factors. The reader’s trust is therefore requested, for it is a requirement to embark alongside these thinkers and surf new knowledge.
“To suppose that the eye with all its inimitable contrivances for adjusting the focus to different distances, for admitting different amounts of light, and for the correction of spherical and chromatic aberration, could have been formed by natural selection, seems, I freely confess, absurd in the highest degree”
Natural Selection or Survival of the Fittest
I) Of Natural Selection or Survival of the Fittest
Of the origin of species, we are very ignorant. Numerous questions remain obscure and unanswered. Darwin published his book in 1859, whereby he posits his conclusions. After deliberately analyzing different organic beings and meditating about findings, he arrived at the theory of natural selection. When organic beings yield offspring, the creation tends to highly resemble their progenitor, but they are not equal. Charles observed that new productions carry new variations, wherein certain characters of the progenitor are slightly modified.
For all organic beings occupy a physical space and live off nutrients, being the latter finite, struggle with other beings unequivocally follows. The best adapted species beat the others in the struggle for life, thereby having better access to food and shelter, both of which determine who ultimately survives.
Species’ likelihood of survival increases in direct proportion to how profitable their structures are. Each slight modification, or variation, carries unique chances of survival and reproduction. Natural selection is the mechanism by which the most profitable variations are kept, and injurious ones are discarded. It is to be observed, however, that it is the union of species’ characteristics and peculiarities that lead to survival. We cannot determine which is the single element that causes the species to survive.
“This preservation of favorable individual differences, and the destruction of those which are injurious, I have called Natural Selection, or the Survival of the Fittest”
“For as all the inhabitants of each country are struggling together with nicely balanced forces, extremely slight modifications in the structure of habits of one species would often give it an advantage over others”
The most profitable variations are those that allow species to better combat others. Both elements are fundamentally tied and therefore made the theory be called “Natural selection, or Survival of the Fittest.” Nonetheless, the original name was Natural Selection. Only after the race for life was so vividly revealed did Darwin notice that it was indeed meant to equip species for competition.
II) Of Competition and its Implications
“All organic beings are exposed to severe competition”
For ecosystems are composed of a large number of species and their respective varieties, the struggle for life is intrinsic to their existence. Invariably, alterations of a single species are tested against those with whom it competes. I believe this dynamic may be metaphorically represented by a continuous push and pull, whereby each new variation causes value creation, or destruction, for the possessor’s species. Profitable variations help them do better in the race for life, ultimately raising long-term reproduction and survival rates.
Unequivocally, natural selection has two fatal implications, namely: (i) the dynamism embedded in all ecosystems, for species are continuously varying and physically moving, requires all species to constantly adapt to avoid extermination; (ii) change brings destruction.
“Any form which did not become in some degree modified and improved, would be liable to extermination”
“The extinction of old forms is the almost inevitable consequence of the production of new forms”
If we imagine ecosystems as a composition of interconnected variables, whenever one slight change occurs, the whole system is massively shaken. I’m inclined to believe this phenomenon follows a non-linear pattern. At least, I cannot visualize a method by which the effects of variation could be calculated. Modifications to whichever species will necessarily affect the species with whom it competes and those to which it is prey.
Natural selection operates by compounding variations. Since organic beings are species’ agnostic at the individual level, they do not discriminate among competitors. In fact, it has been observed that competition is the most severe among similar beings, which I explain in the chapter called “Of Red Oceans, Natural Prices and The Elements.” It then becomes evident to conclude that progenitors will tend to be replaced by their better adapted creations.
“As natural selection acts solely by the preservation of profitable modifications, each new form will tend in a fully stocked country to take the place of, and finally to exterminate its own less improved parent-form and other less favored forms with which it comes into competition
Domination implies struggle. Domination equates to spreading the farthest, achieved only by displacing neighbors, thereby occupying their physical space and consuming their food. If it is achieved, to some degree, it is fair to conclude that the species is better adapted than others.
This dynamic, when complemented with compound interest, has derived into a frequently observed pattern in business: winners keep winning. Profitable variations of already dominant species turn them into even more dominant, absent other species’ extraordinary improvements.
“For, as varieties, in order to become in any degree permanent, necessarily have to struggle with the other inhabitants of the country, the species which are already dominant will be the most likely to yield offspring, which, though in some slight degree modified, still inherit those advantages that enabled their parents to become dominant over their competitors”
Ecosystems require continuous adaptation from species, for all of the others are changing as well as resources, further affected by other phenomena. Agents varying subsequently demand one’s species to vary. That is what I believe pushed Darwin into claiming the following.
“No country can be named in which all the native inhabitants are now so perfectly adapted to each other and to the physical conditions under which they live, that none of them could be still better adapted and improved”
III) Of the Inevitability of Vast Destruction
All species, at some point in their lives, experience massive destruction. Nature tends to occasionally disrupt ecosystems, signaling the end of a species’ dominance. Such events seem, however, unpredictable.
“A struggle for existence invariably follows from the high rate at which all organic beings tend to increase. Every being, which during its natural lifetime produces several eggs or seeds, must suffer destruction during some period of its life”
If these were absent, the planet would be completely filled with organic beings, leaving no physical space remaining; hence why the conclusion is necessarily true.
“Lighten any check, mitigate the destruction ever so little, and the number of the species will almost instantaneously increase to any amount”
Checks have been temporarily lightened in the economy at certain periods, and we in fact experienced insurmountable increases in the number of businesses. Although this might be perceived as ultimately positive, catalysts of this nature tend to concentrate creation on a specific area. Without the possibility of focusing on different end markets, companies will be competing for the same food. For food is limited, only those species with the most profitable structures will get to feed themselves. Ultimately, a period of massive destruction ensues.
“When a species, owing to highly favorable circumstances, increases inordinately in numbers in a small tract, epidemics often ensue”
After some meditation, I suspect my hypothesis is not directly in line with what Darwin posits. It appears to me as if Darwin refers to Nature bringing destruction through external agents, not by competition. This may be caused by the species overextending territorially. Occupying more land necessarily entails dealing with more phenomena. Complex biological agents may be encountered, some of which natural selection has not prepared the species to combat. For these agents tend to be highly contagious, an infected species at the edge of territorial control will soon affect those who reside at the center. I am still dubious of the foregoing speculation.
Darwin had also observed that some organic beings, such as seedlings, are severely affected by the existence of various enemies. For instance, insects and slugs cause massive destruction of seedlings. I believe similar entities can be found in the economy, all of whom ultimately require destruction for survival.
Hereafter, I shall attain to briefly explain bubbles upon Darwin’s finding on the climate’s effect in ecosystems:
“The action of climate seems at first sight to be quite independent of the struggle for existence; but in so far as climate chiefly acts in reducing food, it brings on the most severe struggle between the individuals, whether of the same or distinct species, which subsist on the same kind of food”
All businesses ultimately compete for the same food. Strong delineations differentiate available food for specific sectors. Notwithstanding this, I imagine that a gigantic external shock to, for instance, the money supply, blurs delineations, causing competition among widely different businesses. The possibility of such distressed scenario existing inclines me to believe that there is fundamentalness in the levels of demand. In economics, a fine term that captures this is “non-discretionary demand.”
External factors, of smaller magnitude, may cause the delineation of a specific sector to compress, reducing its addressable market. Other events might keep the territory unchanged but trigger rapid spreading of a specific variation. The former of both statements leads to an increase in competition, necessarily implying destruction, for there’s fewer food to be distributed among the same number of individuals. In contrast, the latter entails a check being lightened that suit perfectly a specific variation. Under the premise of good execution, the individual takes advantage of its superiority and appropriates others’ food.
The final cause of vast destruction I’ve identified in Darwin’s writing is species experiencing slightly different conditions, augmented by compound interest. My sense is that, especially early on, inputs, and their timing, are of the utmost relevance. Organisms are beautifully complex and tend to endure enough time so that compounding has pronounced effects. Slight changes have a colossal impact in their development trajectory.
“In some few cases it has been discovered that a very trifling change, such as a little more or less water at some particular period of growth, will determine whether or not a plant will produce seeds”
IV) Of Natural Selection, The Pricing Mechanism, and Purifying Effects
In 1945, Friedrich Hayek published The Use of Knowledge in Society, wherein he dives into the problem societies face when trying to leverage information in order to make decisions. Knowledge is spread among everyone throughout the economy. Each person has an informational advantage over the others regarding their particular circumstances, time, and place. A rational economic system should be one that conveys all dispersed individual pieces of knowledge and sets ‘things’, like prices, for instance.
Similar to what happened with financial literacy, there was a belief that all of this information could be granted to a particular individual so that they make the ultimate call. Scientific knowledge, praised as the most valuable asset we have, needs to be arranged in this manner. Experts are those who are capable of taking the discipline further and, to do so, they need to be thoroughly instructed about available information.
Having economic decisions consequences to the whole society, it results imperative to take all information into consideration. To the contrary, scientific discoveries do not have this condition; only vertical knowledge is needed, and consequences are not external. However, it is impossible to convey scattered knowledge in a way that all is considered by a single decision-maker. Therefore, a decentralized system is needed.
“It is in this connection that what I have called the “economic calculus” proper helps us, at least by analogy, to see how this problem can be solved, and in fact is being solved, by the price system. Even the single controlling mind, in possession of all the data for some small, self-contained economic system, would not—every time some small adjustment in the allocation of resources had to be made—go explicitly through all the relations between ends and means which might possibly be affected.”
All agents participate in the pricing mechanism, sending signals to the system; the latter being in the form of buying or selling. Each of these would implicitly include, in prices, individual circumstances that caused the signal to be sent. This mechanism aggregates all dispersed knowledge and ‘makes’ decisions in accordance with everybody.
If we, for a moment, entertain the idea of assets being similar in nature to varieties of species, there might be a case to be made where the pricing mechanism resembles natural selection. It appears to be one of those ideas whose spirit seems correct, but whose details escape my cognitive capacity. It must be observed that the following will be no more than speculations.
“Natural selection will never produce in a being any structure more injurious than beneficial to that being”
The problem these two systems have is their incapacity to foresee the future, augmented by the ever-changing conditions wherein they act. I believe it is not a whim, but a necessary evil, that both need to produce numerous variations, leading to some of them putting a specific organic being at a disadvantage. Similar to how products get tested in the market, so are species’ varieties. In the case of organic beings, my sense is that there is a gap from the time of ‘variety ideation and preparation’ to the time when it manifests. Therefore, having not foreseen how the ecosystem would change in the meantime, some variations turn out to be disfavorable. The other possibility is that it is simply a matter of brute force.
Nature preserves profitable variations just as the pricing mechanism weighs over ‘truer’ signals. Nonetheless, it’s only at longer term horizons that such states appear to be reached. In nature, I may only hypothesize this is due to the difficulty of the task. In the economic world, I’m inclined to believe it is a byproduct of multiple things, namely: (i) information arrival to assets’ prices has delays; (ii) the dollar volume which specific assets attract causes some decisions to be weighed very heavily in the short term, not necessarily implying they are true; (iii) Man is not a persistently rational agent, for which even one’s signals may lack an appropriate reflection of circumstances.
I suspect the information delay is the effect of not all agents actively participating in the pricing of assets, which, incidentally, is a natural course of action. Furthermore, the signal one sends may be irrational, thereby implying the signal is essentially contaminated. Were the agent in question to send numerous signals over the course of subsequent years and I would be inclined to believe signals will, on average, contain a truer essence than the first one. Maybe the element of assets reflecting their true value in the long term generates this phenomenon of purification. The process by which true values are obtained resembles how swords are forged.
If we attain to think of these speculations as close to accurate, the following and final observation may be considered. Darwin stated that variations are solely focused on improving the organic being’s state. They cannot be produced in favor or disfavor of another individual.
“Natural selection can produce nothing in one species for the exclusive good or injury of another”
Signals sent follow a similar dynamic, for all of them encompass the agent’s view on the asset price. On average, human decisions tend to be rational, thereby being beneficial to the individual, or at least perceived as such. Otherwise, the obverse action would be taken. In the Theory of Moral Sentiments, Smith posits that humans cannot physically feel others’ sensations. Based on these reasons, I’m initially inclined to believe that signals are exclusively sent for the benefit of the individual. Whether authentic and selfless philanthropy exists, or not, escapes the purpose of this writing and is something I ignore.
Taking it one step further, Adam Smith stated, in his Inquiry into the Nature and Causes of The Wealth of Nations, how acting in favor of oneself ends up promoting the public good. It would be too pretentious if I were to extrapolate this to Natural Selection because I don’t see the relation very clearly myself. Why this phenomenon occurs remains an obscure question on which I cannot shed any light with my current understanding.
“As every individual, therefore, endeavours as much as he can, both to employ his capital in the support of domestic industry, and so to direct that industry that its produce maybe of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”
Of the Mechanisms for Survival
I) How to Deal with Vast Destruction
Organic beings have dealt with vast destruction for millions of years. It is an interesting phenomenon, I may observe, that nature is acting in favor of everyone. With the objective of reproducing and mitigating destruction, species have produced mechanisms of the most extreme differences. I have some reasons to believe that all of these could be leveraged in pursuit of business survival. Investors caught up with the first mechanism a long time ago.
“A large number of eggs is of some importance to those species which depend on fluctuating amount of food, for it allows them rapidly to increase in number. But the real importance of a large number of eggs or seeds is to make up for much destruction in some period of life; and this period in the great majority of cases is an early one”
The fluctuation of food is a norm in ecosystems. For dynamism is a fundamental component of both, I doubt one can find a space where food is stable. The latter not only implies its permanent and constant generation, but also the lack of competition for this food. Only at the utmost extreme of the chain may we find such miraculous places, which could be triggered by other species’ incapacity to digest this specific type of food. Notwithstanding this obscure scenario, I’m inclined to stand by the former statement.
Darwin suspected that nature’s thesis for large numbers of eggs revolved around the protection against massive destruction.
“The only difference between organisms which annually produce eggs or seeds by the thousand, and those which produce extremely few, is, that the slow-breeders would require a few more years to people, under favorable conditions, a whole district, let it be ever so large. The condor lays a couple of eggs and the ostrich a score, and yet in the same country the condor may be the more numerous of the two, the Fulmar petrel lays but one egg, yet it is believed to be the most numerous birds in the world. One fly deposits hundreds of eggs, and another, like the hippobosca, a single one; but this difference does not determine how many individuals of the two species can be supported in a district.”
Consequential to this effect, there is no incentive for producing high levels of eggs if massive destruction is generally absent at the earlier stage of the being’s life. When, for unclear reasons, nature or external agents are not working fully against the survival of new organisms, the strategy for reproduction should change in pursuit of endurance. Further, I’m entertaining the idea that dominance may be more easily achieved with the strategy I shall expand hereafter.
It may be of greater interest to some organic beings to redirect their effort of yielding offspring into nurturing their creations. Naturally, the more times an organic being yields offspring, the less effort it can put into maintaining each individual and help it thrive. I suspect those organic beings that utilize the former strategy are very likely to score high in the scale of nature.
“It would suffice to keep up the full number of a tree, which lived on an average for a thousand years, if a single seed were produced once in a thousand years, supposing that this seed were never destroyed, and could be ensured to germinate in a fitting place.”
I suspect the most enduring businesses enjoy the advantage of their offspring not experiencing vast destruction early on in life. This should translate into capital deployments with higher certainty of returns, for less unknowable factors are present. Furthermore, a larger number of eggs carries greater degrees of aggregated variations. In contrast, when a species yields offspring on an infrequent basis, part of the thesis may be around the fact that the overall structure of the organic being is powerful, thereby suggesting dominance from the go. I’m inclined to believe a similar pattern plays out in companies’ investments.
Numerous investors operate under the premise that, because we do not know the future, they cannot put all of their eggs in the same basket. Although a very sound idea, I find that taking it to the extreme is an unwise practice. For profits cannot grow forever and revenues cannot exceed GDP, market returns should tend towards GDP growth. A basket full of all eggs should carry the same results as the average produced by all variations of species. The latter, on average, do not fare very well.
II) Of the Effects of Isolation
Darwin found that some isolated areas possess uniform conditions of life for organic and inorganic beings. For they are all affected in the same manner, and isolation presupposes that no external threats are to be found, natural selection is prone to modify all varieties of a species in the same manner.
Absent the incentive for abrupt variation to better adapt, the ecosystem’s rate of change should be low. In consequence to this phenomenon, logic would dictate a non-variable scale of dominance, wherein each species is solidly established and with good prospects of survival, in the number they are.
Destruction for species comes by Nature’s ‘random’ strikes and competition with others. In isolated areas of these characteristics, both elements seem to be missing. More importantly, by definition, the ecosystem enjoys protection from other better adapted organisms.
Preventing disruptions and the absence of vast destruction converge to generate the perfect conditions for uninterrupted compounding. For all of these organic beings are persistently improving, isolation facilitates the creation of greatly adapted species. The only problem I foresee derives from the scenarios where isolation stops. Although it is likely for species to be powerful in very peculiar respects, it is unclear to me whether or not their strength would help them thrive when competing with external organic beings. The final hypothesis I’d therefore posit is that returns on capital would be guaranteed for as long as isolation remains. Thereafter, one can only speculate.
“Isolation will give time for a new variety to be improved at a slow rate”
III) Of the Obscure Protection that Some Low-Scale Organic Beings Enjoy
I believe to have read that one of the arguments against the theory of survival of the fittest revolved around the fact that there is no single dominant species. An outcome of that sort, where one species is simply the best adapted and thereby dominates every other, has not materialized. Furthermore, Charles presents an even more curious phenomenon:
“And geology tells us that some of the lowest forms, as the infusoria and rhizopods, have remained for an enormous period in nearly their present state”
For food and nutrients are limited resources, it’d be natural to expect the best adapted species to be the only ones with access to them. Nonetheless, Darwin suggested the following:
“For the high advancement of certain whole classes, or of certain members of each class, does not at all necessarily lead to the extinction of those groups with which they do not enter into close competition”
I believe this may be explained by two potential causes, namely: (i) if the more advanced species does not reside in the same area as the less advanced species, they will not be able to reach their food nor they will compete for physical space; (ii) more advanced species may live on different food.
How to leverage both analogies in the business world is an obscure question. Ultimately, all companies compete for the same resource, people’s money. The latter is obtained through competition for a share of mind of the buyers. Although it may appear as if both elements lead to severe competition between all businesses, this is not the case. From this set of premises, I’d be inclined to suspect that a blurry line may divide types of companies, which guarantees the pool of food for which they compete. The blurriness of this line, it is to be observed, is the consequence of the fundamental premises I posit.
IV) Of Peculiar Cases
Nature has been granted an invaluable resource: billions of years to work on its creations. When we combine natural selection with the extreme contextual differences to which each species is exposed, and the effects of compound interest, results are of the vastest discrepancies; inasmuch that naturalists used to argue that humans’ eyes couldn’t have been produced by natural selection. It should not be of any surprise to the reader that some species have survived by developing utterly different and strange strategies. I will hereafter expose some of these, with the hope of triggering some connections on how some businesses may achieve a similar goal.
A species may be reproduced by its seed reaching fertile soil. It thereby becomes evident how crucial of an aspect it is for the seed to end in soil. Natural selection has found it wise to embed these in fruits. In fact, it may be argued that the whole reason why fruits are produced in the first place is to guarantee the species reproduction. This fascinating agent has observed that, to obtain, one has to first give. If a tree produces a fruit which another being finds enjoyable, the latter will consume it. Were a seed included at the heart of the fruit and its likelihood of germinating is much higher than what would be otherwise.
Importantly, Nature has further noticed that the product may well be great, but other participants of the ecosystem are not necessarily aware of this element. Plants must then produce fruits that capture organic beings’ attention and tilt their behavior into a desire of consumption. These intelligent species have therefore coloured their productions with brilliant tints, or have focused on making them white or black, depending on the environment.
“I infer that this is the case from having as yet found no exception to the rule that seeds are always thus disseminated when embedded within a fruit of any kind, if it be coloured of any brilliant tint, or rendered conspicuous by being white or black”
Some species have recognized the endurance of other organic beings and have leveraged their capabilities for survival. The mistletoe has found refuge in trees, from whom they feed themselves by extracting water and nutrients from their host. I suspect this is a very valid strategy to escape competing with other organic beings and not having to fight for one’s physical position in the ecosystem. It is to be observed, however, that extreme dependence may have detrimental consequences. Durable hosts that live with a surplus do exist, but the surplus is finite. Therefore, too many mistletoes growing on the same tree causes competition to be incredibly tough between one another, ultimately concluding in their own destruction.
“The mistletoe is dependent on the apple and a few other trees, but can only in a farfetched sense be said to struggle with these trees, for, if too many of these parasites grow on the same tree, it languishes and dies. But several seedling mistletoes, growing close together on the same branch, may more struggle with each other”
Alternatively, some plants’ strategy revolves around flooding a single space and sticking together. Only by doing so do they get to survive. The lack of enough participants would cause the destruction of them all. A threshold seems necessary to be met for the species to thrive.
“For in such cases, we may believe, that a plant could exist only where the conditions of its life were so favorable that many could exist together, and thus save the species form utter destruction”
Although the ultimate cause remains unknown to me, I believe this mechanism may have been developed due to some reasons, namely: (i) it’s plausible to suspect the species in question is so weak on its own that having another species next to it would cause its destruction, thereby requiring for all physical space to be filled with peers, all similarly weak; (ii) cooperation and societal conformation may be fundamental for the group to survive, as it happens with ants or, perhaps, bees; (iii) maybe they feed on stronger species or ones higher in the scale of nature and therefore need to hunt in group, or, similarly, gather resources together. It is to be observed that the latter two are not observations based on the direct phenomenon, but on situations alike.
I must hereby escape the current line of thought and expose not a mechanism for survival, but of revival. Nature has improved species to incredible degrees and in very complex manners, creating ecosystems for which ancient species could be unprepared. Notwithstanding this, it has happened that new variations in certain breeds have featured traits or characteristics that had been lost.
“When a character which has been lost in a breed, reappears after a great number of generations, the most probable hypothesis is, not that one individual suddenly takes after an ancestor removed by some hundred generation, but that in each successive generation the character in question has been lying latent, and at last, under unknown favorable conditions, is developed”
Naturalists could argue that such a misstep could be seen as natural selection being wrong at its root, for why would it discard profitable variations. I find this to be slightly wrong. Ecosystems are a dynamic place. The lost trait was tested and proven ineffective under scenario X, which doesn’t imply the trait would prove ineffective in scenario Y. Infinite variables should be considered, which is why I suspect Darwin says, “unknown favorable conditions,” and it may be the case that scenario Y, which naturally arrives after the passage of time, makes the trait to be a profitable one.
Finally, I must refer to a case of unconventional wisdom that Darwin posits. It had been a common conclusion from naturalists to believe that the bigger the monster, the better adapted to its environment. Furthermore, it is likewise easy to speculate that it is more difficult to compete with a species of this character.
“So little is this subject understood, that I have heard surprise repeatedly expressed at such great monsters as the mastodon and the more ancient dinosaurs having become extinct; as if mere or bodily strength gave victory in the battle of life. Mere size, on the contrary, would in some cases determine quicker extermination from the greater amount of requisite food”
In addition to naturalists’ line of thought, I may argue that, in businesses, it is similar, though for another vital reason. Bigger corporations demand more food to cover their cost structures. Getting more food consists in fighting for more nutrients everywhere. Overextension implies struggle in all frontiers, some of which may be led by people whose desire to win is less than that of their competitors, for the latter require the nutrients to survive, while the former does not. Similarly, at the micro level on each frontier, maneuvering gets increasingly complex as layers of bureaucracy are added, thereby favoring smaller competitors.
Of the Variation of Species and the Durability of Returns on Capital
I) The Variation of Species
The Origin of Species posits that profitable variations will be kept and, those that are injurious to the species, discarded. Dominant species, understood as the best adapted ones, will therefore tend to keep dominating. Having a large population of a certain species will increase aggregated variability. Dominant beings will tend to produce more profitable variations, in absolute terms. Furthermore, compounding profitable variations on already dominant species is a powerful loop.
“Wherever many species of a genus have been formed, the species of that genus present a number of varieties, that is of incipient species, beyond the average”
It’s crucial to acknowledge that, although this aspect is ultimately favorable for the species and genus, it’s highly disadvantageous at the individual level. The genetic code seems to be aligned towards species reproduction, but it does not discriminate between organic beings. Species not only compete for physical space with others, but with their peers as well. Under the circumstances described, I’d expect parent-replacements to be above average within dominant species.
Darwin found that, in this line, some elements tend to persist throughout relatively long periods of time, maybe due to natural selection acting in a slow fashion. Ecosystems that present a large number of species’ varieties are generally those where the foundations that led to this state are still present. High degrees of variation are caused by factors naturally favorable for variation, which we should expect to remain.
“For wherever many species of the same genus have been formed (…) the manufactury of species has been active, we ought generally to find the manufactury still in action”
“Where many species of a genus have been formed through variation, circumstances have been favorable for variation; and hence we might expect that the circumstances would generally be still favorable to variation”
Another peculiarity that occurs in Nature is the variability ‘s dependence on the territory. It was observed by Charles how much more advanced land species were, when compared to those produced in the sea. I may attain to speculate competition was highly incidental in this regard; for higher organisations, to reach any level of such, require the compounding of profitable variations. Faster rates of change are consequential to the levels of competition to which a species is exposed, thereby making it plausible to suspect competition is more severe in the land than in the sea.
“The production of the land seem to have changed at a quicker rate than those of the sea. There is some reason to believe that organisms high in the scale, change more quickly than those that are low”
Groups of species have tended to follow a pattern “of gradual increase in number, until the group reaches its maximum, and then, sooner or later, a gradual decrease.” I find this statement especially peculiar, as I suspect most industries tend to emulate the pattern. What I would further conjecture, based on my prior remarks, is that, during the period of gradual increase, the rate of change of the species continuously increases. In contrast, as a species decreases in number, I’d expect the rate of change to diminish.
There might be a time in an individual species’ lifecycle where their structure acquires its absolute best form compared to others, so that no variations can be as profitable as those of their competitors. Thereafter, the gradual decline of the species commences. I believe these trajectories may be explained by each organic being’s fundamentals, their bodies, and how they relate to the environment wherein they operate.
For how long a species or genus will endure remains an obscure question. Darwin, however, observed that a group’s destruction process tends to be slower than their creation process. My sense is that this occurs because the creation process is the preparation of the species. Increased time provides nature with more room to upgrade and perfect its creation. Additionally, more time will only be given to species whose intrinsic fundamentals are the best for their specific ecosystem. Conclusively, a wonderful machine is created. Being adapted to more threats, its destruction requires more time, making the relation between preparation-destruction to be non-linear.
“There is reason to believe that the extinction of a whole group of species is generally a slower process than their production”
The only clue nature has given us was that, when a species becomes rare, the likelihood of extinction rises. Natural selection can only do so much with a handful of variations. Not enough time is given to generate profitable and enduring modifications. Action becomes slow. I am not sure about what this entails for the business world. It does seem like a similar pattern plays itself out across the centuries.
“Rarity, as geology tells us, is the precursor to extinction. We can see that any form which is represented by few individuals will run good chance of utter extinction, during great fluctuations in the nature of the seasons” (…) “Rare species will be less quickly modified or improved”
II) Of the Returns on Capital and the Competitive Advantage Period
The competitive advantage period measures how much time will the underlying business generate excess returns. It is the life expectancy of a company’s moat. The lack thereof would imply that competition has free access to the business’ profits, which would rapidly erode, under a capitalistic system.
Competitive advantage periods are mostly defined by two elements: (i) barriers to entry, for they impose the “sacrifices” one ought to make to operate within the ecosystem; (ii) rate of industry change, which I’d speculate is consequential to how often customers’ preferences change. The second point is largely determined by the breadth of supply that can potentially exist. We cannot know beforehand how a species will evolve, for we ignore the scope of potentially profitable variations. Similarly, customers ignore the extent to which companies could supply their needs.
Adam Smith wrote that profits, at the beginning of a new successful trade, are high, but as the project evolves, competition drives them towards the level of other trades. It appears as if the proposed trajectory was a rapid climb and a gradual decrease. This would translate into companies’ excess returns on capital to follow a similar path. He further posits that when the effectual demand for a product increases, so does the market price, fueling merchants’ profits. This will cause other merchants to enter the market, since they are looking to invest their capital, and their supply will address the effectual demand. Thus, the market price shall tend towards the natural price, driving profits down.
“When, by an increase in the effectual demand, the market price of some particular commodity happens to rise a good deal above the natural price, those who employ their stocks in supplying that market, are generally careful to conceal this change. If it was commonly known, their great profit would tempt so many new rivals to employ their stocks in the same way, that, the effectual demand being fully supplied, the market price would soon be reduced to the natural price”
“Sudden fortunes, indeed, are sometimes made in such places by what is called the trade of speculation. (…) He enters into every trade when he foresees that it is likely to be more than commonly profitable, and he quits it when he foresees that its profits are likely to return to the level of other trades.”
“The establishment of any new manufacture, of any new branch of commerce, or of any new practice in agriculture, is always a speculation, from which the projector promises himself extraordinary profits” (…) “If the project succeeds, they are at first very high. When the trade or practice becomes thoroughly established and well known, the competition reduces them to the level of other trades.”
After careful analysis, Mauboussin found something that was overlooked. Excess returns on capital have not, in the past, diminished in a linear fashion. Rather, they’ve been cut off at a certain point in time.
A hypothesis of mine is that the rate of change within an industry tends to increase as excess returns on capital scale. I’d expect this to occur up to a certain threshold, generally imposed by the nature of the businesses’ operations. A ceiling in excess returns is determined by the industry’s intrinsic fundamentals. Thereafter, I have some reasons to believe that the rate of industry change tends to decline.
The latter statement derives from observing that numerous industries have tended towards consolidation. Generally, as happens with species, the number of companies of a certain nature tends to increase and then diminish, sometimes gradually, and sometimes abruptly. Such a pattern might be explained by the dynamics of capitalism, raised by Adam Smith. However, it has not been my experience to observe profits and excess returns to decrease under a species’ decline. In fact, excess returns seem to outlast most of the group’s members. For they are still present, it would be natural to suspect that industry consolidation causes, in turn, a consolidation of excess returns and, therefore, its generated profits. Prior to this event, smaller players could get a share of the market, decreasing larger companies’ potential profits.
In contrast, what I suspect has misguided initial conjectures is the fact that the addressable market of species could be seen as the aggregated food they consume. An ever-increasing number of a species implies an ever-increasing food consumption; the obverse being the case as well. In industries, though there may be an element of pie compression, parts are split among less companies.
A concentration of excess returns and profits does not appear to be a universal pattern, however. Some factors that might be required for this phenomenon to occur may be: (i) the industry’s fundamentals need to be such so that a bigger player can serve customers better than many small ones; (ii) the dominant species’ variations needs to count with mechanisms for absorbing extra food; (iii) dominating companies need to carry a profitable variation that allows them to access large extents of the market.
Another factor I’m inclined to consider fundamental is for dominant companies to have a wise leader. Detecting profitable variations in peers and adopting them is crucial for survival, under perfect competition and the climb stage. This will not always be relevant, as there have been companies whose initial core offering could not possibly be displaced, such as VisaNet. For consumer behavior emulates natural selection, a hint is provided as to where to focus. Ideally, species would know the criteria natural selection employs and produce variations in accordance with it. In the case of businesses, such ideal is possible. Working backwards from customers’ problems is something organic beings should be jealous of.
Of The Specialization of Organs, The Division of Labour, and the Fragmentation of Jobs
I) The Specialization of Organs
Living beings are optimized for procreation. In doing so, nature causes them to economize on effort. Maintaining composure and structure is a daunting task. The environment applies constant pressure for their dissolution. In consequence, combating this and extending organic beings’ lives consumes several resources. Partly due to this, genetic codes don’t urge organic beings to perform unnecessary functions, so that energy and resources can be focused on survival and procreation.
”In order to spend on one side, nature is forced to economise on the other side” Goethe
“Natural selection is continually trying to economise every part of the organization”
On a similar note, by keeping profitable variations, a clear tendency made itself apparent to Darwin. Natural Selection will cause organs to specialize, if proven to enhance an individual’s survivability prospects.
“For all physiologists admit that the specialization of organs inasmuch as in this state they perform their functions better, is an advantage of each being; and hence the accumulation of variations tending towards specialization is within the scope of natural selection”
Naturally, spreading resources and focus will tend to deliver worse results at the micro level. The obverse is not necessarily true, as per my understanding goes. An organic being whose structure is not optimal for its specific circumstances should succumb to competitors that are better prepared. These beings tend to present more variability than usual. Similar observations led Charles to notice that functions were most perfectly performed when organs specialized in doing them. He further noticed that the higher in the scale of nature, the more specialized the being’s organization.
“Multiple parts are variable in number and in structure, perhaps arising from such parts not having been closely specialized for any particular function, so their modifications have not been closely checked by natural selection. It follows probably from this cause, that organic beings low in the scale are more variable than those standing higher in the scale, and which have their whole organization more specialized”
Experiments point out that much better results are achieved if an organ performs only one function than if it resolves two or more. Were Nature to detect a higher degree of relevance in one of these functions, it will cause the organ to focus on doing only that one.
“No physiologist doubts that a stomach adapted to digest vegetable matter alone, or flesh alone, draws most nutriment from these substances”
I suspect it is based on these inferences that Darwin concludes that organic beings that stand low in the scale of nature possess more variable structures and organs. This entails that their bodies are not adapted for performing specific functions and remain somewhat diversified in nature. It reminds me of the quote that “the something of somewhere is mostly just the nothing of nowhere.” Maybe this phenomenon explains why their organs need to remain variable, for it is yet unclear to Nature which is the competitive advantage of these beings.
II) The Division of Labour
In The Wealth of Nations, Smith remarked how a large part of society’s increase in productivity was caused by the division of labour. This implies fragmenting a complex operating process into smaller components. Smaller dimensions of the tasks generally embed increased simplicity. On aggregate, complexity might remain even. But at the individual level, it is remarkable how much can be removed.
Most systems where labour is divided categorically outperform those wherein single operators deal with the whole. Smith concluded this is explained by three factors: (i) the increase of dexterity in the workman; (ii) an avoidance of time lost by switching activities; (iii) the enhanced allowance for automation.
Making a task more granular helps delineate it to much further specificity. In consequence, it becomes easier to practice. Continuous focus on these types of tasks helps master them faster. Secondly, people think by association, and every time we become aware of some variable, infinite images related to the variable flood the mind. A useful metaphor is to think of these as different glasses, all of which are required for their particular situation. Switching tasks is metaphorically similar to repeatedly changing glasses, leading to great time lost at the aggregate level. Lastly, better defining an activity, which is a byproduct of the reduced dimension, facilitates its automation. The difficulty in creating a machine for performing a task is directly proportional to the difficulty of the task itself.
III) Jobs Needed to be Done and the Fragmentation of Jobs
Clayton Christensen pointed out the fact that, in everyday life, people face problems. They encounter jobs they need to get done. To resolve them, we hire products and companies. Individuals’ characteristics are the wrong unit of analysis. Correlation will always exist among some elements, but it isn’t those that cause the person to hire the product. It’s the problem they face and the related job they need to get done. A classic job might be physically getting from point A to B as fast as possible. Initially, we’d walk; then we’d hire horses; then cars; now planes. The job remains the same.
What I think occurs in some industries is that, at first, there might be only one company or product. Considering the product lacks a precise definition of the job it does, a broad scope of use cases may arise. In consequence, people with seemingly different jobs to be done turn to this product, since it offers a good approximate solution to the problem they have. The addressable market for the product, therefore, encompasses multiple different markets, all of which represent specific jobs needed to be done.
Nature found it wise to make organic beings’ organs tend towards specialization, as did industry owners. I suspect both premises would tend to predict a similar pattern in industries wherein the underlying characteristics are as mentioned. Invariably, by focusing on a more specific job, the agent will be able to provide a better service than the general player.
My sense is that such an event will only occur if the specific job that’s needed to be done exceeds, on aggregate, a certain threshold on addressable market. In addition to this, there needs to exist an appropriate distribution channel. The lack thereof would not allow for the improved solution to reach destiny, killing the startup in the process.
The catalyst that caused this waterfall of thoughts was Google and ChatGPT. Google Search has dominated internet search for two decades, but ChatGPT composed the first proper threat. However, it peaked at 200-300 million monthly active users (MAUs) in 16 months, whereas GSearch still has in excess of 3bn MAUs.
I think this is the reason why ChatGPT captured only a part of Google’s addressable market, but, in its current form, it’s not clear if it can take any more. I think Google Search did (and does) multiple jobs for people, and ChatGPT does only one or two, but it does them much better than its competitor. Under the hypothesis that ChatGPT already does the specific job of the 80-90% of people who have it, Google Search remains the best approximate solution to all of the other jobs.
Overshooting the customer in any dimension is what gives room for disruptive innovation. It is unclear to me what’s the specific job that ChatGPT does. My sense is that people that need to get this job done were previously overshot by the amount of information Google Search provided. This carries the necessity from customers to do proper selection of sources and then come out with a cross-checked and decently thought conclusion. ChatGPT removes these inconveniences, dramatically bringing down the effort and time needed to do the job.
IV) Interdependence vs Modularity
Products are made of multiple components. Value chains are made of multiple steps. When an industry begins, a completely new solution for a job is created. For it portrays novelty, there will be no other company that produces any of the components, implying the new business has to do everything. Vertical integration, or an interdependent architecture, is required.
As industries evolve, some tend towards a modular architecture. This implies, in the most extreme example, defining all steps of the value chain, having companies focused on each, and for customers to get customized solutions. Interdependent architectures optimize for performance, while modular architectures for flexibility. Generally, when a product overshoots the customer in performance, the surplus of the latter can be sacrificed for customization and convenience.
The semiconductor industry is an example I find interesting in this regard. Initially, semiconductor companies had to do every part of the manufacturing process for the chip to function accordingly. As time went by, the process got fragmented to the point that we now have different monopolies/oligopolies in each part of the value chain. I suspect this may have been caused by society’s desire and necessity of keeping up with Moore’s law, which predicts that the number of transistors in a chip would double every two years. The complexity of each vertical, combined with the inefficiency bureaucracy brings, forced the industry into dividing labour. It seems as if it was the only way to meet demand on performance.
Natural Selection predicts that only profitable variations will be kept. I think this unequivocally applies to industries. Only if a modular configuration helps address customers’ needs, namely the measurement of performance they value, is that the industry will tend towards modularity.
“Under very simple conditions of life a high organization would be of no service”
Similarly, an organ that previously performed two functions will start performing only one if doing so increases the being’s chances of survival. For getting to that point, refinements had to be done to the organ across multiple generations. The moment in which manufacturing processes start getting fragmented is when each part of it has a decently sized addressable market on its own. I’d be inclined to believe that steps of the process would be separated one by one from the interdependent system. For if a step crosses the threshold sooner, it shall be separated earlier.
Of Red Oceans, Natural Prices, and The Elements
Blue Ocean Strategy revolves around metaphorically visualizing markets as if they were all part of a big ocean. A big distinction can be made between different areas, which consists of the presence, or absence, of sharks. Where sharks abound, the sea invariably tends to be dyed red. All of them are feeding on living beings, whose blood ends up on the surface. Competition in these places for food is ferocious. In contrast, there are regions wherein no predators are to be found, called “Blue Oceans.” Monopolies are more easily built and maintained by supplying previously unmet demand, creating a completely new market.
In the business world, this correlates with an observation based on some researchers’ findings as well as investors’ meditations. I’m inclined to believe that industries, or certain types of businesses, as exposed in foregoing chapters, have intrinsic fundamentals, which are ultimately inescapable.
The restaurant business is one where this seemingly applies. Nonetheless, I freely confess that I have recently heard of a businessman who is now operating at 20-30% margins by changing the business model. This example in particular is clouding my judgment and impedes me from generalizing my view on the matter. Notwithstanding this extraordinary case, I shall endeavor to still entertain the idea.
As exposed in a former chapter, Adam Smith brilliantly articulated why profits attract competition. Additionally, he observed that there are two types of prices. Firstly, market prices, generated by supply and effectual demand. Secondly, natural prices, composed of the cost of bringing the product to market.
“There is in every society or neighbourhood an ordinary or average rate, both of wages and profit, in every different employment of labour and stock (...) There is likewise in every society or neighbourhood an ordinary or average rate of rent (…) These ordinary or average rates may be called the natural rates of wages, profit and rent, at the time and place in which they commonly prevail. When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price”
Both prices differ, but Smith conjectured that economic dynamics cause market prices to generally trend towards natural prices. When there is a mismatch between effectual demand and supply with regards to a certain product, the market price will be pushed above its natural price. I may speculate that the initial push, leaving aside matters of scarcity, may be explained by how much value the effectual demand derives from the product, probably related to the idea of marginal utility. Thereafter, other merchants will want to participate in this prosperous market, increasing supply until no profit can be obtained in the sale of this product.
“The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labour, and profit, which must be paid in order to bring it thither.”
I’m inclined to believe that the restaurant industry, there being not a large room for unique and effective differentiation, is one wherein Smith’s remarks seem to apply. The appearance of differentiation should not trick oneself. Profit margins speak for themselves. One of the premises upon which I shall build my hypothesis relates to another of Darwin’s observations:
“With plants there is a vast destruction of seeds, but, from some observations which I made it appears that the seedlings suffer most from germinating in ground already thickly stocked with other plants”
A similar pattern may play itself out in industries where barriers for competition are low and the end-product resembles a commodity. I suspect industries that present these, and probably other, characteristics, have already captured the total effectual demand, and that the latter does not increase. Maybe a ceiling on effectual demand is imposed, in this case, by a natural constraint, namely our incapacity to eat over a certain amount of food. It is to be observed, however, that the effectual demand differs from the absolute demand. The latter includes people who want the product but don’t have the resources to buy them. Therefore, scenarios exist where it is possible to bridge the gap between effectual demand and absolute demand by creating a more accessible product. The process of disruption is somewhat in charge of this.
Businesses that present these unfortunate peculiarities will be some of those that compose the aforementioned “Red Oceans,” wherein competition reaches its most pronounced degree among peers. I have some reasons to believe that the ceiling in effectual demand, if true, and accompanied by an impossibility of bridging the gap between demands, makes this type of industry have a fixed pool of food, or money. These businesses cannot derive dollars from other industries and do not seem poised to create wealth in excess of what has already been created. I may be overextending myself with these remarks.
“As the species of the same genus have, though by no means invariably, much similarity in habits and constitution, and always in structure, the struggle will generally be more severe between them, than between the species of distinct genera”
Taken even further, I would argue the metaphorical oceans should have another colour: dark red. While travelling, Darwin noticed that extremely unfavorable ecosystems, like Arctic regions or absolute deserts, had organic beings that stood very low in the scale of complexity and organization. In these contexts, natural selection can do almost nothing for the improvement of species. All iterations are needed to keep fighting the impossible conditions around them.
“When we reach the Arctic regions, or absolute deserts, the struggle for life is almost exclusively with the elements”
This is analogous to cases wherein some organic beings are prey to others. Under such circumstances, natural selection employs its modifications to better adapt them against predators. By doing so, nature is necessarily not focusing on improving other aspects of this species. Surviving is the most fundamental requirement for reproduction, thereby tilting nature’s action in its favor.
“If the number of individuals in a country is determined chiefly through destruction by beasts of prey, then natura selection will be able to do little, or will be greatly retarded, in modifying any particular structure for obtaining food”
Just as nature has its whims, so does the economic system, I may posit. Environments generate the variables that end up defining intrinsic fundamentals. Over the long term, these unfavorable ecosystems may cause businesses to trend towards their true base.
“The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating.”
“It is notorious that specific characters are more variable than generic (…) if in a large genus of plants some species had blue flowers and some had red, the colour would only be a specific character; but if all the species had blue flowers, the colour would become a generic character, and its variation would be a more unusual circumstance”
The Effects of Use and Disuse
Darwin observed numerous organic beings that possessed organs or body parts whose utility was unclear. Furthermore, there were patterns of different beings having structures remarkably similar in nature, but dramatically different when analyzed specifically. This is one of the premises that made him think that the use or disuse of organs has extreme consequences in the long term. Natural selection favors the former and tries to reduce the latter.
“We may conclude that habit, or use and disuse, have, in some cases, played a considerable part in the modification of the constitution and structure”
Stephen Jay Gould wrote extensively on this by speaking about the panda’s thumb, which vividly captures the slow motion in which nature operates and how it manages the same resources for different ends, partly addressed in the specialization of organs.
When there is an organ with no valid function, natural selection focuses on minimizing its size while optimizing for another. Part of this phenomenon is explained by the laws of correlation. It is curious that nature can render useless seemingly vital body parts, such as wings in beetles.
“Many animals possess structures which can be best explained by the effects of disuse” (…) “Mr Wollatson has discovered the remarkable fact that 200 beetles, out of the 550 species inhabiting Madeira, are so far deficient in wings that they cannot fly”
“Thus, as I believe, natural selection will tend in the long run to reduce any part of the organization, as soon as it becomes, through habits, superfluous”
I have exhaustively addressed the importance of the environment where organic beings reside. Natural selection adapts them to ecosystems’ specifics. The effects of use and disuse are one of the parameters on which natural selection bases its work, as I have hitherto exposed. However, there is a further interesting element to analyze.
The same organic being could have widely varying structures, depending on its context. For each country appears to possess a unique culture, geographical expansion should almost certainly follow this premise. Some organs may be of no use in a foreign country to a business. Effective international expansion may require the adoption of new structures and to optimize for organs which may be useless in the business’ home. The obverse case is also true; some organs which are vital at home are not necessarily vital outside of it.
“For when a new insect first arrived on the island, the tendency of natural selection to enlarge or to reduce the wings, would depend on whether a greater number of individuals were saved by successfully battling with the winds or by giving up the attempt and rarely or never flying”
Competition largely explains why and how organic beings have evolved, given the idiosyncrasy of their environments. Darwin found that all organic beings’ structures are related for this reason.
“Each organic being is either directly or indirectly related in the most important manner to other organic beings. We see that the range of the inhabitants of any country by no means exclusively depends on insensibly changing physical conditions, but in a large part on the presence of other species, on which it lives, or by which is destroyed”
I may attain to add that the same seems to be the case in the economy and the underlying businesses. Some of them have operations solely due to others’ operations. Others sell directly to consumers and may possess structures so that other merchants find it more difficult to steal their business. Many of these advantages are a natural consequence of certain market structures, though they nonetheless have similar implications to competition in nature.
Darwin confessed that Man’s eye, performing miraculous functions, is a good argument against natural selection. It seems highly improbable that a complex organ as this could have been forged by slow and small variations. At the same time, the opposite appears to be true to my eyes. It seems impossible for an organ of these characters to have been suddenly created in its form, thereby implying the iterations of which nature requires to improve organic beings.
“Almost every part of every organic being is so beautifully related to its complex condition of life that it seems as improbable that any part should have been suddenly produced prefect”
This mechanism, which certainly highlights nature’s strengths and wisdom, also represents the biggest weakness this agent has. I’m not able to visualize a world where adaptations occur in a fast fashion, for everyone would be continuously adapting to one another, leading to an unclear end. But if only some organic beings possessed this unique trait, they would certainly be dominant. Businesses can take advantage of this themselves.
Of Barriers for Competition and their Implications on Complexity
Evidently, territorial boundaries constitute a huge factor in determining nature’s action and organic beings’ survivability. In fact, barriers are so impactful that Darwin noticed sea species are almost wholly distinct from land species. They prevent immigration of other species. Almost invariably, organic beings that spread the farthest are the better adapted ones. To each fraction of territorial advancement, competition of the most different dynamics ensues. Spreading implies persistently dominating over these organic beings, thereby suggesting that migrants are generally the strongest species. Unprotected areas are continuously threatened by these species.
“The degrees of dissimilarity will depend on the migration of the more dominant forms of life from one region into another having been more or less effectually prevented”
It is quite interesting to think about the obverse case. The larger a country is, and under the absence of barriers for migration, organic beings are expected to be of the utmost resilience, and to stand high in the scale of nature. With the precautions exhibited in the chapter of the variability of species, it is plausible to suspect that candidates for future success are those who’ve been exposed to the most severe competition.
“For in the larger country where there will have existed more individuals and more diversified forms, and the competition will have been severer, and thus the standard of perfection will have been rendered higher”
In the same line of analysis, as good as barriers may be for organic beings, they cause them to be weak. It would be natural to assume that, if these barriers were eventually lifted and more advanced organisms entered the ecosystem, they’d rapidly obliterate the residents. The lack of competition with which they live impedes natural selection from improving their structure beyond a certain degree. There is no need to.
In the business world, it is not that clear. Competitive advantages are mostly built by the company who profits from it. The case seems to be completely opposite to those that happen in nature. Nonetheless, unauthentic and arbitrary barriers may cause a similar phenomenon.
“On a small island, the race for life will have been less severe, and there will have been less modification and less extermination”
Conclusion
In the foregoing chapters, I have laid down my reasons to believe why these systems are highly similar at their core. Not all answers have been found, but I leave this inquiry satisfied with the result. I think it’s fundamental for us to forge an analytical process capable of handling widely diverse problems. The man-with-a-hammer tendency is incredibly real and something I am noticing in multiple thinkers.
I believe many of the concepts discussed compose the so-called “mental models.” As mentioned in one of my opening remarks, we may leverage them to previsualize how certain situations may end. Nonetheless, it is yet unclear to me what a “mental model” entail. This will probably be the subject of my next worldly wisdom inquiry, which I’ll probably base on my reads on Freud and others who have theorized about the subconscious.
Contact: giulianomana@0to1stockmarket.com