Henry Holt and Company, 115 W. 18th Street, New York, NY 10011 • 1990 • 423 pages • $24.95 cloth
It is quite rare to discover a book that sheds new light on the workings of the economy. To actually explain the dynamics of any economic system is no easy task. In fact, most professional economists fail miserably at this endeavor. Michael Rothschild, however, has registered some success with Bionomics. In a tome-long analogy with biology and the ecosystem, he explores the processes of economic change and growth.
Rothschild argues that capitalism, much like an ecosystem, is a naturally occurring phenomenon. The capitalist system is the “way in which economic activity spontaneously organizes itself.” Market-based economics didn’t spring forth from the minds of bureaucrats and lawmakers. But socialistic systems, being conceived and guided by bureaucrats, inevitably stagnate, wither, and die. As evidenced by the ongoing changes in Eastern Europe, survival requires that the natural process of capitalism prevail in the end. Rothschild observes, “The immutable, natural forces of economic evolution are too powerful to be stifled permanently.”
In both the ecosystem and the economic system, information and innovation are critical. Rothschild declares at the very outset: “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.” This theme is carried forward throughout the book.
The incentives and opportunities presented by the capitalist system are impetuses to innovation and entrepreneurship, i.e., to “using new knowledge to create value.” Rothschild’s emphasis on such creativity is well-placed, and he issues caveats against such incentive-destroying policies as high taxes on income and profits. Innovation and entrepreneurship are, after all, the true driving forces in any economy. As Rothschild explains, “Innovative ideas become the new methods and new equipment that push back the limits of productivity. A firm’s efficiency is constrained only by its technology, and its technology is limited only by its members’ ability to work together as an intelligent, creative organization.”
Both production and innovation have clear parallels in the biological environment. Rothschild explains the analogous production processes: “The entire global economy is comprised of work cells and organizations engaged in the interdependent production and exchange of products . . . .
Encoded information is developed or preserved in DNA or blueprints. Copies are shipped to ribo-somes or assembly sites. After raw materials are prepared, components are reassembled in new configurations. In a series of finishing steps, these objects are packaged into desirable products. From protein to microprocessor, the essentials of organic and economic production are the same.”
As for innovation and change, the analogy continues: “Rapid change happens at the edge, when a group of organisms becomes isolated from its main population. And it happens when a frustrated inventor grows tired of being told no, goes off by himself or with a few associates, and mutates the existing technology into something absolutely astonishing.” How many times has one read about such occurrences in high-tech industries for example? Rothschild gives us several examples of the innovative process that at first glance might seem mundane but turn out to be quite intriguing, including the development of the grocery store, the efficiency gains made on egg farms, as well as the death of a stultifying “corpocracy” at Walt Disney.
Bionomics also illustrates why central planners and mathematical economists continually fail to understand and communicate how an economy works. Rothschild points out that “It the punctuated equilibrium of unexpected, erratic change across an immense variety of technologies is terribly frustrating for those who want to plan and control the economy. The intrinsic unpredictability of technological evolution makes a mockery of every effort to plan the future. Just as random events reshape the natural environment and cause genetic mutations that set off bursts of speciation, serendipitous discoveries launch new industries.” The central planner’s efforts are forever destined to be barren of any success due to the natural and inherent dynamism of the economic world.
The same can be said of efforts made by the mathematical economist. Rothschild observes that the mathematical models of the economy are constrained by “a given quantity of resources, a stable population, and a fixed state of technology.” Solutions are only derived if input and output factors remain unrealistically constant. Rothschild aptly describes the current state of the economics profession: “Unable to explain the awesome complexities of real economic life as experienced by workers and business people, where history matters and change is constant but largely unpredictable, Western economists have barricaded themselves inside their obtuse mathematical models.”
Until economists throw off the shackles of mathematics and econometrics, as Rothschild makes dear, their ability to describe the workings of an economy will continue to deteriorate. This will become increasingly apparent as economic change and innovation accelerate. If they wish to remain pertinent, economists must eventually recognize that they cannot account for a dynamic, natural economy with static analysis. The economics profession can no longer ignore human action and the processes of innovation.
In closing, Rothschild’s thoughts on the dramatic nature of today’s economic changes are well worth noting: “Because we lack the benefit of hindsight, we cannot fully appreciate the magnitude of the economic restructuring we are now experiencing. But our descendants will almost certainly judge the ‘computer-on-a-chip’ to be the most economically significant technical achievement of the previous 500 years. The microprocessor will rank at the very pinnacle of human invention because—like the printing press—it slashed the cost of encoding, copying, and communicating information. And by doing so, it has brought vast areas of previously unattainable knowledge within human grasp and has made possible a staggering array of new products. Today these products are profoundly altering the capabilities of millions of work cells in every niche of the global economy.” This was all born of the natural process known as capitalism.
Michael Rothschild’s analogies to biology, evolution (which in this reviewer’s mind serves economics better than it serves human biology), and the ecosystem are vehicles, but by no means the only vehicles, that transport economic analysis into a more intriguing and realistic realm. In the traditions of the supply-side and Austrian schools, and unlike Keynesians and socialists, Bionomics emphasizes the natural human potential to create and innovate. Such a book is required reading for those who wish to gain a better understanding of how the economy works.
Mr. Keating is New York Director of Citizens for a Sound Economy.