The Evolution of Economic Ecosystems

Dr Theodore F Piepenbrock1 and Garry G Piepenbrock2 Introduction Where is humanity headed in the 21st century? Who will be the “winners” and “losers”? This paper summarises the theory of The Evolution of Economic Ecosystems (EEE),3 which is a meta-theory of how modern human economies evolve over time.4 It explains this rise and fall at three levels of analysis: the micro-individual, the meso-organisational, and the macro-international. It characterises this evolution in both quantity and quality space. While orthodox economics is based on the mechanistic paradigm of physics, EEE is based on the organic paradigm of biology, and specifically evolutionary ecology. As such, EEE is based on a multi-predator-prey model comprised of four theoretical constructs connected in an endogenous causal loop: Environment, Form, Function and Performance as shown in Figure 1 below.5 Each construct establishes a taxonomy-based typology and will be discussed in turn.

Figure 1: The Evolution of Natural and Human Ecosystems

1  International Institute for Strategic Leadership  (http://www.ii-sl.org  ).  2  International Institute for Strategic Leadership  (http://www.ii-sl.org  )  and Eton College.  3   EEE is based on Piepenbrock, T. (2009) Toward a Theory of the Evolution of Business Ecosystems. EEE is known colloquially as “Blue vs Red”. EEE is supported by the International Institute for Strategic Leadership.  4  Although EEE is focused primarily on economic ecosystems, it encompasses adjacent interconnected human ecosystems including: political, social, psychological, legal, etc. EEE combines economics and ecology into the interdisciplinary field of “econology.”  5  This multi-construct, multi-level, multi-dimensional theory is known in management theory as “configuration theory”.  

Form Performance

Natural Ecosystems

Function

Environment

Form Performance

Function

Environment

Human Ecosystems

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Environment The environment of any economic organisation6 comprises the resources which enable and constrain the growth and development of the organisation. Within EEE, the environment is analysed at multiple levels of proximity, the macro level being the global economic ecosystem itself.7 Each economic ecosystem has a “carrying capacity”, which is a finite limiting constraint on resources. We can express this economic ecosystem and its carrying capacity in terms of quantity and quality space. Global GDP, for example, is comprised of human population (quantity) times productivity (quality), both of which have carrying capacities and therefore limits to growth.

“Anyone who believes that exponential growth can go on forever in a finite world is either an economist or a madman.”8

As shown in Figure 2 below, in the past 200 years (c. 1900 to c. 2000), the world has experienced exponential growth of GDP (or industrial output), driven by positive feedbacks between capital and labour.9 We define this as the “Blue” world. Conversely, as we reach the carrying capacities of the global economy in its ecosystem over the next 200 years (c. 2000 to c. 2100), the world will experience logistic or “S-shaped” growth, driven by negative or balancing feedbacks between capital and labour. We define this as the “Red” world.

Figure 2: Limits to Growth in the Global Economic Ecosytem10

Having defined the environment of the economic ecosystem, we next turn to which economic “forms” might exist in these different “Blue” and “Red” environments. 6  The organisation under consideration can range in level of analysis from individual consumer/producer, household, firm, industry, national economy or global economy.  7   The next, more proximate level of environment to be analysed is the “extended enterprise” (or extended phenotype) of the organisation under consideration. This will be discussed in the next construct of EEE, the “Form” of the local organisation-environment.    8 Kenneth Boulding (1910-1993), British/American evolutionary economist who was one of the first recipients of the John Bates Clark Medal. (https://en.wikipedia.org/wiki/Kenneth_E._Boulding). 9  Piepenbrock, G. (2018). “Marxism in the 21st Century.” Eton College Politics Prize Essay (highly commended).  10 Source: Meadows, D., et al. (1972, 1992, 2004), adapted by Piepenbrock, T. (2009). Note that the “sustainable” scenario presented is an optimistic prediction of logistic growth in the future. The more realistic “status quo” scenario results in overshoot and collapse.  

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Form The “architectural form” is the primary “independent” variable of EEE. It is the genetic/memetic logic or coding of the form, the economic genotype or “memotype”.11 When put in its environment, this genotype/memotype becomes the economic phenotype. As the economic organisation (e.g. the firm) has control reach into the environment, we call the extended enterprise the extended phenotype12, the part of the environment which the organism/organisation directly interacts with and to some degree controls. The “architecture” of the form is derived from design science of Nobel prize-winning economist, Herbert Simon.13 By performing a functional decomposition of the memotype, we can identify the functional stakeholders of the economic firm: customers, suppliers, capital, labour and government. We can then develop a typology of these forms for extended enterprises of firms, ranging from modular to integral with the following definitions in terms of objective function, boundaries and interfaces. Modular tends towards, individualist, short-term, competition while Integral tends towards collectivist, long-term, cooperation.

“Competition beats cooperation within groups, while internally-cooperative groups beat internally-competitive groups.”14

At the meso level, examples of modular and integral firms include General Motors and Toyota respectively in the global automotive industry. At macro economic level, modular and integral economies map to liberal market economies and coordinated market economies.15 At micro level, modular and integral individuals map to masculine “king” and feminine “queen” cultural gender traits.16

Figure 3: “Memotypical” Architectural Forms Having defined this typology of architectural forms, we next turn to investigate how such forms might function within the ecosystem.

11  This “memotype” is enacted culturally via “memes” per Dawkins, Richard, The Selfish Gene (1976).  12  Dawkins, Richard, The Selfish Gene (1976).  13  Simon, Herbert, Sciences of the Artificial (1968).  14 Adapted from Wilson, David Sloan. 15  Hall and Soskice, Varieties of Capitalism (2001).  16   Hofstede, Geert. Note that gender traits do not necessarily imply sex traits, i.e. not all males exhibit primarily masculine traits and not all females exhibit feminine traits.  

Firm

S

E I

C

Firm

S

I E

C

Integral Architectures

Modular Architectures

Micro-level: Strategic Leadership

Macro-level: Varieties of Capitalism

Meso-level: Enterprise Architectures

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Function The economic forms define how they function17 within the ecosystem. In the mathematics of the nonlinear differential equations which define the evolution of the economic ecosystem,18 modular forms represent growth-oriented “r-strategists”19 which are built for speed20, efficiency and profit, while Integral forms represent equilibrium-oriented “K-strategists”21 which are built for stability, equity and market share.22 This is the economic equivalent of the tortoise-hare fable.

“An ‘opportunist’ or r-strategist is a species with a high maximal rate of increase, but a species of poor competitive ability at low resource density.

It is focused on short-term returns and operates by spotting opportunities and acting quickly.”

“An ‘equilibrium’ or K-strategist is a species with a low maximal rate of increase,

but it is capable of growing at its maximal rate at very low levels of resource density. It makes substantial investments to develop the market

and open up potential positions of market power. Such firms are necessarily slower to act.”

Figure 4: Function: r-strategists and K-strategists

Having defined how the different economic forms function, we next turn to how such form’s functioning performs in the economic ecosystem.

17  Using terms denoting more agency, “functions” can imply “strategies”.  18  These equations are based on Thomas Verhulst.  19  The variable “r” corresponds to growth rate.  20  More specifically, modular forms are built for short-term speed (i.e. the hare), while integral forms are built for long-term speed (i.e. the tortoise).  21  The variable “K” corresponds to carrying capacity.  22  Such r and K strategies were first postulated biologically by E.O. Wilson, and subsequently in Sociology by Jack Brittain.  

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Performance Given that modular r-strategists are built for speed and efficiency and that integral K-strategists are built for stability and equity, which form/strategy will dominate in which ecosystem environment? Performance of the economic actors can therefore be seen in some static sense as the “dependent” variable in EEE. Note that the short-term speed of the modular r-strategists seem well-suited to the fast and increasing growth rates of the “Blue” environment, while the long-term speed of the integral K-strategists seem well-suited to the slow and decreasing growth rates of the “Red” environment. “Intra-species”23 competition between populations of modularising economic forms creates the economic ecosystem of the nascent “Blue” economic world.24 The winners in the maturing “Red” economic world however are populations of integrating economic forms. If the early-entrant modular r-strategists cannot adapt and reintegrate, they will lose dominance in the new economic landscape to late-entrant integral K-strategists in “inter-species”25 competition.

“It is not the strongest of the species that survives, nor the most intelligent. It is the one that is most adaptable to change

and works co-operatively against common threats.”26 “Ecological succession” occurs in the economic ecosystem27, with the dominant design in economic form oscillates between modular and integral as shown in Figure 5 below. “Multi-level selection” therefore takes place, where first modular individuals are selected, and then integral groups are selected. Figure 5: Community Ecology, Inter-species Competition and Ecological Succession

23  Otherwise described as “intraspecific” or “intra-population” competition.  24  This is referred to as “exploitation competition”. As populations grow and organisations come in direct competitive contact, this is referred to as “interference competition”, which can lead to bankruptcy/death or exit/migration.  25  Otherwise described as “interspecific” or “inter-population” or “community” competition.  26 Attributed to Charles Darwin. 27  The community of populations which exist in equilibrium are called the “climax community”. However the Gause “competitive exclusion principle” makes such equilibrium impossible if both species occupy the same niche.  

time

Industry Growth

Industry Maturity

Industry Decline

Industry Death

Lifecycle of Incumbent EA

Lifecycle of Challenger EA

Incumbent growth

Incumbent decline

Challenger growth

Challenger decline

Industry lifecycle

Incumbent maturity

Challenger maturity

1900 ± 1950 ± 2000 ± 2050 ± 2100 ±

Firm & Industry Growth Rates (quantity & quality)

Dominant Design (in Enterprise Architectures)

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Conclusion This brings EEE full circle as a meta-theory which integrates the four constructs and their associated typologies: Environment (nascent-mature or “Blue-Red”), Form (modular-integral), Function (r-K strategies) and Performance (winners-losers). In addition EEE is based on the evolutionary mechanisms of variation, selection and retention28. The ecosystem environment enables and constrains variation in the development of economic forms, which in turn enables and constrains the economic functions/strategies which in turn selects the dominant economic performers, which in return retains the reproduction of dominant economic memes that evolve the ecosystem environment in a co-evolutionary cycle. This is summarised in Figure 6 below. While orthodox economics, which was based on the mechanistic paradigm of physics, was appropriate for the rapidly growing economies of the “Blue” world, EEE is based on the organic paradigm of biology (and specifically evolutionary ecology) and is better adapted to the maturing economies in the “Red” world.

Figure 6: The Evolution of Economic Ecosystems

28  The variation-selection-retention mechanism is a form of “Universal Darwinism”.  

Environment (nascent-mature)

Performance (win-lose)

Variation Selection

Retention

Form (modular-integral)

Function (r-K strategies)

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Word Count 1,200 words including quotations, but excluding footnotes, acknowledgements, bibliography/references and appendices. Acknowledgements The authors would like to thank Professor Sophie Marnette-Piepenbrock of the University of Oxford, Professor Deborah Nightingale of the Massachusetts Institute of Technology and Michael Wargel, Vice President of Flexe Inc. for their continued intellectual, professional and personal support over the many years of this research programme.

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Bibliography / References

Boulding, K. Energy reorganization act of 1973: Hearings, Ninety-third Congress, first session, on H.R. 11510. p. 248. Brittain, Jack and Freeman, (1980). Darwin, Charles. Dawkins, Richard, The Selfish Gene (1976). The Economist, “Capitalism and its discontents.” (1 October 2015). https://www.economist.com/business/2015/10/01/capitalism-and-its-discontents *The Economist, “Labour is right - Karl Marx has a lot to teach today’s politicians.” (11 May 2017). https://www.economist.com/britain/2017/05/11/labour-is-right-karl-marx-has-a-lot-to-teach-todays-politicians *The Economist, “Rulers of the world: read Karl Marx!” (3 May 2018) https://www.economist.com/books-and-arts/2018/05/03/rulers-of-the-world-read-karl-marx *The Economist, “Rousseau, Marx and Nietzsche: The Prophets of Illiberal Progress.” (6 September 2018). https://www.economist.com/schools-brief/2018/09/08/the-prophets-of-illiberal-progress *The Economist, “Was Karl Marx Right?” (4 May 2018). https://www.youtube.com/watch?v=TMmDebW_OBI The Economist, “The next capitalist revolution” (15 November 2018). https://www.economist.com/leaders/2018/11/15/the-next-capitalist-revolution Forrester, J., World Dynamics, Pegasus Communications,1971. Galbraith, John Kenneth. A Life in Our Times, Houghton Mifflin, 1981. Hall, P and Soskice, D. (2001). Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. Hofstede, Geert. *Jeffries, Stuart, The Guardian, “Why Marxism is on the rise again.” (4 July 2012). https://www.theguardian.com/world/2012/jul/04/the-return-of-marxism *Jeffries, Stuart, The Guardian, “Two centuries on, Marxism feels more revolutionary than ever.” (5 May 2018). https://www.theguardian.com/commentisfree/2018/may/05/karl-marx-200th-birthday-communist-manifesto-revolutionary

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Keen, Steve, “Hyman Minsky and financial instability.” Lecture at Eton College, Michaelmas 2018. Keen, Steve, “Marx sacrificed logic on the altar of his desire for revolution.” https://www.rt.com/op-ed/426249-karl-marx-capital-labor/ Keen, Steve, “How Marx was wrong on revolution.” https://www.youtube.com/watch?v=2b1JETZ6-Ck Keynes, John Maynard. *Marx, Karl, and Engels, Friedrich, The Communist Manifesto (1848). *Marx, Karl, “The Eighteenth Brumaire of Louis Napoleon” (1852). https://en.wikipedia.org/wiki/The_Eighteenth_Brumaire_of_Louis_Napoleon *Marx, Karl, Das Kapital: Kritik der Politischen Oekonomie (Capital: Critique of Political Economy), Volume 1 (1867). Meadows, D., Meadows, D., Randers, J., and Behrens III, W., The Limits to Growth, 1972. Meadows, D., Meadows, D., and Randers, J., Beyond The Limits to Growth, 1992. Meadows, D., Randers, J., and Meadows, D., The Limits to Growth: The 30-year Update, 2004. *The New Yorker, “Karl Marx, Yesterday and Today.” (10 October 2016). https://www.newyorker.com/magazine/2016/10/10/karl-marx-yesterday-and-today Dr Marius Ostrowski, “Marx at 200.” Lecture at Eton College, Michaelmas 2018. Jordan Peterson and Bret Weinstein, “Marxism is ignorant of the Pareto principle” (8 September 2017). https://www.youtube.com/watch?v=i0iL0ixoZYo Jordan Peterson, “The only reason Marxism will fail”. https://www.youtube.com/watch?v=1lTGu35BpZs Piepenbrock, G. “Trumponomics”, Eton College lower boy Economics Prize essay (Lent 2017), highly commended. Piepenbrock, G. “Populism and Globalisation”, Eton College lower boy Politics Prize essay (Michaelmas 2017), runner-up. Piepenbrock, G. “The Problem of Global Inequality”, Eton College lower boy Economics Prize essay (Lent 2018), highly commended. Piepenbrock, G. “The Importance of Reducing Global Inequality”, Eton College lower boy Geography Prize essay (Summer 2018), highly commended.

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Piepenbrock, G. “The Cold War and Large-Scale Conflict”, Eton College lower boy History Prize essay (Summer 2018), highly commended. Piepenbrock, G. “Marxism in the 21st Century”, Eton College lower boy Economics Prize essay (Michaelmas 2018), highly commended. Piepenbrock, T. F., “Toward a Theory of the Evolution of Business Ecosystems,” PhD dissertation, Massachusetts Institute of Technology, 1,325 pages (2009). Piketty, T., Capital in the Twenty-First Century, 2014. http://piketty.pse.ens.fr/files/capital21c/en/Piketty2014FiguresTablesLinks.pdf http://www.hup.harvard.edu/catalog.php?isbn=9780674430006 The School of Life, “Political Theory – Karl Marx” (19 December 2014). https://www.youtube.com/watch?v=fSQgCy_iIcc Simon, Herbert, Sciences of the Artificial (1968). Smith, A., The Wealth of Nations (1776). Sterman, J. (2000). Business Dynamics: Systems Thinking and Modelling for a Complex World. *Varoufakis, Yanis, The Guardian, “Marx predicted our present crisis – and points the way out.” (20 April 2018). https://www.theguardian.com/world/2012/jul/04/the-return-of-marxism Verhulst, Thomas. Wilson, David Sloan Wilson, E. O. Wheen, Francis, Karl Marx, Fourth Estate (1999). Wheen, Francis, Marx’s Das Kapital: A Biography, Atlantic (2007). https://en.wikipedia.org/wiki/Marxism

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Appendix A: Definitions Defining terms for this essay is quite challenging, as there are different meanings across disciplines (e.g. economics and politics) and across nationalities (e.g. US and UK). See my typology summarised in Table 1 below.

Table 1: Political and Economic Typology

29  Piepenbrock, T. (2009).  30  Hall, P. and Soskice, D. (2001).  31   The convention of the “Left” denoted by the colour red and the “Right” by blue was reversed in the 2000 US Presidential election. See Wikipedia: “Red States and Blue States.”  32  Based on data in Wikipedia: “Historical rankings of Presidents of the United States”.  33  Based on data in Wikipedia: “Historical rankings of Prime Ministers of the United Kingdom”.  

The “Left” The “Right”

Focus Collectivist (we/us) Individualist (I/me)

Interactions Cooperative Competitive

Time Horizons Longer-term Shorter-term

Strategies29 Stability Growth

Ideologies Socialism (& Communism) Capitalism

Economic Inequality Low High

Market Economy30 Coordinated Liberal

Factor of Production Focus Labour Capital

Economic Sector Emphasis Production (Supply) is concentrated

Consumption (Demand) Is diffused

Focus of Growth Quality (e.g. Productivity) Quantity (e.g. GDP)

Locus of Power Top-down Bottom-up

Size of Government Big Small

Social Dimension Liberal (or Progressive) Conservative

Economic Dimension Social Liberal (Neo-Liberal)

Economic thought-leaders

Karl Marx (1818-1883) John M. Keynes (1883-1946)

Paul Krugman (1953-)

Adam Smith (1723-1790) Friedrich Hayek (1899-1992) Milton Friedman (1912-2006)

US Political Parties31 Democrats (blue) Republicans (red) Key US Presidents32 F.D. Roosevelt (“New Deal”) R. Reagan (“Supply-side”) UK Political Parties Labour (red) Tories / Conservatives (blue)

Key UK Prime Ministers33 C. Attlee (“welfare state”) M. Thatcher (“Supply-side”) Fiscal Policies Tax and spend

(deficits are o.k.) Low tax, low spend

(deficits are not o.k.) Fiscal (Tax) Policies Benefit the Poor

(“pump-up”) Benefit the Rich (“trickle-down”)

Monetary Policies Active Passive Trade Policies Protectionist,

Multi-lateral Free-trade, Bi-lateral

Government Regulation High Low