Innovation/Global Risk

Runaway Capitalism: How to Clip the Peacock’s Tail       

By Shlomo Maital


 Peacock’s Tail 


Smithian or Hayekian capitalism, and Darwinian “survival of the fittest” evolution, are closely related.  The social philosopher Herbert Spencer made the link explicit, saying that the weakest workers and businesses had to fall by the wayside, so that the strongest could thrive, gain resources and ‘reproduce’.  This has become known as Social Darwinism.

    Now, an HBR article  titled “Runaway Capitalism”, by Christopher Meyer and Julia Kirby (HBR Jan.-Feb. 2012), addresses a flaw in evolution, one that creates species NOT adapted for long-term survival, and relates this to capitalism’s similar flaw.

     Peacock’s tails have grown flamboyantly large and colorful, because peahens like it, and other things equal, choose cocks that have them.  This makes the peacocks more susceptible to predation and even compromises the whole species.  Capitalism, similarly, like peacocks, are obsessive in its pursuit of short-term return on equity.  Both peacocks’ tails and ROI began as valid ‘proxies’ but have now become so extreme as to “misdirect our priorities”. 

     The authors cite GE as a good example. Under legendary GE CEO Jack Welch (we must be first or second in every industry we operate in), ROI and ROE became GE’s gods.  Today GE, under Jeff Immelt, has adopted not only different rules, but a different rule book.  So for instance, GE’s new MACi electrocardiograph is priced, in developing countries, at one-tenth its price in developed countries, and is now selling well in Europe.  A business model driven by considerations of profit margin, and ROE, would never have gone this route. 

     Capitalism is still the best system.  But it became a peacock.  Evolutionary pressure, and human logic and pragmatism, will eventually moderate the peacocks’ tail effect and bring capitalism back from its lemming-like obsession with short-term profitability.