Ebook: The Origin and the Evolution of Firms

The universe, the galaxies, the solar system, the earth, life, humankind, science, economies, markets and firms developed and develop in a spontaneous process we commonly term evolution. In this book, we attempt to develop a consistent theory that traces the evolutionary path that connects the birth of the universe in the Big-Bang to the complexity of today's socioeconomic system with, among others, its firms and markets. What are the regularities or, if you like the laws, and the forces that drive this evolution?

As far as living organisms are concerned, we owe a landmark body of theory to Darwin and Wallace. Darwin publishes his work “On the Origin of Species” in 1859. His work highlights the existence of a continuous “Tree of Life” that connects the present life forms to a common ancestor. In the evolution of life on earth, we clearly see a development in the direction of increasing complexity. Matter becomes increasingly organized. Evolution clearly involves increasing organization.

Later on, when we explore the molecular basis of life and its evolution, we realize that evolution derives from the processing and communication of information. Life largely rests on the evolution of DNA macromolecules that provide the information for the biological structure that engages in competition for scarce resources with other structures based on different DNA codes. In this book, we unveil that information processing and its perfection through competition forms the basis of the evolution of society based on the appearance of new sets of information beyond the DNA macromolecules that drive biological evolution. Information is the scarce commodity that drives economic progress. A continuous line of evolving information sets connects the Big-Bang to the present-day socioeconomic system with its firms and markets. We term the evolution beyond the replicating DNA exogenic evolution.

No doubt, the theory of evolution Darwin introduces in the 19^th century marks a monument in the history of scientific thinking and for that matter the philosophy of science. Earlier in that same century, the French engineer Sadi Carnot analyzes the workings of the “heat engine”. It is a contraption that allows the conversion of high temperature heat, obtained by the combustion of energy resources such as coal, into motive work. This greatly increases the availability of sources of motive power beyond those provided by human and animal muscles and e.g. waterpower. As we explain in this book, this increased availability of sources of useful work, triggers the industrial revolutions in the 18^th and 19^th century. These revolutions mark a strong increase in economic prosperity measured in terms of per capita Gross Domestic Product. This development becomes particularly manifest after 1850 when we witness the birth of many industrial initiatives that are the precursor of large industrial corporations that appear in today's economic landscape.

Sadi Carnot's analysis of the heat engine marks the birth of an important body of theory that, just as in the case of the theory of evolution, marks a revolution in the history and the philosophy of science. It spawns thermodynamics, the theory that governs the transformation of sources of energy, such as heat and the various flavors of work. The theory of thermodynamics introduces a number of laws that put restrictions to the transformation of said energy sources. The first law states that energy is conserved: It cannot be created or destroyed in any process. Hence, the total energy in the universe today is the same as the amount that exists when it emerges 13.5 billion years ago. In addition, thermodynamics introduces the intellectually evasive quantity entropy. The second law of thermodynamics states that entropy can only increase in the processes that take place in a closed system. Hence, the total entropy of the universe increases in the evolution of the universe after its birth and it continues to increase in the future. This leads to an apparent conflict with the process of evolution we introduce earlier. Evolution leads to a local decrease of entropy reflected in the increase of organization of matter. We see the evolution of organized systems, such as organisms.

Prigogine and his coworkers (see e.g. Nicolis and Prigogine (1977)) importantly contribute to removing the apparent paradox of the laws of evolution and the laws of thermodynamics. The theory of non-linear non-equilibrium thermodynamics reconciles the local evolution of “Order out of Chaos” with the second law direction of spontaneous processes. The theory shows that in non-equilibrium systems forces exist that locally drive processes in a direction against the natural direction the second law dictates. Such a development can take place as long as for the universe as a whole entropy increases. This introduces the concept of dissipative structures that organize themselves against the direction of the second law by using sources of energy in the environment. Organisms are examples of such dissipative structures. This book extends the concepts of thermodynamics beyond the conventional “physical” sources of work to include economic work. We thus identify organizations like firms as dissipative structures.

Another important result from thermodynamics introduces the notion that entropy intimately relates to the information we have about the details of complex systems. It identifies the information that is missing in our picture of reality as a scarce quantity that comes at a cost. In addition, this leads to the identification of the forces that drive evolution. This highlight the important role of information in thermodynamics and this closes the circle between evolution, based on the processing and communication of information, and our extended interpretation of thermodynamics.

We combine the information-based forces of thermodynamics with the information-based forces behind the theory of biological and exogenic evolution to arrive at a systems theory of evolution. This theory shows that evolution rests on the coupling of forces that drive processes in the natural direction defined by the second law, to processes that drive evolution against the natural direction dictated by the second law. This also holds for the coupling of economic work that drives our economy and the evolution of the socioeconomic system with its markets and firms, to the downhill processes that result from the non-equilibrium situation in the universe. Our theory allows tracing the path from the Big-Bang to the contemporary socioeconomic system. In this way, we trace the origin and the evolution of firms.