Woodrow Wilson was the only president with a Ph.D. in political science.
He came to office having thought more about how a government functions than most before him or since.
One of his complaints was that too many people in government held the belief that it was a Big Machine: that once you set up a series of rules you could take your hands off the wheel and let the government run on its own forever. They viewed government like physics, with a set of customs and laws that required no updating or second-guessing because they were believed to be precise and perfect as they were.
Wilson thought that was wrong. He wrote in 1908:
The trouble with the theory is that government is not a machine, but a living thing. It falls, not under the theory of the universe, but under the theory of organic life. It is accountable to Darwin, not to Newton. It is modified by its environment, necessitated by its tasks, shaped to its functions by the sheer pressure of life.
The policy changes don’t matter here. “Accountable to Darwin, not to Newton,” is a useful way to explain how a lot of things work, and why a lot of people get things wrong.
Growing a population has rarely been a problem in human history. Virtually every nation could count on a consistent flow of births exceeding deaths. Population growth fueled economies and seemed like a law of nature. But Newton isn’t involved. Darwin runs the show. Things changed, living conditions improved, competition favored something new, and over the last 30 years births have fallen so much that most big nations will have fewer workers in 2050 than in 2020.
For decades, the dividend yield on a company’s stock was usually higher than the interest rate on its bonds. It made sense to people: stocks were riskier than bonds, and you must be paid extra in return. It seemed like an iron law of finance, blessed by Newton. But things changed. Around the 1950s, companies began withholding more profits to finance growth in lieu of dividends. Dividend yields fell below bond yields. Some people thought it was a sign of madness that must revert. But it didn’t. Today we think it’s normal because bonds have no growth upside, so you should be paid more to make the investment worthwhile. That now seems like a Newtonian law of finance. But in both cases investors are just being accountable to Darwin.
The hard thing here is reconciling two opposing ideas:
Reversion to the mean is a powerful force and you should expect most things that are disconnected from their long-term averages to find their way back in due time.
Things change, and what used to reliably work in the past often becomes outdated, arbitraged, outlawed, and socially unacceptable.
If an equation existed to know which is which we’d all be better off. But for most things I think it’s only in hindsight that you realize whether Newton or Darwin was in control.
If there is a common theme in this puzzle, it’s that Darwin is usually the boss, but anything that does answer to Newton is exceptionally important.
Compounding reports to Newton. You’re not entitled to long-term growth but the math behind those who get it will always stay the same, will always be underappreciated, and will always play a role in the most important outcomes. So it’s supremely important.
Incentives are Newtonian too. Their details come and go, but the idea that rewards guide motivations and morals – in good ways and bad – was as true 1,000 years ago as it will be 1,000 years from now. It’s also a guiding force of most outcomes.
Then there are things like customers wanting low prices, people desiring connections, markets overshooting, cultures being different, and some other inevitable behaviors that report to Newton because it’s impossible to imagine a world where they don’t exist.
But Darwin is in control most of the time
He rules by enforcing humility. He hates assumed certainties and overconfidence.
He has his fingers in anything that involves people making subjective decisions. In business and investing his guiding principle was summed up by author Maggie Mahar who wrote, “men resist randomness; markets resist prophecy.” He has little tolerance for outliers and no tolerance for fragility. Even the rigor of hard science can’t escape his force; Sam Arbesman writes in his book The Half-Life of Facts:
Medical knowledge about cirrhosis or hepatitis takes about forty-five years for half of it to be disproven or become out-of-date. This is about twice the half-life of the actual radioisotope samarium-151.
I read two things recently about how to deal with Darwin.
One was from Charlie Munger, who says:
If you fall in love with an idea, you won’t see the merits of alternative approaches – and will probably miss an opportunity and two. One of life’s great pleasures is letting go of a previously cherished idea. Then you are free to look for new ones.
The other is from Aaron Brown of Bloomberg, who wrote:
In investment and life it is important to have principles—things you believe in deeply and are willing to stick to even when they are unpopular and costly. But only fanatics make every decision a matter of principle. The basics of quant investing, rigorous and skeptical consideration of all evidence plus insistence on logical theory, are sound principles in good times and bad. But principles are only general guides. Wise investors allow themselves flexibility in execution.
Some combination of “strong beliefs, weakly held” and “guidelines vs. rules.”