How do economies begin? That was something that Joshua Epstein and Robert Axtell wanted to know. So they built a simulation of an economy that they called Sugarscape. They built a virtual landscape that was overlaid with a 50×50 grid. The landscape was endowed with sugar in various locations, and with two large sugar mountains. Then they built agents to inhabit the landscape. (Beinhocker 2007)
Each virtual person, or “agent”, is an independent computer program that takes in information from the Sugarscape environment, cunrches that information through its code, and then makes decisions and takes actions. In the most basic version of the simulation, each agent on Sugarscape can only do three things: look for sugar, move, and eat sugar. That’s it. In order to find food, each agent has the ability to move toward this source of energy. Each agent also has a metabolism for digesting sugar…
… each agent has a “genetic endowment” for its vision and metabolism. In other words, associated with each agent is a bit of computer code, a computer DNA, that describes on many squares ahead the agent can see and how much sugar it burns each round. An agent with very good vision can see guars six squares ahead, while an agent with poor vision can only see one square ahead. Likewise, an agent with a slow (good) metabolism needs only one unit of sugar per turn of the game to survive, versus an agent with a fast (bad) metabolism, which requires four. Vision and metabolism of agents is heterogeneous (meaning that not all agents are alike). Some agents have poor vision, but great metabolisms; others have great vision and poor metabolisms, while somre are well endowed with both, and the genetically unlucky are poor on both.
There were 250 agents dropped randomly on Sugarscape, and then Epstein and Axtell analyzed what happened over various simulation periods and you know what they found? Inequality. Agents could store any sugar they found that they did not need, and at the beginning, the sugar distribution was pretty egalitarian. Over time though, super-rich sugar agents evolved, just like in the real economy.
This was interesting, so they looked deeper into it. Was it genes that caused the inequality? No. It wasn’t all the agents with great sight and slow metabolisms that got rich. Then it must have been birthplace, right? Surely the agents lucky enough to be born on sugar mountains were rich and the others were poor. No. That was wrong too. What they found is that the skewed wealth distribution was driven by complexity, and was an emergent property of the system. That means that the wealth in Sugarscape was path dependent.
Sugarscape had something that is supposed to be prohibited in mainstream economics - horizontal inequality. It means that agents with similar skills and similar levels of sugar wealth at birth should end up roughly equal. But they don’t. Take the example of two agents born with similar levels of vision and slow metabolisms. They are born right next to each other on the Sugarscape board. Neither can see any sugar, so one randomly goes north and the other randomly goes south. One turns out to be heading towards a sugar mountain, the other is doomed to starvation in a valley with no sugar. Same genes. Same birthplace. Only the path they each randomly took determined where they ended up. This doesn’t mean genes don’t matter, or birth place doesn’t matter… it just means that random choices have just as much to do with guiding our fate as our skills and work ethic.
What does this mean for startups? The good news is that hard work pays off. Working hard increases your chances of startup success. The wealth distribution in Sugarscape wasn’t random, it just wasn’t a simple meritocracy either. Overall, better agents fared better.
The bad news is that you can never guarantee success because some small random event could make the difference between a $100 million exit and a total fire sale failure. And you may have no way of knowing at the time that the event is that significant.
What does this mean in practice?
1. Don’t listen too much to one-hit wonders and self-appointed entrepreneur gurus. Their advice needs to stand on it’s own two feet, and not be taken as gospel just because they had one nice exit (or none, in the case of some so-called gurus).
2. Improve your chances of finding the right path by always learning and always improving your skills.
3. Get as close to you can to a sugar mountain. Marc Andreesen has always said that you will have the best chances if you are located at the geographic center of your industry.
4. Try as much as possible. If paths matter, take a lot of them.