April 13 (Bloomberg) -- Mix Microsoft Corp. together with pop star Madonna and Shakespeare's ``Macbeth.'' Leaven with studies on evolution, chess and planned economies. Throw in a few logarithms, a dash of sex and a knack for explaining highbrow mathematical concepts in plain English.

The result is ``Why Most Things Fail,'' Paul Ormerod's latest book on why we err in assuming that the economy hums along like a well-greased machine. Ormerod, a former head of the Economic Assessment Unit at the Economist magazine, argues that companies and society behave more like living organisms: Unless they evolve, they die.

``Species fail and become extinct,'' he writes. ``Brands fail, companies fail, public policies fail.'' All things, he writes, succumb to the ``Iron Law of Failure.''

Despair not, for Ormerod's book does posit ways in which companies and countries can render themselves fitter for survival in a world where even Bill Gates starts looking like somebody's lunch. First, though, he takes us on a tour of what losers we humans are and why.

We all tend to lionize great corporate survivors like General Electric Co. Established in 1892, GE has become a bastion of superlatives -- the world's biggest provider of jet engines, locomotives, power-generation equipment and medical-imaging machines, among other things.

Failed Fossils

But how many people remember meat packer Cudahy Packing Co., one of the world's largest companies in 1912?

The simple truth, Ormerod reminds us, is that most corporations are more like Cudahy than GE. More than 10 percent of all U.S. companies fail each year, be they one-man start-ups or energy trader Enron Corp., Ormerod says. Charts plotting their birth and demise resemble those of fossil records compiled by paleontologists.

Ormerod's intellectual touchstones are two economists who fled Central Europe in the 1930s, Friedrich Hayek and Joseph Schumpeter. Hayek derided conventional economic theory, seeing desirable social and economic outcomes as an evolutionary process where individuals change and adapt in response to the behavior of others and the institutions in which they operate. Schumpeter called this process ``creative destruction.''

Yet economic theory remains rooted in a 19th-century notion that the world ticks in equilibrium, like a Swiss watch. In reality, Ormerod argues, companies operate in an environment characterized by disequilibrium, where it's a challenge for General Motors Corp. and other carmakers to know what pickup truck to build, what price to charge and how many drivers might buy it in the future.

`Mice and Men'

No matter how hard companies and individuals study, plan and work, Scottish poet Robert Burns was right: ``The best laid schemes o' mice and men / Gang aft a-gley.''

That applies to societies as well as corporations, Ormerod argues. Racial segregation persists in the U.S., for example, despite the federal government's decisions to muster the National Guard to enforce school integration and to boost spending on health and education in minority communities.

Does this prove that we're all bigots? Not according to the studies Ormerod cites. Segregation, he says, results from thousands of people making individual choices, such as moving into a leafy suburb or away from a city with a high crime rate.

``The empirical evidence does not give much support to the view that individuals have widespread, strong racial preferences,'' he writes.

Here, as elsewhere, Ormerod underscores his point with theoretical models based on game theory. This isn't always easy material to digest, as the author acknowledges. At one point, for example, he describes a relationship between two logarithms, then posits that the statement will probably divide his readers into two groups, ``those for whom the previous statement is obvious and those for whom it is not.''

Macbeth's Error

Yet just when you think Ormerod has taken you off on one mathematical mind-bender too many, he yanks you back to his central argument with a splash of human color.

Macbeth is invoked to show just how uncertain the results of our actions will be: Macbeth kills King Duncan because he thinks it will enhance his fitness for survival. Instead, the murderer sows the seeds of his own destruction.

Singer Madonna buys a grand mansion in the English countryside in Wiltshire -- not far from Ormerod's home, it turns out -- in what amounts to a private auction, demonstrating that the laws of supply, demand and uncertainty always determine prices, no matter how rich you are.

As for Bill Gates, he almost gave up on Windows in the late 1980s in favor of developing a new operating system, OS/2, with International Business Machines Corp.

``Windows was almost abandoned as a stand-alone product,'' Ormerod writes. ``Its support team was cut to virtually zero. And yet it proved a massive, overwhelming success. Success, like failure, comes in many guises.''

Lively Teacher

The idea that economists should draw inspiration from biology has been kicking around for a century. What Ormerod brings to the topic is a gift for playing to the crowd. Like a popular university professor, he clothes abstract ideas in colorful examples and breathes life into arcane arguments.

Is humanity powerless? Not if we learn to adapt to the world as it actually is, Ormerod says.

Antitrust authorities, for example, should realize that innovation creates natural monopolies, which only competition -- not regulation -- will sweep away, Ormerod suggests. Even mighty Microsoft will one day be undermined, he says.

Companies can also learn from their failures, as Coca-Cola Co. did after consumers spat out the ``New Coke'' it launched two decades ago. Notwithstanding a massive research effort, the company said it failed to understand how passionate its customers were about the original beverage. Less than three months later, the company withdrew New Coke. It adapted.

To contact the reporter responsible for this story: James Pressley in Brussels at jpressley@bloomberg.net.

Last Updated: April 12, 2005 20:20 EDT