The Origin of Wealth

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The Origin of Wealth

Postby dukes » Sat Mar 10, 2007 11:29 am

The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics, by Eric D. Beinhocker; Harvard Business School Press; 2006

On the face of it, a book about economics without charts and supply/demand function curves seems a heresy, but Beinhocker’s premise could also be considered heretical. This is about jettisoning many of the principles of traditional economics, and adopting a theoretical framework that borrows heavily from evolutionary science.

Over the span of 450 pages, Beinhocker – a senior consultant with McKinsey & Co. - reviews current thinking in the development of economic theory, particularly as it pertains to a dynamic world environment. Starting and ending in a Masaai hut, he traces the development of traditional economics from well before Adam Smith, and writes at length about early efforts to utilize principles borrowed from the physical sciences to explain market function. According to the author, and supported by extensive footnotes and commentary by others, this early effort led to the adoption of assumptions that have not stood the test of time, in that the models developed using these principles fail to explain empirical observations. One key assumption, currently taught, is the understanding of the consumer as being rational and purely self-interested, which is revealed to be true only part of the time.

Moving on from the earlier underpinnings, Beinhocker leads the reader through the development of the theory of Complexity Economics, which works in a manner very similar to Darwinian evolution. For example, he shows how businesses function as organisms, where the Business Plan is the manifestation of DNA. In the replication of DNA a certain amount of variance can occur, and so it is with Business Plans, which draws on theories proposed by Benoit Mandelbrot. He describes the “Library of Smithâ€￾ (named for Adam Smith) that includes every possible Business Plan – a near infinite collection from which only the tiniest few can actually survive. Thus the notion of ‘survival of the fittest’ is applied to profit-making: this works intuitively but Beinhocker dissects it logically also. The theory, which continues to unfold, is in fact largely based on one aspect of the physical sciences: The Second Law of Thermodynamics. Again bringing together the works of others, Beinhocker shows how an economic entity is in fact a “complex adaptive systemâ€￾, that wealth is created as complexity increases, and that the system will tend towards a lower state of entropy without a constant flow of capital (either financial or intellectual). This inflow satisfies the demands of the Second Law, and without it failure is guaranteed.

Further drawing on the theory of Complexity Economics, Beinhocker traces the development of business, and shows how even the largest can be brought down by a failure to adapt to social changes. Using the British East India Company – one of the largest companies the world has ever known and likely larger than today’s biggest if evaluated on a percentage of global trade – as an example, he shows that nothing is permanent. Within the macroeconomic sphere, he demonstrates how two parallel forces evolve together, enabling growth at the highest and also the lowest levels. These forces are Physical Technologies such as fire, the wheel, metallurgy, and computers, and Social Technologies such as the written word, democracy, corporations, and a consistent legal framework.

In closing, and combining the thoughts of the Right and the Left, Beinhocker attempts to explain modern politics as a parallel development of economic complex adaptive systems. In this he is a bit more pessimistic, observing:

“In earlier times, cultures tended to collide only at their geographic frontiers. Today they collide on a daily basis on television, over the internet, and in our great multicultural cities. Unfortunately, humanity’s record of sensitively managing cultural clashes, from the landing of Cortes in Mexico to the current tensions between Islam and the West, is not encouragingâ€￾.

Beinhocker is a persuasive writer, and the book is choc-a-block full of anecdotes and explanatory parables, which makes what would otherwise be a very dry subject actually rather readable. The reader will be provided with a good understanding of Traditional Economics as well as Complexity Economics, and does not need a background in economics as a precondition.
Christ you know it ain't easy,
You know how hard it can be.
The way things are going
They're gonna crucify me.

Ballad of John and Yoko

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