September 19, 4 Minutes In The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics , Eric Beinhocker argues that the economy should be studied as a complex adaptive system made up of adaptive agents, with the economy emerging from the interactions of those agents. It is an excellent book and possibly the best discussion of why the economy should be studied as a complex adaptive system, but as for other explorations of this area, it does not take the step of bringing complexity economics to life as an applied science. Complex adaptive systems are open, dynamic and modelled individually, with macroeconomic outcomes reflective of microeconomic behaviour. The units of selection — which for Beinhocker are the modules of business plans — undergo an evolutionary process of differentiation, selection and amplification.
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This is the question I want to foreground. Malthus predicted a population collapse in Europe due to famine, disease, and war by the midth century. Darwin read Malthus in and drew from him the concepts of geometric increase of populations in nature resulting in a universal struggle for existence.
Although some species may be now increasing, more or less rapidly, in numbers, all cannot do so, for the world would not hold them. Darwin thought that nature was like a laissez faire economic market. He frequently refers to nature as an economy — the economy of nature. Thus, at the very foundations of evolutionary theory lie powerful analogies to economics. Robert Malthus got it wrong. Mass famines in Europe and around the world have been largely avoided through dramatic increases in agricultural production.
Adam Smith, on the other hand, got it largely right. There is something profoundly creative about laissez faire economics. Increasing specialization, the division of labor, and free trade have been powerful engines for economic growth over the last two centuries.
That being said, economic theory and evolutionary theory have largely gone separate ways since Darwin. It is not until the last few decades that bridges between economics and biology have begun to be rebuilt, though largely on the side of the economists, who now talk about bionomics and import many evolutionary concepts into their latest theories.
It is my suggestion in this review that the biologists also have a lot to re-learn in a new encounter with economics, and that this encounter may yield new insights for evolutionary theory. If biologists were to figuratively wander across campus to the economics department, what book should they pick up to enter into the contemporary debates in that field.
He was previously a partner at McKinsey. He has worked as a software CEO, a venture capitalist, executive director, and consultant. He has written extensively on business and economic issues.
The book includes sections on how to rethink the role of governments and private sectors, as well as how Complexity Economics might impact corporate management and strategic planning. Beinhocker is a gifted storyteller and is able to call on a wide range of research to illustrate his arguments. The guiding question is what is wealth and how is it created? Curiously, Beinhocker only gets around to defining wealth in chapter fourteen, pages into his page text. Before he gets around to offering his definition of wealth, however, he makes it very clear that we have exponentially more wealth than our ancestors, even a few generations back.
This complexification is part of the key to what Beinhocker means by wealth. Economic complexity is dynamic. It is adaptive. It is accelerating. In the last years, world GDP per person has increased fold . Beinhocker writes: To summarize 2. This is the mystery of economics that Beinhocker wants to explain. The human agents in the traditional model were assumed to be selfish and rational with access to perfect information.
The mathematics of Traditional Economics TE was mostly borrowed from 19th century physics. TE was elegant in theory, but falsified by the empirical evidence. No one oversees it. No one designed it. No one can control it.
Economic complexity emerges from the bottom-up. How has this marvelous self-organized system evolved? What is the something new and more in economic growth and how is it created?
What is the origin of wealth and how can individuals, business, and societies get more of it? By analogy, the hard problem that needs to be explained by evolutionary biology is not the logic of limits, not the universal struggle for survival, but the increased diversification and complexification of life. This chapter will be useful to someone not familiar with the field, providing a condensed introduction to the academic discipline, starting with Adam Smith , Jaques Turgot , Jeremy Bentham — , John Stuart Mill , and Alfred Marshall These chapters are dense with details, but short and easy to read.
The fatal error of the discipline was in adopting the mathematics of nineteenth century physics. The use of equilibrium models from physics led economics down a dead end: The models of Walras, Jevons, and Pareto began with the assumptions that an economy already exists, producers have resources, and consumers own various commodities.
The models thus view the problem as how to allocate the existing finite wealth of the economy in a way that provides the maximum benefits for everyone. An important reason for this focus on allocation of finite resources was that the mathematical equations of equilibrium imported from physics were ideal for answering the allocation question, but it was more difficult to apply them to growth. Equilibrium systems by definition are in a state of rest, while growth implies change and dynamism.
Traditional Economics assumes that humans are rational actors with access to perfect information as they engaged in frictionless auction-like economic transactions all with the purpose of maximizing their self-interest. This, of course, is not the case. Traditional Economics thus gets it mostly wrong. It fails to predict or explain. Layers of economic theory have been built upon these false assumptions progressively disconnected from the empirical data. Beinhocker cites a long list of contemporary economists, including many of the recent Nobel laureates in the field, who have gradually dislodged the old paradigms.
Some of these concepts will be familiar to the biologist and evolutionary theorists, but others will be quite new. All of this will be in a different context and offers a vantage point to look back at theoretical biology, because my hunch is that empirical biology has evolved, while theoretical biology is largely stuck with an inadequate, though elegantly simple paradigm Wesson Depew In this sense, Beinhocker appears to be ultra-orthodox in his reading of Natural Selection.
He notes, of course, that the selectionist paradigm applied to human economic activity is going to be vastly different than biological evolution. The random-and-blind nomenclature is pernicious and misleading in the biological context. These terms are ideologically load metaphors that have little to do with molecular or cell biology.
In any case, we are re-reading economics not to re-read Dennett and Dawkins, but to seek new guiding metaphors for understanding evolutionary theory. The hard question in biological evolution is not survival and reproduction, nor whether selection operates on the backdrop of randomness. The hard problem is complexification over the eons. The hard question in economics is not equilibrium, but the exponential growth of wealth. Scientific and technological innovations are often self-reinforcing processes that unfold exponentially in economic development.
PTs are purposeful adaptations driven by deductive tinkering. Much of the exponential economic growth in the last years is the result of new Physical Technologies. He offers numerous examples.
In the history of economics, STs include the use of money, property rights, double-entry accounting, limited liability joint stock corporations, the rule of law, effective banking systems, economic transparency, lack of corruption, family networks, social capital, trust, and reputation.
All of these play a profound role in determining economic outcomes in communities and nations. Social Technologies are necessary for unleashing the non-zero sum dynamics through which new wealth is created to the mutual advantage of the community. Here too, I wonder whether we might see a biological analogue, perhaps at the level of biochemical cascades, developmental biology, behavioral biology, or ecological networks. This is what lives and dies within the substrate of economic evolution.
Business Plans are distinct from businesses or firms; rather they are strategies, formally articulated or not. A Business Plan is a strategy for how to make a profit providing goods or services to the market.
A single firm might have multiple Business Plans nested as modules within a larger strategy. A business could be a single person or a corporation with hundreds of thousands of employees. The Business Plans are the instructions for creating a business, for harnessing both Physical and Social Technologies in order to seek profits.
The successful modules are rewarded with more resources. Unsuccessful Business Plans go extinct, sometimes taking the business down with it. Beinhocker seems to suggest that the Social Technologies involved in creating wealth are much more difficult than the Physical Technologies. Prior to the evolution of market economies, economic activity was based on and limited to what he refers to as the Big Man system, here drawing on the work of Robert Wright and others.
And the Big Man system still troubles many underdeveloped nations in the world, even as it troubles the internal workings of many multi-national corporations. The Big Man system is governed by sex, money, and status. Beinhocker writes: In a Big Man system, the fitness function maximized is the wealth and power of the Big Man and his cronies rather than the overall economic wealth of the society. So Complexity Economics is not such a revolution after-all, rather it is a reframing and re-description of business-as-usual as we have come to know it in the United States.
It is not until chapter fourteen that Beinhocker offers a formal definition of economic wealth. He defines wealth in terms of the Second Law of Thermodynamics, drawing in part on the work of Friedrich Hayek but especially Nicholas Georgescu-Roegen Economic value is created by 1 thermodynamically irreversible processes that 2 reduce entropy locally while increasing it globally 3 in reference to some human purpose .
Economics, like evolution, obeys the letter of the law — the Second Law of Thermodynamics — but everywhere seems to violate the spirit of the law — with historical examples and patterns of run away complexiification, creativity, and novelty. Beinhocker writes: Economic wealth and biological wealth are thermodynamically the same sort of phenomena, and not just metaphorically.
Both are systems of locally low entropy, patterns of order that evolved over time under the constraint of fitness functions. Both are forms of fit order. Yet rather than treating knowledge as an assumption, an exogenous input, a mysterious process outside the bounds of economics, the Complexity-based view I have outlined puts the creation of knowledge at the endogenous heart of the economy.
The traditional meta-scientific paradigm knows what to do with matter-energy and space-time, but information is neither. Or not? Information also costs energy, though not all energy is information. Wealth has grown exponentially through a fantastically creative global economy, but if the Second Law of Thermodynamics has the last word, then our human-dominated ecosystem is headed for a collapse, if not in this century than in the next.
Beinhocker's The Origin of Wealth
Review of Beinhocker The Origin of Wealth