The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics

Slowly but steadily, complex adaptive systems theory is working its way into the mainstream. I have studied it for years, and applied its concepts in public policy, business and finance. This real world experience has made me a believer in CAS' long-term importance, and ability to fundamentally change our understanding of multiple fields. Unfortunately, many written treatments of complex adaptive systems theory are either too technical for the general reader, or too simplistic -- either high math or squishy analogy. Beinhocker's book is a shining exception to this rule, and for the first time makes this subject accessible in rigorous yet understandable way. I highly recommend it whether you are in business, government or finance.

Eric Beinhocker's The Origin of Wealth provides a compelling synthesis of recent advances in the application of complex systems to economic phenomena and proposes that classical economics with its assumptions of perfect rationality, perfect information and equilibrium are fundamentally wrong. Much of this will be obvious to those who have been following the work of the Santa Fe school - Holland, Kaufman, etc., but there is enough new here to make the book well worth the investment in time. Beinhocker proposes that economies are best understood as dynamic systems, composed of agents, acting in networks, that support emergent behaviors with selection operating to drive evolution. He simplifies the evolutionary algorithm to differentiate-select-amplify, and those who are seriously interested should probably read through Dawkins books to get a deeper understanding (I find The Extended Phenotype particularly useful in thinking about organizations). I have two quibbles and one more serious question about his approach, which in general I find useful and applicable to my own work of designing knowledge based systems (I actually work for a competitor of his employer McKinsey & Co.). The quibbles. Beinhocker describes `primitive' and certain other societies as being dominated by a `Big Man.' This is simply wrong for most primitive societies which are generally governed by a form of consensus hierarchy in which no one person can take unilateral action. Another quibble, Beinhocker has accepted Steven Pinker's silly characterization of music (and by implication other aesthetics) as mental cheesecake. For a more useful approach see Steven Mithen's new book The Singing Neanderthals (`Steven' seems to be a popular name in this field, and a good name it is too). But these do not concern his main argument. I have more questions around his formulation of business plans as constituting a design space and the notion that a `management team' is a reader of `business plan schema'. There are several problems here. There is no language by which to define the design space of business plans. Beinhocker gets around this with a Borgesian approach of defining a library of all possible texts and then providing a filter to determine what is a business plan. I am less than convinced that any such filter could exist. If there is no language of business plans and no filter to determine what is and is not a business plan I do not see how the design space exists (and I have made effective use of the notion of design space and design space exploration in many projects). Take this away and the precise mechanisms proposed for understanding economic and business processes are on shaky ground. It may be more useful to think of business plans as simply another form of social technology that exist in the larger design space of social technologies. Given the difficulty involved in filtering out what is a business plan and what is not, this may be a more general and effective approach.

Do not buy this book expecting a prescriptive solution to specific business scenarios. This book begins with an absolutely stunning breadth of reference material covering both the highlights of the entire history of economic thought from Adam Smith to today's SKU enhanced supply chains. Combine this with the latest theories of power series and fractal mathematics of markets. Throw in a complexity theory from the Sante Fe Institute. Add a sprinkling of Nicholas Georgescu-Roegen and entropy as value creation ( A sample - three conditions are required for value creation: irrevisibility of a transaction, reduction of local entropy involving the local scope of thetransaction and production of artifacts from the transaction suitable for human purposes) reaching this pinnacle: All evolutionary wealth is he creation of a "fit order" and the economy is ultimately a genetic replication strategy which can be understood using a pattern of differentiation, selection and amplification. This evolution is based on knowledge creation. The last section of the book explores the impact of this theory of evolutionary wealth in four dimensions: strategy, organizational structure and complexity, finance and finally, political systems and policy. The theory of evolutionary wealth creation has important tests as to whether businesses should be organizaed to both endure (using adaptation) and the tension required to generate the greatest short term profit. In finance, the market price for a share has little to do with the funadmental economic value of a business and can be disconnected from the value for lon periods of time. Organizations appear directly effected by their ability to adapt over complex hierarchical structures. The author also includes Francis Fukuyama's work of trust in organizational growth and complexity. Overall this is an encouraging and optimistic book. The good news is the growing complexity in the economy means we have the potential for significantly increasing economic wealth. This pathbreaking book will open up much discussion and change in understanding the power of evolution as applied to wealth creation.

Wealth creation is central to any understanding of economics. What is it? How is it created? How is it increased? These questions are essential to most of us. They dominate our daily working lives. They dominate our political lives. In "The Origin of Wealth" Eric D. Beinhocker argues wealth creation is the product of a "simple, but profoundly powerful" three step process: 1. Differentiate. 2. Select. 3. Amplify. The same process that drives the order and complexity of life, the author says, drives the order and complexity of the economy. Borrowing from Darwin's theory of natural selection - which incidentally was borrowed from the economist Richard Malthus - the senior advisor to McKinsey & Company argues the economy evolves. It is a "design without a designer." If the economy is a complex, adaptive system, the author argues, there are four implications: 1. Equilibrium, and with it much of the economic thinking that has dominated the past century, is out. 2. A new tool set with its own techniques and theories are available to explain economic phenomena. 3. Wealth is a product of evolutionary processes. 4. Changes in economic thought foreshadow tremors. Adam Smith begat free trade. Karl Marx begat revolutions and socialism. Neo-classical economics begat the rise of global capitalism. Whether you are an investor, business or political leader, this well-written, readable book offers a thought-provoking tour of the latest in economic thinking. If the author is right, we are standing on the threshold of an economic revolution. Eric D. Beinhocker's book provides insight into how this changing view of wealth creation will change business strategy, finance, politics and policy. Time spent reading and understanding its implications will be well-spent.

The biggest idea of the book is pretty simple: The idea of equilibrium in economics doesn't stand up to empirical observation, but if you think of the economy as a subest of evolution, a lot of economic phenomena can be explained. Beinhocker lays out quite a meticulous case and presents some startling implications. He is very careful to say that it is still very early in the game to speak with full certainty about what can happen, and indeed, giving up the concept of certainty is one of the themes of the book. It is one of those books that will have you start looking at the world in a very different way. It is sure to be one of the best economics books of 2006.