The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics (Harvard Business School Press; 2006)

Eric D. Beinhocker's "The Origin of Wealth" critiques a neoclassical economics and presents a new school of economic thought called "Complexity Economics". The book starts off by presenting the history of economic thinking and the rise of the neoclassical paradigm - the current dominating economic methodology that uses complex mathematical models and assumes perfect rationality, equilibrium, etc. Beinhocker critiques Neoclassicism for some of the reasons that I heavily disagree with it-it involves too much math, assumes perfect rationality, and relies on faulty economic constructs (equilibrium is an example). In short, the theories of Neoclassicism are not in one respect consonant with reality. However, after he critiques Neoclassicism he begins a very long, long, long explanation of his complexity economics. Most of the following chapters are descriptions of "complexity economics" and how while mainstream mathematical formulas are erroneous, his computer lab scenarios provide insight into how humans behave.In my opinion he seems to make the same mistakes that he accuses Neoclassicism of doing, using complex formulas and computerized equations as data for human action and how they behave. He simply provides a new perspective but doesn't really build on it because in reality it requires a vast pile of mathematical research and more outlandish computer models that haven't been concocted yet. He even seem to support Keynesian economics, a school of thought that can be considered as mainstream as mainstream comes, as representing some business cycle theory of complexity economics because it takes into account entrepreneurial expectations (To his credit, he still critiques it because he says they still rely on perfect equilibrium). In short, it appears as if his critique of neoclassical economics is more with the fact that they base their fancy models on 19th century physics, not 20th century physics. (I believe he states this earlier in his book, although he ties it into his "new approach" and does not say it in such a critical way). His analysis of business structure is a little bit better. He talks about market competition and how dynamic, capitalistic and innovative companies will survive but if they fail then a new and better company will supplant them. He provides evidence that markets are in fact always changing, giving examples of companies that have started as small businesses, evolved into large ones, and then declined into shadows of their former self. Unfortunately he makes mistakes in his final chapters, such as where shuns the free market and supports antitrust. In his last chapter he supports a great deal of government intervention which in fact hampers the dynamic creative destruction he supports (I'm not going to go in detail with them as they don't really deal with the book itself, but I will talk to someone if they want). In summation, he doesn't really provide a consistent theory for Complexity Economics. To his credit,he admits that he is really starting a new trend and is providing the framework for a change in economics. In my opinion though, just like Neoclassism, he is building the framework on a shaky foundation and doesn't combine his theories into coherent thought. Cover......Page 1 Title page......Page 7 Copyright page......Page 8 Dedication......Page 9 Contents......Page 13 Preface and Acknowledgments......Page 15 Whom This Book Is For......Page 16 Acknowledgments......Page 18 Part I: A Paradigm Shift [1]......Page 21 The Mysteries of Wealth......Page 23 Humanity's Most Complex Creation......Page 25 2.5 Million Years of Economic History in Brief......Page 26 A Tale of Two Tribes......Page 28 The Economy Evolves......Page 31 The Creation of Fit Design......Page 33 Complexity Economics......Page 36 The Road Map Ahead......Page 39 2 Traditional Economics: A World in Equilibrium [21]......Page 41 The Need for a New Approach......Page 42 Defining Traditional Economics......Page 43 Pin Making and the Invisible Hand......Page 44 A Healthy Balance......Page 47 Dreams of a New Science......Page 49 As Predictable as Gravity......Page 53 The Panglossian Economy......Page 55 The Neoclassical Synthesis......Page 56 From Allocation to Growth......Page 59 The Legacy of Traditional Economics......Page 62 3 A Critique: Chaos and Cuban Cars [45]......Page 65 The Clash of the Titans......Page 66 Unrealistic Assumptions......Page 68 Incredibly Smart People in Unbelievably Simple Worlds......Page 71 Time Waits for No One......Page 72 Making the Interesting Exogenous......Page 74 Keeping a Lid on Things......Page 76 Reality Test......Page 78 The "Law" of Supply and Demand......Page 80 The Law of One Price......Page 81 Equilibrium in a Few Quintillion Years......Page 82 Nonrandom Walks......Page 83 Misused Metaphors......Page 84 Half-Baked Physics......Page 86 Open Sesame......Page 88 The Misclassification of the Economy......Page 90 Beyond Walras's Cathedral......Page 94 Part II: Complexity Economics [77]......Page 97 4 The Big Picture: Sugar and Spice [79]......Page 99 Welcome to the Sugarscape......Page 100 The Rich Get Richer......Page 103 Birds Do It, Bees Do It... and So Do Agents......Page 108 The Invisible Hand Comes to Sugarscape......Page 109 Equilibrium Lost......Page 112 The Evolution of Hierarchy......Page 114 An Economy in Silico......Page 115 Further Defining Complexity Economics......Page 116 Table 4–1: Five "Big Ideas" That Distinguish Complexity Economics from Traditional Economics......Page 117 5 Dynamics: The Delights of Disequilibrium [99]......Page 119 Dynamics and Feedback......Page 120 The Science of "Nonpachydermology"......Page 122 The Economy Is Complex but Not Chaotic......Page 127 The Invisible Hand Sometimes Shakes......Page 129 6 Agents: Mind Games [115]......Page 135 Spock Goes Shopping......Page 136 Cognitive Dissonance......Page 137 You Selfish Pig!......Page 139 To Err Is Human......Page 141 Arthur's Bar Problem......Page 143 Inductive Rationality......Page 145 Why Deep Blue Can't Tie Its Shoes......Page 147 The Mind of an Agent......Page 149 Frog Learning......Page 150 Frog Poetry?......Page 153 Stock Bots......Page 154 7 Networks: Oh What a Tangled Web We Weave [141]......Page 161 How Networks Catch Fire......Page 163 It's a Small World......Page 164 The Value of Random Friends......Page 166 "The Network Is The Computer"......Page 167 Big Is Beautiful: Informational Scale......Page 168 Big Is Bad: Complexity Catastrophes......Page 170 Degrees of Possibility Versus Degrees of Freedom......Page 172 Two Cheers for Hierarchy!......Page 174 Boring Is Better......Page 176 The Edge of Order......Page 177 8 Emergence: The Puzzle of Patterns [161]......Page 181 Are Business Cycles Like Wiggling Jelly?......Page 183 We're All (New) Keynesians Now......Page 184 "More Is Different"......Page 187 Oscillations: Boom and Bust in Beer World......Page 188 Punctuated Equilibrium: Are There "Keystone" Technologies?......Page 193 Power Laws: Earthquakes and Stock Markets......Page 195 Why Are Stock Markets So Volatile?......Page 201 Design Without a Designer......Page 207 Artificial Life......Page 208 The Library of LEGO......Page 212 The Setup for Evolution......Page 214 The Evolutionary Process: Child's Play......Page 215 Replicators Just Want to Replicate......Page 218 Explorations on the Fitness Landscape......Page 222 The Grand Champion Search Algorithm......Page 227 Good Tricks, Forced Moves, and Path Dependence......Page 232 Stripping Evolution Back to Its Basics......Page 233 From Evolutionary Theory to Economic Reality......Page 236 Part III: How Evolution Creates Wealth [219]......Page 239 The Prisoner's Dilemma......Page 241 The Tournament of Champions......Page 244 Strategies in Silico......Page 245 A Rain Forest of Bits......Page 248 The King of the Forest......Page 250 Unpredictable but Understandable......Page 251 The Library of Babel......Page 253 The Library of Smith......Page 255 A Model of Economic Evolution......Page 257 11 Physical Technology: From Stone Tools to Spacecraft [241]......Page 261 The Dawn of Economic Man......Page 262 Physical Technology Space......Page 263 Physical Technology Readers......Page 265 Physical Technology Feeds Its Own Growth......Page 266 Technology Evolution by Deductive-Tinkering......Page 269 Selection on the Physical Technology Landscape......Page 272 Imitation Is the Sincerest Form of Flattery......Page 273 Explaining Technology S-Curves......Page 274 Disruptive Technologies......Page 277 The Scientific Revolution: Reprogramming Evolution......Page 278 12 Social Technology: From Hunter-Gatherers to Multinationals [261]......Page 281 Let's Get Organized......Page 282 How Social Technologies Evolve......Page 283 Deductive-Tinkering in Social Technology Space......Page 284 Competing to Cooperate......Page 285 Non-Zero Magic......Page 286 Dividing the Spoils......Page 287 Cheaters (Mostly) Never Win and Winners (Mostly) Never Cheat......Page 288 From Family Units to Business Units......Page 290 Peace, Love, and Understanding......Page 292 Building Computers Out of People......Page 295 13 Economic Evolution: From Big Men to Markets [279]......Page 299 Businesses Do the "Living and Dying"......Page 300 Units of Selection......Page 302 Strategy Glue......Page 304 Differentiation: From Entrepreneurs to Bureaucrats......Page 305 Selection: Big Men Versus Markets......Page 307 How Selection Works in Market Systems......Page 309 Replication: Amplifying Success......Page 311 Economic Evolution in a Nutshell......Page 313 In Praise of Markets—for Different Reasons......Page 314 Meta-lnnovations: Revisiting 1750......Page 316 14 A New Definition of Wealth: Fit Order [299]......Page 319 Cranks and Half-Baked Speculators......Page 320 A Proposal: Three Conditions for Value Creation......Page 322 Irreversibility: Breaking Eggs to Make an Omelet......Page 323 Decreasing Entropy: Are Pink Cars and Bombs Value Creating?......Page 326 Fitness (Part 1): An Evolutionary View of Preferences......Page 328 Fitness (Part 2): Pushing Our Own Pleasure Buttons......Page 332 The Universal Utility Function......Page 334 Wealth Is "Fit Order"......Page 336 Did We Pass the Test?......Page 338 Part IV: What It Means for Business and Society [321]......Page 341 15 Strategy: Racing the Red Queen [323]......Page 343 Are You Committed?......Page 344 A $270 Billion Frozen Accident......Page 346 "The Future Ain't What It Used to Be"......Page 347 The Myth of Sustainable Competitive Advantage......Page 349 Strategy Is a Red Queen Race......Page 351 Companies Don't Innovate; Markets Do......Page 353 Strategy as a Portfolio of Experiments......Page 354 Context: Creating Prepared Minds......Page 357 Differentiation: How Bushy Is Your Strategic Tree?......Page 359 Selection Pressure: Setting Aspirations......Page 361 Amplification: Swarming Like Bees......Page 364 An Adaptive Mind-Set......Page 367 16 Organization: A Society of Minds [349]......Page 369 Social Architecture and Adaptability......Page 370 Organizations Are Complex Adaptive Systems......Page 371 Why Firms Exist......Page 372 Executing and Adapting......Page 375 Individuals: Through Rose-Colored Glasses......Page 377 Individuals: Adaptability and Loss Aversion......Page 378 Individuals: The Price of Experience......Page 379 Individuals: "Rigids" Versus "Flexibles"......Page 381 Structure: How Much Hierarchy?......Page 384 Structure: The Coevolution of Resources and Business Plans......Page 386 Culture: Rules of Behavior......Page 388 Culture: The Ten Commandments......Page 390 Innovating norms......Page 391 Culture: Inherent Tensions......Page 392 Creating an Adaptive Social Architecture......Page 394 A Society of Minds......Page 398 Crashing Nobel Prizes......Page 401 Forgotten Frenchmen and Dusty Libraries......Page 402 Textbook Stock Picking......Page 403 Vegas, Churchill Downs, and Wall Street......Page 405 Cotton Prices, Fat Tails, and Fractals......Page 408 "A Non-Random Walk Down Wall Street"......Page 409 Attack of the Econophysicists......Page 410 Markets as Evolving Ecosystems......Page 411 Price Does Not Equal Value......Page 414 A New Definition of Market Efficiency......Page 419 Implications for Managers......Page 423 The Cost of Capital......Page 424 Do Stock Options Make Sense?......Page 425 What Is the Goal of a Corporation?......Page 428 Endure and Grow......Page 429 18 Politics and Policy: The End of Left Versus Right [415]......Page 435 A Framework Past Its Time......Page 436 Human Nature and Strong Reciprocity......Page 438 The Critique of the Left......Page 442 The Critique of the Right......Page 443 Government as Fitness Function Shaper......Page 446 "Culture Matters"......Page 448 Social Capital and the "Great Disruption"......Page 455 Inequality, Social Mobility, and the Culture of Poverty......Page 460 Is Inequality Moral?......Page 461 A Lack of Social Mobility......Page 462 The "Culture of Poverty"......Page 464 Rawlsian Logic and Policy......Page 465 Changing Cultures and Creating a "Common Layer"......Page 466 Future Directions......Page 469 Epilogue [451]......Page 471 1 The Question: How Is Wealth Created?......Page 475 2 Traditional Economics: A World in Equilibrium......Page 479 3 A Critique: Chaos and Cuban Cars......Page 482 4 The Big Picture: Sugar and Spice......Page 486 5 Dynamics: The Delights of Disequilibrium......Page 487 6 Agents: Mind Games......Page 488 7 Networks: Oh What a Tangled Web We Weave......Page 489 8 Emergence: The Puzzle of Patterns......Page 490 9 Evolution: It's a Jungle Out There......Page 492 10 Design Spaces: From Games to Economies......Page 494 11 Physical Technology: From Stone Tools to Spacecraft......Page 495 12 Social Technology: From Hunter-Gatherers to Multinationals......Page 496 13 Economic Evolution: From Big Men to Markets......Page 497 14 A New Definition of Wealth: Fit Order......Page 498 15 Strategy: Racing the Red Queen......Page 500 16 Organization: A Society of Minds......Page 503 17 Finance: Ecosystems of Expectations......Page 505 18 Politics and Policy: The End of Left Versus Right......Page 507 Epilogue......Page 509 A......Page 510 B......Page 511 C......Page 513 D......Page 514 F......Page 515 G......Page 516 H......Page 517 K......Page 518 L......Page 520 M......Page 521 P......Page 522 R......Page 523 S......Page 524 W......Page 525 Z......Page 526 A......Page 527 B......Page 528 C......Page 529 D......Page 530 E......Page 531 F......Page 533 H......Page 534 I......Page 535 L......Page 536 M......Page 537 N......Page 538 O......Page 539 P......Page 540 R......Page 541 S......Page 542 T......Page 544 W......Page 545 Z......Page 546 About the Author [527]......Page 547 Over 6.4 billion people participate in a $36.5 trillion global economy, designed and overseen by no one. How did this marvel of self-organized complexity evolve? How is wealth created within this system? And how can wealth be increased for the benefit of individuals, businesses, and society? In The Origin of Wealth, Eric D. Beinhocker argues that modern science provides a radical perspective on these age-old questions, with far-reaching implications. According to Beinhocker, wealth creation is the product of a simple but profoundly powerful evolutionary formula: differentiate, select, and amplify. In this view, the economy is a "complex adaptive system" in which physical technologies, social technologies, and business designs continuously interact to create novel products, new ideas, and increasing wealth. Taking readers on an entertaining journey through economic history, from the Stone Age to modern economy, Beinhocker explores how "complexity economics" provides provocative insights on issues ranging from creating adaptive organizations to the evolutionary workings of stock markets to new perspectives on government policies. A landmark book that shatters conventional economic theory, The Origin of Wealth will rewire our thinking about how we came to be hereand where we are going. What is wealth? How is it created? And how can we create more of it for the benefit of individuals, businesses, and societies? In The Origin of Wealth, Eric Beinhocker provides provocative new answers to these fundamental questions.

Beinhocker surveys the cutting-edge ideas of economists and scientists and brings their work alive for a broad audience. These researchers, he explains, are revolutionizing economics by showing how the economy is an evolutionary system, much like a biological system. It is economic evolution that creates wealth and has taken us from the Stone Age to the $36.5 trillion global economy of today.

By better understanding economic evolution, Beinhocker writes, we can better understand how to create more wealth. The author shows how complexity economics is turning conventional wisdom on its head in areas ranging from business strategy and organizational design to investment strategy and public policy. As sweeping in scope as its title, The Origin of Wealth will rewire our thinking about the workings of the global economy and where it is going. Beinhocker has written this work in order to introduce a broad audience to what he believes is a revolutionary new paradigm in economics and its implications for our understanding of the creation of wealth. He describes how the growing field of complexity theory allows for evolutionary understanding of wealth creation, in which business designs co-evolve with the evolution of technologies and organizational innovations. In addition to giving his audience a tour of this field of complexity economics, he discusses its implications for real-world issues of business