Complexity meets economics: from caveman to the present today in three easy steps

“Wealth is knowledge and its origin is evolution”

Hark, those of you who don’t know about economics but would like to, or those who know about economics but are dissatisfied with the Neoclassical mainstream. Read this book. In fact, anyone who thinks about politics, business or development or anything should read it too, because it will fling open new mental doors (leading to complexity theory and other fun things).

In 450 compelling pages (hah), Beinhocker uses evolution theory to sketch out sometimes mindblowing answers to the basic questions of ‘what is wealth?’ and ‘how can it be increased?’. First of all, he meticulously sweeps away the Traditional economics which has so conspicuously failed in recent years, with its ridiculous assumptions like perfect rationality and fixation on the concept of equilibrium. Apparently it got lost in 19th century physics and forgot that “if the universe cannot escape the Second Law [of Thermodynamics], then neither can economics”. Instead, he shows how wealth is knowledge, emerging from a simple evolutionary algorithm: differentiate, select and amplify. Essentially, what biological evolution does for genes and living organisms, economic evolution does for business plans (broadly defined) and companies. As Beinhocker himself puts it, evolution says: “I will try lots of things and see what works and do more of what works and less of what doesn’t”. And the result of this ‘deductive-tinkering’? A complex adaptive system (‘explained’ in an earlier post so I won’t bore you here) which doubled world per capita GDP to $180 in the 15 000 years to 1750 AD, then in the following 250 years increased it 37 fold.

Because blurry tables explain things better than I do.

Going beyond parsing the intro, it’s a book that makes you challenge how we instinctively conceptualise the world around us. How often is it that you’ve heard a Business defined as “a person, or an organized group of people, who transforms matter, energy and information from one state into another with the goal of making a profit”? It’s rewarding but hard, thinking in systems, and not because you’re stupid; it’s “just that our brains are not wired to think this way”. Beinhocker also produces new, or at least unfamiliar terminology for his cast of evolutionary characters, from ‘Physical and Social Technologies’, to the ‘evolutionary design space’ to ‘schema readers’. But it’s done in an accessible way - at one point he uses the analogy of a toddler making Lego figures – and even with the occasional amusing anecdote: who knew that the Italian economist Pareto “spent his later years as a recluse in a Swiss mountain chalet with twenty angora cats”?

So an economics that can take us from caveman to the present day, and which does not depend on ironing out our humanity to make its models work. And with lessons for business strategy (think portfolio of experiments not taking a big bet), organisations, policymakers, and anyone who wants to effect change. Even nearly 10 years since it was first published, these are ideas that still haven’t broken through into the mainstream, as Kate Raworth recently pointed out. But it’s an exciting time for thinking, when the ground is shifting beneath your feet.

More to come on this, for sure, but for now, read the book.

Credit: cheezburger.com