The Origin of Wealth, by Eric D. Beinhocker

Posted: September 14, 2007 at 8:37 am in nonfiction

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Subtitled “Evolution, Complexity, and the Radical Remaking of Economics”, this book is a weird mishmash of several subjects. It starts with a critique of neoclassical economics, moves on to a review of complexity theory and evolution, reframes economics as an evolutionary competition among business models, and then finishes by applying some of these ideas to business strategy, economics and politics. I applaud Beinhocker’s ambition, but the result is a disappointingly shallow book with only a tenuous thread connecting its different parts.

The strongest part of the book was the criticism of neoclassical economics. Beinhocker goes into the history of how economics developed over the course of the twentieth century, and how its practitioners yearned to turn economics into a real science. By co-opting the forms and equations of equilibrium physics, they were able to create mathematical models that bore some resemblance to the economies they were studying.

However, some of the assumptions that are necessary for neoclassical economics are patently unrealistic. For instance, the model of consumers as rational economic maximizing agents doesn’t make any sense when we consider our own purchasing decisions. Economists also assume that economic systems are in a state of constant equilibrium, and that all disruptions to that equilibrium settle immediately, hence the joke about the economist who didn’t pick up the $100 bill because if it was a real $100 bill, somebody else would have picked it up already.

Beinhocker explains how the equilbrium model that the economists were using slowly came to imprison them. Because they had some success with the equilibrium model, they trapped themselves because changing the equilibrium assumptions would mean giving up the advances they had made. Beinhocker uses the analogy of map-making – good maps “are approximate pictures of an underlying reality”. But economists were using a map not based in underlying reality, and it trapped them on a local maximum where any incremental step from where they stood was a step back. This book is Beinhocker’s attempt at a giant leap to a new model that can fit reality better.

Beinhocker stops there and takes a detour into complexity theory, starting with a Social Atom-esque description of a simple economy simulation using software agents. He has chapters about dynamics, agents, networks, emergence and evolution. Most of this section was a review for me as I’ve read books like Gleick’s Chaos, Waldrop’s Complexity, Ian Stewart’s Does God Play Dice?, Kelly’s Out of Control, Kauffman’s At Home in the Universe, Duncan’s Six Degrees, Johnson’s Emergence, Dawkins’s Selfish Gene, etc.

The next section is “How Evolution Creates Wealth”, where he posits that the economy is an evolutionary battleground between competing business models using unique combinations of “Physical Technology” and “Social Technology”. Biological evolution depends on initial differentiation (genetic drift), selection of positive traits, and replication (reproduction), to find good fits with the existing and ever-changing environment. Beinhocker’s theory is that the same factors are at work in the economy, as businesses try to adapt to a changing economic world, with the ones that adapt most successfully and achieve the best fit being copied. It’s a cute theory, but I felt that he was really stretching to try to make it work.

The last section had some interesting ideas as he used his model to suggest new business strategies, better ways of organizing businesses to achieve results, and some implications for finance and politics. I particularly liked the section where he says “Executing and adapting are the ultimate imperatives for any design in an evolutionary system”, as it echos the learn and latch theory that I posited last year. Some of his critiques of finance are pointed as well, in particular how the simplistic assumptions necessary to make current economic models work have deleterious effects on actual behavior.

I thought the book was a decent review of several different subjects, but it didn’t really give me new ideas to play with. Beinhocker’s “evolutionary economics” model is not sufficiently developed for me to be able to use it to think about the world yet, and it’s unclear whether it’s any more based in reality than neoclassical economics was. There are good bits of criticism throughout, but I wouldn’t recommend this book – The Social Atom is a much more compact and thought-provoking book tackling a similar topic.

4 Responses to “The Origin of Wealth, by Eric D. Beinhocker”

  1. Beemer Says:

    I heard an interview on NPR about Supercaptialism that had a lot about competition and it really got me thinking in the direction of economic development as being like evolution. Maybe it has some better ideas in it.

  2. Beemer Says:

    In particular, Supercapitalism got me thinking that there is no going back to the point where corporations are not a significant part of the political landscape. Since we can’t treat them as silent and obedient servants, what we need to do is figure out how to get them to behave like good citizens…

  3. Eric Nehrlich, Unrepentant Generalist || Exponentially increasing communication || September || 2007 Says:

    […] The Origin of Wealth, by Eric D. Beinhocker […]

  4. Eric Nehrlich, Unrepentant Generalist || Social technologies || June || 2008 Says:

    […] Picking up on yesterday’s post and Seppo’s comment, another topic that has been coming up in my conversations is the idea of “social technology”. This doesn’t mean social software, where technology is applied for social purposes like Facebook or LinkedIn, but instead the idea of creating better social patterns that we can use. In this sense, democracy and monarchy would be two different social technologies, as would consensus-driven and hierarchical decision making. Social technology is the counterpart to physical technology, like telecommunications advances or increased computing power, a distinction observed in Beinhocker’s The Origin of Wealth. […]

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