The Origin of Wealth: Complexity, and the Radical Remaking of Economics by Eric D. Beinhocker

Published by: Harvard Business Press: 2006
Pages: 527pp
Reviewed by Stephen R. Reiner

In The Origin of Wealth, Eric D. Beinhocker discredits neoclassical economic theory, calling it inadequate to explain the most important characteristics of the development and workings of the economy.

Beinhocker, the Executive Director of a new center supported by the Institute for New Economic Thinking at the London School of Economics and Political Science, believes that “traditional economics” attempts to describe an orderly, rational and predictive system which, save for periodic disruptions, tends to maintain a state of equilibrium. Thus “traditional economics” oversimplifies what Beinhocker posits is really an ever-evolving, highly dynamic, adaptive system which he calls “complexity economics.” The key to Beinhocker’s thesis is that the theory of evolution is applicable not just to our biological development, but to our economic, technological and social development as well. And, he explains, all of these evolutionary processes continuously interact as they each operate according to the principles of differentiation, selection, amplification and repetition.

In today’s world no nonprofit can be successful unless it thinks of itself as a business.

Competing ideas fight for primacy in the marketplace, with the winners moving the process forward until better or more advanced ideas take their place. In Beinhocker’s terminology, these are the “fit designs,” and all evolution is a “search algorithm” for them. Successful businesses are those that have created “fit designs,” but they cannot rest on their laurels because if they do, the evolutionary process will overtake them with something better. Economic evolution is marked by ever-increasing knowledge, which drives both the technological development of new inventions and products and the organizational methodologies that enhance productivity. (For an example of the latter, think of the impact of Henry Ford’s assembly line, which revolutionized manufacturing efficiency.)

Editor’s Note:
As the world experiences yet another stage of economic turmoil, we believe it is useful to revisit a 2006 book that explores the roots of the crisis.

Thus Beinhocker views evolution as a trial-and-error process moving from simplicity to complexity, rather than large periodic disruptions that interrupt the equilibrium of traditional theory and move economies forward, only to return them to a new level of equilibrium. For Beinhocker, change is constant, and it comes in much smaller pieces from many sources. His is bottom-up, not top-down thinking: economics is not an equilibrium-bound system. While there are many forces at work (and these can be technological, social or political), no one is really in charge, and that is why the evolutionary process is always dynamic, always adapting. Economic evolution is the product of what he calls “deductive tinkering,” the work of many people, businesses and institutions contributing to economic success and to moving the economy forward.

In The Origin of Wealth, Beinhocker takes the reader back thousands of years to the hunter-gatherers to describe the beginnings of economic activity: the production of tools and weapons which began to be traded and which themselves evolved into more sophisticated implements. Evolution in its various iterations is marked by continuous increases in knowledge over time. Thus, in the field of economics, he equates knowledge with wealth, and defines the origin of wealth as evolution.

Beinhocker draws upon the work of a large number of scientists, social scientists, economists both classical and modern, game theorists and others to make his case,including the debunking of classical theory as well as to provide support for his theses. He builds his case carefully and convincingly, although his rejection of what he calls “traditional economics” is more unforgiving than it might be. After all, economic theory and thought have also evolved over time, and continue to do so.

In the last few sections of the book, Beinhocker addresses issues of “left” and “right” politics, multiculturalism in an increasingly linked global economy, the impact of poverty and inequality and other related social, political and cultural questions. He concludes that all of these affect economic evolution and are, in turn, influenced by it. In his view neither the left nor the right has the answers to the economic and social issues of today’s world, and he offers some possible solutions that draw from both philosophies. Readers can decide for themselves whether or not they agree; however, keeping in mind that this book was published in 2006, it would be hard for anyone to argue that these issues have not intensified in the years since then. We need to find common ground soon, or risk even greater problems in the years ahead.

One part of the economy hardly mentioned in The Origin of Wealth is the nonprofit sector. One could argue that this is perfectly appropriate, given that wealth creation is not the goal of this part of our economy. Nonetheless, not only are nonprofits a significant part of the economy, particularly in the United States, but also, in today’s world no nonprofit can be successful unless it thinks of itself and manages itself as a business. (There are probably exceptions in the realm of small, volunteer organizations that provide individual services of one kind or another, but these are hardly a significant portion of the sector.)

The demand for nonprofits to obtain funding makes it incumbent upon them to be adaptable.

For readers willing to apply insights into how businesses adapt to and drive changes in the economy to the world of the nonprofit sector, there is much to be gained from this book. One important lesson lies in understanding the impact of evolution on the ever-increasing complexity of the nonprofit arena, in terms of laws, rules and regulations. Thus, in addition to program delivery, nonprofits need to have sufficient infrastructure to be able to deal with these issues. In a world in which change is the order of the day, the demand for nonprofits to successfully obtain funding from whatever source – whether tuition, fees, government or philanthropy – makes it incumbent upon them to be adaptable, and in this context to be able to demonstrate the ability to generate and successfully execute viable business plans.

In developing business and strategic plans to achieve his notion of a “fit design,” Beinhocker believes that the best plans are generated when leadership focuses on learning and on creating “prepared minds,” combined with deep discussion, fact-gathering and analysis – prior to any decision making. Leaders should consider plans that make multiple bets on a variety of these options as a “portfolio of experiments” in order to minimize the risk of betting the entire plan on only one choice. While this might not work for all organizations, it surely offers food for thought for for-profit and nonprofit organizations alike.

STRATEGY MATTERS © No 6
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