Rethinking the economy

I have recently had the pleasure of reading Eric. D. Beinhocker's book The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. Cambridge: Harvard Business School Press; London: Random House, 2006. 526 p. As someone whose whole scientific career has been in systems science, I found it encouraging that mainstream business people are finally waking up to the fact that traditional economics is based on the wrong premises about human nature and purpose, and about the way complex systems of all kinds work and evolve.

Beinhocker starts by asking how wealth is created. He demonstrates that the foundations of traditional economic theory in concepts of equilibrium from 19th century physics and of perfectly rational actors in the market place do not hold in practice. The science of complex evolutionary systems has gone far beyond these misleading concepts, and sheds new light on how economies really function in a dynamic interplay of agents forming networks with emergent properties as they evolve over time. Periods of relative stability alternate with rapid changes in what is termed a punctuated equilibrium, using the market to select from an almost infinite variety of business plans those that represent a fit order at any point in time. The ground rules of traditional economics produce the characteristic booms and busts of economic cycles, but these can be dampened by replacing competitive secrecy by consultation. Wealth creation depends on the spaces available, the physical technologies, and the social technologies including institutions, laws and norms. Drawing from the concept of entropy in the second law of thermodynamics, Beinhocker demonstrates that real wealth is the information or knowledge that uses the flow of energy to reduce entropy in the system, increasing its carrying capacity, efficiency and complexity (a theme that I explored in my own book "The Eco Principle: Ecology and Economics in Symbiosis", 1996). The goal of a corporation then should be enduring and growing, with profitability only a fundamental constraint. Businesses that survive must balance present efficiency based on experience with innovation to prepare for inevitably changing conditions and possibilities.

The implications of what he calls Complexity Economics are considerable. In non-zero-sum systems, there is an incentive to cooperate. There is a constant co-evolution of different actors, and no competitive advantage is sustainable. The result is an inevitable tension between control and innovation, and between structure and culture. Since the future cannot be predicted, it is important to have prepared minds and a culture of learning, rather than a fixed strategy. The most significant determinant of success is the social architecture, including the behavior of people, the structures and processes in which they operate, and the culture that emerges.

Beinhocker shows that traditional dichotomies of left and right, liberal and conservative, based on two views of human nature, altruist and self-regarding, need to yield to scientific evidence that these two both exist in each of us, but our natural tendency is to strong reciprocity: I cooperate if you cooperate, but if you cheat, I punish you. This focuses attention at the micro level and the rules and norms of individual behavior. Trust is essential to build social cohesion. He identifies the norms that favour economic development. At the individual level, these are a strong work ethic, individual accountability, and a belief that you are the protagonist of your own life, with benefits from a moral life in this world, being realistic about the present situation but optimistic about the future. The norms for cooperative behavior include a belief that life is not a zero-sum game and that cooperation has benefits, that generosity and fairness have value, and that free-riding and cheating are sanctioned. Norms also need to favor innovation by valuing rational scientific explanations of the world, tolerating heresy and experimentation, supporting competition and celebrating achievement. It is important to have an ethic of investing for tomorrow, saving for future generations, sacrificing short-term pleasures for long-term gain, and enjoying high levels of cooperation.

Both a strong sense of community and values, complemented by government leadership, are needed. Inequalities should be reduced to build social cohesion, and priority given to health, education and a minimum living wage for the poor to empower them for their own development. Justice and altruism can be increased through education to address the challenges of wealth distribution. In this context, the Baha'i principles can be seen as the next stage in the evolution of social technologies, and the Baha'i community, with its global spread and many random connections, has an unusually high networking potential, well-placed to contribute positively to a complexity economy. Beinhocker uses scientific arguments and recent research to confront the traditional certainties of economics and to propose an alternative paradigm in which ethics and values have a central role.