Scattered throughout The Origin of Wealth is a five star survey of new ideas in economics, incorporating discoveries from science and psychology. Unfortunately, in the end, the book is undone by Beinhocker's unfortunate habit of stating hypotheses and non sequiturs as facts, and his continuous harping on "Traditional" economics (and "Traditional" finance) as obsolete and irrelevant. Also, the book is quite uneven in the amount of detail presented; there's too much sometimes (which is tedious), and too little other times (which is frustrating). I really wanted to be able to give the book three stars because of its broad scope and entertaining analyses, but just cannot do so after a few days of mulling over the entirety of its content. If you can separate the wheat from the chaff, it's a decent read; but if you are not already familiar with the subject matter discussed, caveat emptor (buyer beware)!
Some examples of the unevenness of detail: Several times the author described computer simulations, but did not include enough detail for the reader to fully understand how they were set up. For example, in one simulation of evolution, 1's and 0's were referenced as having been strung together to represent strategies in the "prisoner's dilemma" game. Unfortunately, the author did not bother to explain how the strings of digits corresponded to the strategies; therefore there was not enough information to figure out how the simulated evolution actually worked. In another case, over a page is consumed in an unnecessary blow-by-blow description of how a factory manager might increase production capacity, only to see the demand cycle slowing due to a feedback lag.
A distracting aspect of Beinhocker's presentation is the way that he repeatedly refers to mainstream economics as "Traditional Economics" with a capital T, indicating that it is not progressing, is resistant to change, and is obsolete. Of course, like any science, mainstream economics evolves slowly, but I don't think that a neutral observer could say that economists as a whole have not been open to new ideas over time. "Traditional" economics is actually in the process of absorbing some of the results he relates -- for example those from behavioral economics -- but you wouldn't know it from the text.
There are many statements in the book that seem questionable, but are stated as if they are incontrovertible facts. For example: that punctuated equilibrium is a fully accepted part of standard evolution theory (it's still under debate), that success in evolution can be fully defined by a "fitness function" (success in evolution is ultimately defined by success itself), that the second law of thermodynamics applies to the interactions between people (just because something applies to atoms doesn't mean that it applies to people -- consider the strong nuclear force).
The main part of Beinhocker's thesis is that the economic system can be equated to an evolutionary system, with companies consisting of a set of "businesses" that interact with each other in the economy. Businesses that are "fit" replicate, and those that are not disappear. He creates the concept of a hypothetical, written business plan that corresponds to DNA in evolution. This is a neat concept, but the parallel doesn't quite work. DNA "describes" the organism in a condensed, holistic manner. A business plan fully describing a business would have to be as complicated as the business itself.
In the final section, Beinhocker presents implications of his new complexity-based, evolutionary economics for business and policy.
For business, a major implication is that a company should not try to determine up front what strategy will work, but should set up different parallel businesses with different strategies and see how things go before betting on a single strategy. Ignoring the issue of when a company should stop providing capital to a business, -- What if the "fittest" business takes the longest to succeed? -- this is precisely what is suggested by such strategic frameworks as the BCG matrix, which were developed well before complexity economics. Basically the concept comes down to the old saw of not putting all ones eggs in one basket. It's also an implication of CAPM, "Traditional Finance", that diversification is optimal. (By the way, according to the book, "Traditional Finance" is obsolete also!)
(Beinhocker also finds an "implication" that companies should take a stakeholder approach and favor growth over return to shareholders. I cannot see how this follows from the theory, but I'll let it go.)
In terms of policy, The Origin of Wealth gets really crazy. Somehow Beinhocker comes to the conclusion that Behavioral Psychology favors universal health care coverage and a "minimum living wage." (In all fairness, Beinhocker is relating the proposals of a Matt Miller; however, he strongly supports them also.) The text presents these policies as if they are consistent with Strong Reciprocity, but how can these benefits be reciprocal when they apply to everyone regardless of behavior? (He also conveniently ignores moral hazard, and politicians' strong incentives to manipulate programs to benefit themselves.) It's not so much the conclusions -- e.g., no one can argue that the proposed strong elementary education for all is a bad idea -- but the fact that they don't follow logically from the premises.
The bottom line is that describing economics as an evolutionary system is fine, but there is really nothing that you can draw from the resulting model prescribing any particular strategy or policy. In order to see what will happen to the economy as the result of a new policy, one would have to create a simulation as complex as the economy itself -- in essence one would have to create an entire, new economy; or one could just try the policy and wait and see what happens. On the other hand, "Traditional Economics" gives us such theories as the law of supply and demand and interest rate parity. The law of supply and demand may not be perfect, but at least it predicts that a business will reduce sales if it raises prices. Interest rate parity isn't perfect, but at least it predicts that if a central bank raises rates, it should see a strengthening of its currency. Don't give up on mainstream, "Traditional," economics yet!
(If you are considering this book, you should check out "More Than You Know: Finding Financial Wisdom in Unconventional Places" by Michael Mauboussin, which applies some of the same theories of science and psychology to investing; and "Knowledge and the Wealth of Nations: A Story of Economic Discovery" by David Warsh, which presents a history of the development of mainstream growth theory.)
