Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics (Hardcover)

by Eric D. Beinhocker (Author) "I SAT PERCHED on a small ledge, with my back pressed against a dung wall, in the smoky center room of a thatched hut belonging..." (more)
Key Phrases: Business Plans, Complexity Economics, Big Man (more...)

Editorial Reviews

From Publishers Weekly
Accounting for the creation of wealth has long challenged humanity's best minds. For business readers and academics, Beinhocker is a zealous and able guide to the emerging economic paradigm shift he calls the "Complexity Economics revolution." A fellow of the economic think tank McKinsey Global Institute, he rejects traditional economic theory, based on a physics model of closed systems, in which change is an external disruptive shock. Instead, he outlines an open, adaptive system with interlocking networks that change organically, reflecting the interaction of technological innovation, social development and business practice. Wealth is created to the degree that this interaction decreases entropy in favor of "fit order" that meets human needs, desires and preferences. Beinhocker is sufficiently comfortable with this evolutionary model to advocate a comprehensive redesigning of institutions and society to facilitate it. He argues for corporate policies that favor many small risks over a few big ones and recommends restructuring financial theory to favor growth and endurance rather than short-term gains. Though he asserts that complexity economics can reduce political partisanship and increase social capital, Beinhocker stops short of saying that it cures sexual dysfunction. By the end, the concept emerges as a great idea that the author tries to make a panacea. (June 1)
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.

Review
"...a brilliant piece of intellectual history that deserves a prominent place on any shelf of economic literature." -- The Washington Post, September 10, 2006

"...a truly dynamic theory of the economy. Schumpeter would have approved." -- Richard R. Nelson, George Blumenthal Professor of International and Public Affairs, Business and Law, Emeritus, Columbia University

"...required reading for anyone interested in the future direction of economic thinking and its implications for business and society." -- Michael J. Mauboussin, Chief Investment Strategist, Legg Mason Capital Management, and author of More Than You Know: Finding Financial Wisdom in Unconventional Places

"In this ambitious tome, Beinhocker jettisons the math-based canon of economic history and recasts it as a teeming evolutionary stew" -- Josh McHugh, WIRED Magazine

"In this work, he's a story teller of the first rank." -- The Globe and Mail, November 8, 2006

"The Origin of Wealth is a frontal attack on neoclassical economic theory." -- Journal of Economic Literature, December 2006

"The freshest look at modern economics in decades." -- Gregor Bailar, CIO and Executive Vice President, Capital One

"Unquestionably the most important business book of the year." -- John Kay, Management Today

...ambitious...convention shattering. It's premise is novel and sweeping: don't grow your organization, evolve it. -- Josh McHugh, WIRED Magazine

Absorbing...[a] tour de force. It's time to wake up from what Beinhocker calls 'the dream of a clockwork universe'. -- James Pressley, Bloomberg

Eric Beinhocker's The Origin of Wealth ties risk management, incentives, and human psychology together with many other criteria, all under one philosophical framework. --The Motley Fool, December 31, 2007

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Product Details

• Hardcover: 527 pages
• Publisher: Harvard Business School Press; 1 edition (June 1, 2006)
• Language: English
• ISBN-10: 157851777X
• ISBN-13: 978-1578517770
• Product Dimensions: 9.4 x 6.2 x 1.8 inches
• Shipping Weight: 2.1 pounds (View shipping rates and policies)
• Average Customer Review: 4.5 out of 5 stars See all reviews (55 customer reviews)
• Amazon.com Sales Rank: #144,972 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

68 of 75 people found the following review helpful:

5.0 out of 5 stars A Radical Economic Restatement, June 27, 2006

By	Craig L. Howe "The Pointed Pundit" (Darien, CT United States) - See all my reviews (TOP 500 REVIEWER)    (REAL NAME)

Wealth creation is central to any understanding of economics. What is it? How is it created? How is it increased? These questions are essential to most of us. They dominate our daily working lives. They dominate our political lives.

In "The Origin of Wealth" Eric D. Beinhocker argues wealth creation is the product of a "simple, but profoundly powerful" three step process:

1. Differentiate.
2. Select.
3. Amplify.

The same process that drives the order and complexity of life, the author says, drives the order and complexity of the economy. Borrowing from Darwin's theory of natural selection - which incidentally was borrowed from the economist Richard Malthus - the senior advisor to McKinsey & Company argues the economy evolves. It is a "design without a designer."

If the economy is a complex, adaptive system, the author argues, there are four implications:

1. Equilibrium, and with it much of the economic thinking that has dominated the past century, is out.
2. A new tool set with its own techniques and theories are available to explain economic phenomena.
3. Wealth is a product of evolutionary processes.
4. Changes in economic thought foreshadow tremors. Adam Smith begat free trade. Karl Marx begat revolutions and socialism. Neo-classical economics begat the rise of global capitalism.

Whether you are an investor, business or political leader, this well-written, readable book offers a thought-provoking tour of the latest in economic thinking. If the author is right, we are standing on the threshold of an economic revolution. Eric D. Beinhocker's book provides insight into how this changing view of wealth creation will change business strategy, finance, politics and policy.

Time spent reading and understanding its implications will be well-spent.

67 of 76 people found the following review helpful:

2.0 out of 5 stars Ambitious survey; flawed logic, September 22, 2006

By	J. Gordon "nonfiction enthusiast" (Rye, NY) - See all my reviews (REAL NAME)

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.)

20 of 20 people found the following review helpful:

5.0 out of 5 stars Common sense economics, November 7, 2006

By	Steven Forth (Cambridge MA) - See all my reviews (REAL NAME)

Eric Beinhocker's The Origin of Wealth provides a compelling synthesis of recent advances in the application of complex systems to economic phenomena and proposes that classical economics with its assumptions of perfect rationality, perfect information and equilibrium are fundamentally wrong. Much of this will be obvious to those who have been following the work of the Santa Fe school - Holland, Kaufman, etc., but there is enough new here to make the book well worth the investment in time.

Beinhocker proposes that economies are best understood as dynamic systems, composed of agents, acting in networks, that support emergent behaviors with selection operating to drive evolution. He simplifies the evolutionary algorithm to differentiate-select-amplify, and those who are seriously interested should probably read through Dawkins books to get a deeper understanding (I find The Extended Phenotype particularly useful in thinking about organizations). I have two quibbles and one more serious question about his approach, which in general I find useful and applicable to my own work of designing knowledge based systems (I actually work for a competitor of his employer McKinsey & Co.).

The quibbles. Beinhocker describes `primitive' and certain other societies as being dominated by a `Big Man.' This is simply wrong for most primitive societies which are generally governed by a form of consensus hierarchy in which no one person can take unilateral action. Another quibble, Beinhocker has accepted Steven Pinker's silly characterization of music (and by implication other aesthetics) as mental cheesecake. For a more useful approach see Steven Mithen's new book The Singing Neanderthals (`Steven' seems to be a popular name in this field, and a good name it is too).

But these do not concern his main argument. I have more questions around his formulation of business plans as constituting a design space and the notion that a `management team' is a reader of `business plan schema'. There are several problems here. There is no language by which to define the design space of business plans. Beinhocker gets around this with a Borgesian approach of defining a library of all possible texts and then providing a filter to determine what is a business plan. I am less than convinced that any such filter could exist. If there is no language of business plans and no filter to determine what is and is not a business plan I do not see how the design space exists (and I have made effective use of the notion of design space and design space exploration in many projects). Take this away and the precise mechanisms proposed for understanding economic and business processes are on shaky ground. It may be more useful to think of business plans as simply another form of social technology that exist in the larger design space of social technologies. Given the difficulty involved in filtering out what is a business plan and what is not, this may be a more general and effective approach. Perhaps only a person from a management consulting firm could imagine that business plans are so clearly differentiated from the other apparatus of business and that they deserve to be called out as a first order construct.

That said, complexity economics as described in this book represents a paradigm shift from classical and neo-classical approaches and for my purposes anyway offers more actionable models.