Monday, February 16, 2009

Preliminary thoughts on Beinhocker's Origins of Wealth

Someone - or perhaps many someones - could make a career out of turning the "very interesting research plus partially thought-through policy proscriptions" genre into ideas with real political impact. Maybe this is a recipe for a new think tank: scan for this stuff, develop the ideas the rest of the way, determine how to best get them across and then run advocacy based on that research. Eric Beinhocker's The Origin of Wealth and Dan Arielly's Predicatably Irrational both belong to this emerging category and would have tremendous potential for this approach.

Beinhocker's biggest win is the sheer size of the ideas. From the preface: "I...believe that just as biology became a true science in the twentieth century, so too will economics come into its own as a science in the twenty-first century...this book will argue that what we are witnessing in economics today is in fact the early stages of...a paradigm shift." He sets the controls of the heart of economics and goes far in making the case that the very core of the discipline is rotten.

What's at stake in this shift is decidedly not comparable to the turn of the century revolution in physics, where in moving from Newtonian to Einsteinian models, everything basically lined up except for the edge cases (i.e. for things moving near the speed of light or things that are very small, near the Planck length). The assumptions that traditional economics makes often don't match reality either close up or from a distance. The Complexity Economics Beinhocker describes basically rips out the Walrasian equilibrium models, and replaces them with complex adaptive systems. These systems and the models they generate both line up better with how economies work at the human, individual micro- level as well as at the historic macro- level.

Wealth is created from the interplay of what Beinhocker dubs Physical Technologies, Social Technologies and Business Plans, which function as a sort of wealth-creating DNA. Wealth is "fit order," created through jointly meeting 3 conditions: irreversibility, locally decreasing entropy and fitness. This is far too brief of a summary but it is a gorgeous idea: supple, flexible and with a grand historical scope. It's the math behind the history of human cooperation in Robert Wright's Nonzero, a book Beinhocker references frequently.

In terms of the math and the science, there are clear gaps that need filling, which Beinhocker clearly indicates. Equilibrium-based models work for a great many purposes and will continue to do so even as Complexity-based models become more useful. But despite the out-of-control nature of evolution and complex adaptive systems, the key to his analysis of the implications of Complexity Economics is this:

We may not be able to predict or direct economic evolution, but we can design our institutions and societies to be better or worse evolvers.

Policy Implications

The policy side of the book has two big problems. One is structural and likely nothing more than a function of the current state of the research. The other, based on a total misunderstanding of the progressive position on markets, is less understandable.

First, his telling of Complexity Economics seems to gloss quickly over the clear role democracy plays in economic evolution. He divides the processes that sort business plans according to effectiveness into two categories: Big Men and markets. Yet over the course of a few pages devoted to the role of democracy, he points out that "in 1700, America's GDP was 5 percent of Britain's and, by 1775, was 40 percent.."one of the highest growth-rates the world has ever witnessed." (297) - and that this was due in large part to the politics and culture of the colonies.

For another example, consider the growth and broadly shared prosperity of the post-war US economy. The fitness functions of a functioning democracy in a mixed economy seem to have the ability to shape the economy far more effectively than a dictator. But the interplay between functional democratic institutions and economic growth merits only three pages. There is a clear but unexplored connection to Sen's concept of substantial freedom, for another example: in fact it may be that substantial freedom could be defined as the degree to which one can deflect the fitness order with one's preferences. Arguably this is all outside the scope of Origins, but it's certainly an area for more study.

The more incomprehensible problem is that the one chapter specifically devoted to policy implications is built around a somewhat jarring end to left-right/end of history artifice. Maybe this only reads so strangely in the decidedly post-Fukuyama world where Obama is president: Origins was published in 2007. But it relies on a particularly flimsy anti-market strawman of the left that was no more accurate in 2007 than it is today, as if he mistakes the anti-globalization WTO protesters as the left's entire argument. If this isn't an indication that the left needs more aggressive idea marketing, I don't know what is.

Incidentally, as they say on Battlestar Galactica, this has all happened before. Bob Kuttner's April 2003, "Beyond Left and Right: a Guide for the Unwary" picks up the same pattern in discussing the lefty approaches offered up by the New America Foundation as centrist:

"...Lind doesn't deign to address the political obstacles. The very phrase, "Imagine a federal program ..." is a nonstarter in the current Bush era, let alone a program of national economic planning. (If you want to imagine something, imagine the Republican catcalls at the presumption of large-scale social engineering.)

We're in a different moment now, to be sure. An $800B stimulus was unthinkable six months ago and will be signed into law on Tuesday. But in Origins as then, the Rawlsian-compliant opportunity and social-capital expanding proscriptions he offers - such as "efforts to encourage voting and political involvement" or "[r]eforms to make workplaces more family friendly" or "better public transport" and more urban-friendly land-use laws - are all utter nonstarters with what's left of the conservative movement in the US.

Ultimately these two issues may be a quibble. The point is that we can design our institutions across the business, government and nonprofit sectors to evolve more quickly and vigorously

Movement Implications

There are powerful implications for the movement here, both at the movement strategy and the organizational development levels. His conception of strategy as a portfolio of experiments, while brutally difficult to implement, manage and execute, sounds like a key success factor as well as exactly the kind of strategy that a revamped conservative movement (with less to lose) could adopt.

At the organizational level, the key to this is creating organizational cultures that allow for increased evolution. Beinhocker covers so much ground so quickly that he doesn't have a chance to get into this in too much detail, but he does provide 10 commandments of evolutionary culture as a starting point (371):

Performing Norms
1. Performance orientation
2. Honesty
3. Meritocracy

Cooperating Norms
4. Mutual Trust
5. Reciprocity
6. Shared Trust

Innovating Norms
7. Nonhierarchical
8. Openness
9. Fact-based
10. Challenge

There's a clear connection to the Learning Organization school of organizational development: evolutionary optimization and strategy as a portfolio of experiments both sound like tools for executing and evaluating the learning organization. Again there's a lot of room for further analysis here. And this points towards an organization focused on horizontal movement communication, organizational development and spreading best practices around evolving strategy as another serious movement-level gap. (although one that a group like the Democracy Alliance could perhaps step into relatively easily)

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