The Origin Of Wealth: Evolution, Complexity, and the Radical Remaking of Economics

by Eric D. Beinhocker

wealth is not a fixed concept; the value of something depends on what someone else is willing to pay for it at a particular point in time.

no benevolent dictator making sure that fish gets from a fisherman in Mozambique to a restaurant in Korea to provide the lunch for a computer worker who makes parts for a PC that a fashion designer in Milan uses to design a suit for an interest-rate futures trader in Chicago.

The number of SKUs in the New Yorker’s economy is not precisely known, but using a variety of data sources, I very roughly estimate that it is on the order of 1010 (in other words, tens of billions).

wealth creation is the product of a simple, but profoundly powerful, three-step formula—differentiate, select, and amplify—the formula of evolution.

Evolution is an algorithm; it is an all-purpose formula for innovation, a formula that, through its special brand of trial and error, creates new designs and solves difficult problems.

Evolution can perform its tricks not just in the “substrate” of DNA, but in any system that has the right information-processing and information-storage characteristics.

evolution is a form of information processing, it can do its order-creating work in realms ranging from computer software to the mind, to human culture, and to the economy.

evolution a general-purpose algorithm for creating “design without a designer.”30

Evolution creates designs, or more appropriately, discovers designs, through a process of trial and error.

Evolution is a method for searching enormous, almost infinitely large spaces of possible designs for the almost infinitesimally small fraction of designs that are “fit” according to their particular purpose and environment.

Differentiation of designs, selection according to some criterion of fitness, and amplification or scaling up of the successful designs to the next stage of the process—all of this happened both within the clothing company itself and within the overall fashion marketplace. Your shirt was not designed; it was evolved.

The first is Physical Technology;

Social Technologies, on the other hand,

Businesses fuse Physical and Social Technologies together and express them into the environment in the form of products and services.

complex system is a system of many dynamically interacting parts or particles.

In such systems the micro-level interactions of the parts or particles lead to the emergence of macro-level patterns of behavior.

Scientists refer to parts or particles that have the ability to process information and adapt their behavior as agents and call the systems that agents interact in complex adaptive systems.

economic value is created when people take raw materials from their environment and then, through their labor, turn those materials into something that people want.

enabled people to pursue their own self-interest

and make their own choices. After

competitive markets are the most morally just mechanism for allocating a society’s resources.

The law of diminishing returns is a critical force in helping the economy achieve balance.

Bentham identified a quantity that he termed utility to measure individual pleasure and pain.

The credo of the Utilitarians was that society should be organized in such a way as to maximize its collective utility, or happiness.

Just as Turgot showed that there were diminishing benefits to increased production, Gossen showed that there were also diminishing benefits to increased consumption.

The combination of diminishing marginal returns on production and diminishing marginal utility on consumption means that markets have a natural balancing mechanism—price.

Pareto superior trades, and Pareto contended that in free markets, people would keep trading until they had exhausted all the Pareto superior trades.

He treated two key variables in the model as exogenous: the rate of population growth and the rate of technological change. These two variables drove the growth rate

Knowledge is what economists refer to as an increasing returns phenomenon.

First, the assumptions must be appropriate for the purpose of the model, and second, they must not affect the answers the model provides for that purpose.

each researcher needs different types and amounts of idealization.

both the coarse- and fine-grained maps (and theories) must agree with each other and the observations of underlying reality.

in a world where information is costly, incomplete, and rapidly changing, our brains would be wired to make fast decisions that are “good enough” rather than perfectly optimal.

Positive feedback is an accelerating, amplifying, self-reinforcing cycle. Negative feedback is the opposite: a decelerating, dampening, self-regulating cycle.

there is no “final proof” that a theory is correct, but one can say whether a theory is disproved by data, whether one theory fits the data better than another, and whether a theory has yet to be contradicted by data.34

Entropy is what gives time its arrow.

Without entropy and the inevitable drift from order to disorder, there would be no way to tell what was the past, present, or future.

In open systems, there is a never-ending battle between energy-powered order creation and entropy-driven order destruction.

For order to be created in one part of the universe, order must be destroyed somewhere else, because the net effect must always be increasing entropy

The earth thus imports energy and exports entropy.

the system of your house imports energy and matter, which is then used to create the order within its confines, and then sends back into the universe heat and disordered matter, thereby exporting its entropy.

Complex adaptive systems are a subcategory of open systems. It takes energy to process information, sustain order, and create complex patterns.

The virtual island has only one resource—sugar—and each square in the grid has different amounts of sugar piled on it.

Pareto curve has a lot of people at the bottom end of the wealth distribution, a wide range in the middle class, and then a few superrich.

The skewed distribution is an emergent property of the system. It is a macro behavior that emerges out of the collective micro behavior of the population of agents.

small differences at one point (i.e., a lucky or a bad break somewhere) can lead to major differences down the road.

Trade has an effect equivalent to increasing the carrying capacity of the landscape, thus making everyone better off.

In Sugarscape, there is only one reason to become a borrower—to have children.

convenient way to describe a dynamic system is in terms of stocks and flows.3 A

Feedback occurs when the output of one part of a system is the input for another,