The summer is a good time to digest food for thought. The book "The Origin of Wealth" by Eric Beinhocker has proven to be a fertile breeding ground for my mind.
Beinhocker
poses the question: what is the origin of our incredible wealth and why does it
keep growing?
Classical
economic theory does not give an answer. He shows how classical economics is
like the medical profession centuries ago. Doctors are doing their best, struggling to help patients, relying on
inadequate and limited diagnostic tools, plausible but incorrect theoretical
models and assumptions, rules-of-thumb and common sense developed by trial and
error.
Since the
1980's we understand that the economy or "the market' is a specific class of
all complex systems that show emergent behavior. It is clear we have been moving in the direction
of more specialization of functions, more diversity in output, more
interrelations. Unfortunately our mathematical framework is not able to deal effectively
with the non-linear relationships and feedback-mechanisms innate to these
systems. A reductionist brute force approach is impossible: the computational
effort to calculate all possible states is (near) infinite.
Fortunately
computers give us the possibility to simulate these systems and understand more
of their behavior. Like why big integrated
organizations or big integrated software systems are so difficult and costly to
modify (loss of stability is around the corner).
The
interesting question is" how on earth it is possible for such a complex system to evolve,
to reach a stable state and to adapt to changes?
The simulations
show that an evolutionary approach (try many different variations simultaneously
based on best practices, select the best performing, combine them and create
new ones, try again and repeat ad
infinitum) is by far the best. A system evolves very rapidly to an acceptable ("good enough") state, keeps improving continuously
and can adapt quickly to external influences or disruptions. It is far, far
better than a Big Man approach: trying to control and steer everything
top-down.
So the continuous
"tussle" of competing variations under evolutionary pressure is the core driver
of our growing wealth. Reduce the tussle and/or reduce the evolutionary
pressure : the growth of our wealth
slows down.
The big "If"
however is the direction of the evolutionary pressure implied by "select the
best performing variations". What is "better"
in a selection ? Beinhocker argues "
bigger GDP, higher productivity, more profit, bigger bonus" is too limited and can lead to less wealth
instead of more. We need an improved definition of "better".
Based on
his arguments one can define an increase
in wealth as:
-
An
increase in choices and options we have how to lead our lives
o
Given
the energy and time we have as individuals
-
Without
reducing the choices and options of others , now and in the future
o
Which
implies that we have to preserve our
environment
So a better broadband pipe to an
unmitigated Internet is an increase of wealth. The end-to-end paradigm results
in an increase of wealth. Price
differentiation that gives more options is an increase of wealth, but artificial
scarcity to improve profits is a decrease of wealth (Net Neutrality). Walled gardens are a decrease of wealth .
More efficiency which results in lower prices
increases wealth but the bigger increases are generated by increasing our
options: like mobile voice and mobile Internet, or search engines like Google (although
they hardly show up in GDP and productivity statistics).
Less "tussle" by reducing
competition slows the growth of wealth. Less evolutionary pressure by lowering
the bar overall or focusing on the lowest common denominator reduces the growth
of wealth: yes, rural areas need broadband but keep the pressure on the front
runners to keep on improving.
An inspiring definition of "better",
worth to explore further.
