Book Review: The Origin of Wealth

This is a big book. It is big in every sense. While it may take a few attempts to get through it the persistent reader will be well rewarded. The title references an earlier monumental work The Origin of Species. Both books attempt to understand what we are, how we got here, and where we may be going. Darwin explored the evolutionary process at work in biological species. Change is central as well in Bienhocker’s book.

He says,

This book will argue that wealth creation is the product of a simple, but profoundly powerful, three-step formula-differentiate, select, and amplify-the formula of evolution. The same process that has driven the growing order and complexity of the biosphere has driven the growing order and complexity of the “econosphere” (p.11).

Beinhocker continues, “What is wealth? How is it created? How can it be increased? – are among the most important questions for society and among the oldest questions in economics.” The thesis of his book is that new answers to these fundamental questions are beginning to emerge from not only economists but also from biologists, physicists, evolutionary theorists, anthropologists, psychologists and cognitive scientists. I would certainly add financial planners to this list.

The book is organized in four parts. A Paradigm Shift outlines the basic thesis and presents a brilliant historic review of what Beinhocker calls traditional economics. Here he demonstrates how the science of economics developed and gives a piercing critique of how economics has failed to meet the needs of a rapidly changing world.

We are all familiar with the failings of economics. The assumptions traditional economists have postulated in order to develop their intricate models may be elegant in design. Unfortunately they have seldom conformed to how the world works. Beinhocker quotes the economist Axel Leijonhufvud who says, “traditional economics models, “incredibly smart people in unbelievably simple situations,” while the real world is more accurately described by “believably simple people coping with incredibly complex situations.”

The new economics evolving is called Complexity Economics and part two explores in some detail the particulars of the new economics. Part three goes into depth on how the evolutionary process intrinsic to complexity economics creates wealth. Parts two and three are detailed and demonstrate the intelligence one would expect from a senior fellow with McKinsey Global Institute. My suggestion to a casual reader would be to read part one and then jump to part four which covers “What It Means for Business and Society.”

I began by reading this book from cover to cover. Frankly, I bogged down in the center sections. Reading the book beginning with the first section and ending with the last may be as workable for other readers as it was for me. The issues in part four are germane to the challenges facing financial planners. The tools we require today in order to meet the needs of our clients are not necessarily the same that have served us in the past.

The dream of a clockwork universe ended for science in the twentieth century, and is ending for economics in the twenty-first. The economy is too complex, too nonlinear, too dynamic, and too sensitive to the twists and turns of chance to be amenable to prediction over anything but the very shortest of terms. Even if we were as rational as possible and had all the information we could want, the computational complexity of the economy is such that the future would happen before we would have time to predict it.(p.323)

Before preparing this review I checked out several reviews on Amazon. They generally fell into two camps. First were the favorable reviews that found the scope and depth impressive and seminally important. These reviews were general in nature and focused on the generative central themes presented. In contrast the detractors wrote very dense critical deconstructions of his methodology. Since I am trained as a generalist I found these critiques generally unfathomable. Scientists’ involved in the specific fields of study covered by Beinhocker’s sweeping analysis may share these views. I suspect that most readers of InsideMoney.org will not.

Chance and change are variables we all must negotiate in life. Beinhocker relates the story of how IBM obtained DOS from Microsoft as an example of how chance can determine the future. IBM was looking for an operating system for their new personal computer. They approached Bill Gates but he had never written an operating system so he directed them to the leader in the field, Gary Kildall of Digital Research. Supposedly Kildall was wary of the white shirts so he went hot air ballooning and ditched the meeting. IBM went back to Gates who promptly licensed Q-DOS (for quick and dirty operating system) from a local company named Seattle Computer Products. He paid $30,000 for the license and negotiated third party licensing rights from IBM who thought the future was in hardware.

Pretty smart? Well let’s say sort of smart and very lucky. That was in 1981. By 1986 Microsoft was at a crossroads. They had several choices to make regarding the future of the company. Rather than lock into one strategy Gates chose to pursue each independently and by presenting so many alternative possible outcomes was able to outflank the competition and ride Windows to unprecedented wealth creation. Microsoft became what it is today out of the confluence of chance and the recognition and management of change.

According to Beinhocker economics and finance are at such a crossroads. If we continue to employ static strategies dependant on brilliant but ineffective economic and finance models we will likely be unable to continue the wealth creation required if we are to meet the diverse needs of a growing and evolving world population. The application of multiple strategies within the structure of complexity economics has direct impact on the direction of financial planning.

Financial planning is intimately aware of change. We have spent the past thirty years evolving into a profession. We have grown from a marketing and sales wing of the securities and insurance industries into a respected professional service rapidly becoming an essential component in the lives of people throughout the world. We understand change in our lives. We understand the complexity of human nature. We recognize the importance of the interior in understanding our clients and supporting them in achieving their financial and personal goals. The Origin of Wealth is essential reading for anyone who wishes to continue to be an active participant in this wonderful new world.

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