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 / Winter 2006 / Issue 45(originally published by Booz & Company)


Best Business Books: Economics

Intriguingly, although he thematically brands these ideas around complexity, the narrative arc that integrates his insights is the principle of evolution. Mr. Beinhocker’s book is about the “evolvability of evolvability” in economic systems. That is, how do individuals and institutions collaborate and compete to create value? What institutions do they create? What information do they process, and how do they process it? When do they trade as individuals? As teams? As firms? As nation-states? How does new information — feedback — get incorporated into the heuristics and rules that govern decision making?

Where Mr. Warsh does a fantastic job of addressing how traditional economists deal with those questions, Mr. Beinhocker presents the broad array of mathematical tools and models that are better equipped than their predecessors to describe evolvability and adaptation. That’s not to say that traditional economic models and math are irrelevant or obsolete; it’s just that they’ve hit (ahem) diminishing returns.

So Mr. Beinhocker runs tutorials that cherry-pick from the interdisciplinary fields of software design, cognitive psychology, network theory, and genetic algorithms to explain how growth, knowledge, and growth of knowledge all happen. Not only are these tutorials well done, Mr. Beinhocker does what you’d expect an excellent consultant to do: He connects them to the real world of business practice. This can be a self-help book for executives seeking business insight from a different genre of economic modeling.

For example, Mr. Beinhocker uses the networking research of Santa Fe Institute complexity theorist Stuart Kauffman to better explain the economics of adaptation in the face of disruptive competition: “The work by Kauffman and the others leads to a counterintuitive insight. IBM’s problem with Dell was not that the blue-chip company was insensitive to change but rather that it was too sensitive to change. The dense interconnections and tangles of interaction in IBM’s business system meant that small changes (‘let’s sell computers by mail’) could cascade into big problems (‘here are the thousands of reasons why we cannot sell computers by mail’).”

In other words, highly networked enterprises may be far less adaptable in the face of competition than their champions argue. Traditional economists might assert that Nobel laureate Ronald Coase (who appears in both books) anticipated this situation in his classic paper on organizational coordination and transaction costs. Absolutely true. But Professor Coase was from the tradition of “literary economics,” which tells stories; the high-powered mathematical tools of network theory lets economists — and businesses! — build manipulable models. We can now “play” to learn where economies of scale (increasing returns) conflict with coordination costs (diminishing returns) in both organizations and industries.

Mr. Beinhocker’s book is filled with the insights and implications of these “evolutionary economics” tools. He extends them to business and finance. His discussion of how “evolutionary algorithms” offer the most useful intellectual resource in framing economics is remarkably clear and compelling. He’s done superb work in going beyond the metaphorical to give serious readers a sense of how the modeling media of “complexity economics” should transform the way that businesspeople perceive and manage innovation, risk, and opportunity. Even for readers familiar with the growing literature on complexity, chaos, and evolutionary design, Mr. Beinhocker’s commitment to business relevance makes his book a usable read as well as a good one.

The most significant criticism is one to be expected. Consultants with “big ideas” aren’t content to be superb synthesizers and explainers. They want to change the world as well. The last section of the book discusses the implications of these themes for business and society. Let’s just say that Mr. Beinhocker discusses the business implications with greater nuance, sophistication, and applicability than he does the social. Mr. Beinhocker is no doubt a superb business consultant; he’s overreaching when he takes on society as his client. Diminishing returns, indeed.

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