The Origin of Wealth

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The Origin of Wealth

  1. 1. “ The Origin of Wealth” Evolution, Complexity, and the Radical Remaking of Economics
  2. 2. How Is Wealth Created?
  3. 3. Traditional Economics <ul><li>What’s Good </li></ul><ul><li>Enormously Powerful Ideas </li></ul><ul><li>Efficiency of Markets </li></ul><ul><li>Benefits of Free Trade </li></ul><ul><li>Importance of Individual Choice </li></ul><ul><li>What’s Bad </li></ul><ul><li>Increasingly doesn’t describe the real world </li></ul><ul><li>Unrealistic Assumptions </li></ul><ul><li>Equilibrium Analysis Doesn’t Assumes a Static Environment </li></ul>Definition: The set of concepts and theories articulated in undergraduate and intermediate graduate-level textbooks.
  4. 4. The Need for a Change <ul><li>1987 Santa Fe Institute Meeting of Economists and Physicists </li></ul><ul><ul><li>Physicists impressed with the difficulty of problems </li></ul></ul><ul><ul><li>Physicists appalled by techniques and assumptions </li></ul></ul><ul><li>Incredibly Smart People in Unbelievably Simple Worlds </li></ul>
  5. 5. Sugar and Spice <ul><li>SUGARSCAPE developed by Axtell and Epstein </li></ul><ul><li>Grow and economy from scratch? </li></ul><ul><li>Incorporated space, energy, and time </li></ul><ul><li>Rich get richer, obeying a Pareto distribution </li></ul><ul><li>Trading occurs at expected price, but not expected quantity – NO EQUILIBRIUM </li></ul><ul><li>Allowed borrowing and lending and banks emerged </li></ul>
  6. 6. Five “Big Ideas” That Distinguish Complexity Economics from Traditional Economics (from table 4-1, p. 97) No mechanism for endogenously creating novelty, or growth in order and complexity The evolutionary process of differentiation, selection, and amplification provides the system with novelty and is responsible for its growth in order and complexity Evolution Micro- and macroeconomics remain separate disciplines No distinction between micro- and macroeconomics; macro patterns are emergent result of micro-level behaviors and interactions Emergence Assume agents only interact indirectly through market mechanisms (e.g., auctions) Explicitly model interactions between individual agents; networks of relationships change over time Networks Modeled collectively; use complex deductive calculations to make decisions; have complete information; make no errors and have no biases; have no need for learning or adaptation (are already perfect) Modeled individually; use inductive rules of thumb to make decisions; have incomplete information; are subject to errors and biases; learn and adapt over time Agents Closed, static, linear systems in equilibrium Open, dynamic, nonlinear systems, far from equilibrium Dynamics Traditional Economics Complexity Economics
  7. 7. Dynamics: The Delights of Disequilibrium <ul><li>Nonlinear </li></ul><ul><li>Disequilibrium </li></ul><ul><li>Feedback </li></ul><ul><li>The economy is complex but not chaotic </li></ul><ul><li>Traditional Economics focuses on static equilibrium </li></ul>
  8. 8. Agents: Mind Games <ul><li>Spock Goes Shopping </li></ul><ul><li>Cognitive Dissonance and Behavioral Economics </li></ul><ul><li>More than selfish </li></ul><ul><li>To Err is Human </li></ul><ul><li>Agents learn </li></ul>
  9. 9. Networks <ul><li>Everyone’s connected </li></ul><ul><li>Tipping points and network effects </li></ul><ul><li>Complex catastrophes </li></ul><ul><li>Two cheers for hierarchy! </li></ul>
  10. 10. Emergence: The Puzzle of Patterns <ul><li>Booms, busts and oscillations </li></ul><ul><li>Punctuated equilibrium </li></ul><ul><li>Power Laws – earthquakes and stock markets </li></ul><ul><li>Volatility in the stock market </li></ul>
  11. 11. The Algorithm of Evolution <ul><li>Design without a designer </li></ul><ul><li>Artificial life </li></ul><ul><li>Fitness landscapes </li></ul><ul><ul><li>Adaptive walks (selection) </li></ul></ul><ul><ul><li>Random jumps (mutation) </li></ul></ul><ul><li>Schema (code readers) </li></ul><ul><li>What it leads to </li></ul><ul><ul><li>Order </li></ul></ul><ul><ul><li>Discovery </li></ul></ul><ul><ul><li>Continuous adaptation </li></ul></ul><ul><ul><li>Knowledge accumulation </li></ul></ul><ul><ul><li>Novelty </li></ul></ul><ul><ul><li>Growth </li></ul></ul>
  12. 12. Physical Technology Methods and designs for transforming matter, energy, and information from one state into another in pursuit of a goal or goals. (p. 244) <ul><li>Feeds on its own growth </li></ul><ul><li>Deductive tinkering vs. radical leaps </li></ul><ul><li>Incremental imitation </li></ul><ul><li>Disruptive technologies </li></ul><ul><li>Scientific method changed evolution </li></ul>
  13. 13. Social Technology Methods and designs for organizing people in pursuit of goals or goals. (p. 262) <ul><li>Institutions </li></ul><ul><li>Military and economic advantage </li></ul><ul><li>Competition to cooperate </li></ul>
  14. 14. Business Plans A business is a person, or and organized group of people, who transforms matter, energy, and information from one state into another with the goal of making a profit. (p. 280) <ul><li>Middle Managers (exploitation) </li></ul><ul><li>Entrepreneurs (exploration) </li></ul><ul><li>Selection in markets </li></ul><ul><li>Replication and imitation </li></ul>
  15. 15. New Definitions of Wealth <ul><li>Three Conditions of Value Creation </li></ul><ul><ul><li>Irreversibility </li></ul></ul><ul><ul><li>Entropy </li></ul></ul><ul><ul><li>Fitness </li></ul></ul><ul><li>Wealth is “Fit Order” </li></ul>
  16. 16. Strategy <ul><li>Frozen Accident’s </li></ul><ul><li>The Red Queen’s Race </li></ul><ul><ul><li>Running fast to stay in place </li></ul></ul><ul><li>Myth of Sustainable Competitive Advantage </li></ul><ul><li>Companies Don’t Innovate, Markets Do </li></ul><ul><li>Portfolio of Experiments </li></ul>
  17. 17. Finance: Ecosystems of Expectations <ul><li>Non-random walks </li></ul><ul><li>Markets are not economically efficient </li></ul><ul><ul><li>What does that mean anyway? </li></ul></ul><ul><li>Markets are evolutionarily effective </li></ul><ul><li>Corporation Goals: Endure and Grow </li></ul><ul><ul><li>Wang Laboratories </li></ul></ul><ul><ul><li>Du Pont </li></ul></ul><ul><ul><li>Ye Old Fighting Cocks Pub </li></ul></ul>
  18. 18. Politics and Policy <ul><li>The End of Left Versus Right? </li></ul><ul><li>Human Nature and Reciprocity </li></ul><ul><li>Government as Fitness Shaper </li></ul><ul><li>Critique of Left </li></ul><ul><li>Critique of Right </li></ul><ul><li>Culture Matters </li></ul><ul><li>Rawlsian Veil </li></ul>
  19. 19. Questions?

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