Economic complexity
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Economic complexity

Summary
Eric Beinhocker sets out to answer a question Adam Smith developed in the Wealth of Nations: what is wealth?  To do this he replaces traditional economic theory, which is based on the assumption that an economy is a system in equilibrium, with complexity economics in which the economy is modeled as a complex adaptive system (
This page introduces the complex adaptive system (CAS) theory frame.  The theory is positioned relative to the natural sciences.  It catalogs the laws and strategies which underpin the operation of systems that are based on the interaction of emergent agents. 
John Holland's framework for representing complexity is outlined.  Links to other key aspects of CAS theory discussed at the site are presented. 
CAS
). 

He introduces Sugerscape to illustrate an economic CAS model in action.  And then he explains the major features of a CAS economy: Dynamics, Agents, Networks, Emergence, and Evolution

Building on complexity economics Beinhocker reviews how evolution applies to the economy to build wealth.  He explains how design spaces map strategies to instances of physical are defined by Beinhocker as methods and designs for transforming matter, energy, and information from one state into another in pursuit of a goal or goals.  The effects of nuclear and genetic physical technologies are already challenging.  Beinhocker adds artificial intelligence and nanotechnology as emerging physical technologies that support access to huge new niches and introduce additional challenges. 
and social technologies are defined by Beinhocker as methods and designs for organizing people in pursuit of a goal or goals. He views the three most significant social technologies as: markets, science, and democracy. 
.  And he identifies the interactors is evolutionary philosopher David Hull's term for the schematically specified, instantiated aggregated agent which can interact with the proximate environment and is subject to selection pressures.  Dawkins's equivalent term is 'vehicle'. 
and selection mechanism of economic evolution

This allows Beinhocker to develop a new definition of wealth

In the rest of the book Beinhocker looks at the consequences of adopting complexity economics for business and society: Strategy, Organization, Finance, & Politics & Policy

Following our summary of his arguments, RSS is Rob's Strategy Studio explores his conclusions and aligns Beinhocker's model of CAS with the
This page introduces the complex adaptive system (CAS) theory frame.  The theory is positioned relative to the natural sciences.  It catalogs the laws and strategies which underpin the operation of systems that are based on the interaction of emergent agents. 
John Holland's framework for representing complexity is outlined.  Links to other key aspects of CAS theory discussed at the site are presented. 
CAS theory
and evidence we leverage. 

The Origin of Wealth 
In Eric Beinhocker's book 'The Origin of Wealth' he argues that the global economy is a complex adaptive system (CAS) where he concludes wealth is knowledge.  That is a radical shift from the highly influential orthodox ideas developed over the last century by traditional economics. 

A Paradigm Shift
How Is Wealth Created?
Beinhocker notes that wealth is instantiated in different ways in different situations and cultures is how we do and think about things, transmitted by non-genetic means as defined by Frans de Waal.  CAS theory views cultures as operating via memetic schemata evolved by memetic operators to support a cultural superorganism.  Evolutionary psychology asserts that human culture reflects adaptations generated while hunting and gathering.  Dehaene views culture as essentially human, shaped by exaptations and reading, transmitted with support of the neuronal workspace and stabilized by neuronal recycling.  Sapolsky argues that parents must show children how to transform their genetically derived capabilities into a culturally effective toolset.  He is interested in the broad differences across cultures of: Life expectancy, GDP, Death in childbirth, Violence, Chronic bullying, Gender equality, Happiness, Response to cheating, Individualist or collectivist, Enforcing honor, Approach to hierarchy; illustrating how different a person's life will be depending on the culture where they are raised.  Culture:
  • Is deployed during pregnancy & childhood, with parental mediation.  Nutrients, immune messages and hormones all affect the prenatal brain.  Hormones: Testosterone with anti-Mullerian hormone masculinizes the brain by entering target cells and after conversion to estrogen binding to intracellular estrogen receptors; have organizational effects producing lifelong changes.  Parenting style typically produces adults who adopt the same approach.  And mothering style can alter gene regulation in the fetus in ways that transfer epigenetically to future generations!  PMS symptoms vary by culture. 
  • Is also significantly transmitted to children by their peers during play.  So parents try to control their children's peer group.  
  • Is transmitted to children by their neighborhoods, tribes, nations etc. 
  • Influences the parenting style that is considered appropriate. 
  • Can transform dominance into honor.  There are ecological correlates of adopting honor cultures.  Parents in honor cultures are typically authoritarian. 
  • Is strongly adapted across a meta-ethnic frontier according to Turchin.  
  • Across Europe was shaped by the Carolingian empire. 
  • Can provide varying levels of support for innovation.  
  • Produces consciousness according to Dennet. 
and changes in what it tangibly represents.  Ultimately Beinhocker wants to understand what wealth is and how more can be created.  And if so can it be used to benefit mankind.  But to do that he argues economics must be viewed as a system.  Today this system includes a network of vast complexity.  And no one controls this network. 

Beinhocker proposes 2.5 million years ago as the economy's start point: when two hominids traded tools.  Fire and a broader range of tools had emerged over the next million years.  Homo sapien bands appeared around 130,000 years ago with more sophisticated tools and language.  Then 35,000 years ago people settled, there was division of labor and trade was observed between these hunter gatherer groups. 

Beinhocker compares the lifestyle of a present day Yanomamo hunter gatherer with a New Yorker.  The economic choices available to the New Yorker are astronomically larger than the Yanomamo.  The Yanomamo lifestyle by contrast is fairly similar to our ancestors of 15,000 years agoAround 1750 GDP is:
  • Gross domestic product which measures the total of goods and services produced in a given year within the borders of a given country (output) according to Piketty.  Gordon argues to include products produced in the home & market-purchased goods and services, following Becker's theory of time use.  Gordon stresses innovation is the ultimate source of all growth in output per worker-hour.  GDP growth per person is equal to the growth in labor productivity + growth in hours worked per person.  GDP has many problems.  Gordon concludes that between 1870 and 1940 all available measures GDP is hugely understated because:
    • GDP is a poor measure of:
      • Value & wealth
      • Who gets what
      • Global supply chains
    • GDP excludes:
      • Reduction in infant mortality between 1890 (22%) and 1950 (1%)
      • Brightness & safety of electric light,
      • Increased variety of food including refrigeration transported fresh meat and processed food
      • Convenience and economies of scale of the department store and mail order catalog and resulting product price reductions
      • Services by house makers
        • Time & health gains from having flush toilets, integrated sewer networks; rather than having to physically remove effluent and cope with fecal-oral transmission
      • Leisure
      • Costs & benefits of different length work weeks
      • Speed and flexibility of motor vehicles - which were not included in the CPI until 1935, after the transformation had occurred.  And competition from improved foreign vehicles, while it provides purchaser/user with improved standard of living (less breakdowns, repairs, etc.) is measured as reduced domestic manufacture
      • Coercion and corruption to obtain resources 
      • Consumption impact of finite resources: coal, oil;
      • Destruction impact of loss of entire irreplaceable species
    • GDP includes items that should be excluded:
      • Cost of waste - cleaning up pollution (single use indestructible plastic bags), building prisons, commuting to work, and cars left parked most of the time; should be subtracted
  • Guanine-di-phosphate is a nucleotide base. 
started to grow exponentially. 

Beinhocker builds a test to evaluate theories of the economy.  It must explain how:
  • The economy self-organized.  
  • Complexity and wealth are correlated and grew over time. 
  • The growth has been sudden and explosive. 

Beinhocker suggests evolution provides the only viable theory which is able to explain the tests.  But he notes care must be taken in framing economics with an evolutionarly model.  While evolution facilitates 'design' with no designer, the ecomomy has lots of designers.  Beinhocker argues human rationality & creativity feed and shape the workings of the evolutionary algorithm rather than replacing it. 

Beinhocker views economic evolution as based on three interlinked processes: (1) Physical technology are defined by Beinhocker as methods and designs for transforming matter, energy, and information from one state into another in pursuit of a goal or goals.  The effects of nuclear and genetic physical technologies are already challenging.  Beinhocker adds artificial intelligence and nanotechnology as emerging physical technologies that support access to huge new niches and introduce additional challenges. 
evolution, (2) Social technology are defined by Beinhocker as methods and designs for organizing people in pursuit of a goal or goals. He views the three most significant social technologies as: markets, science, and democracy. 
evolution: how to organize people to do things including: agriculture, the rule of law, money, venture capital; fused together by (3) businesses,  which express these technologies as products and services.  Businesses similarly evolve.  This complexity economics assumes the economy is a complex adaptive system.  But he notes mainstream economics is built on a conflicting assumption of an economy being an equilibrium system

If complexity economics holds, there must be an evolutionary explanation for the creation of economic wealth

Additionally as this paradigm shift becomes accepted Beinhocker suggests how it will impact both busines and society

Traditional Economics - A World in Equilibrium

Business leaders have recognized that traditional economics has not helped them predict and cope with crisis.  It is assumed that economic theory is highly idealized, using untested data, and unrealistic assumptions.  Central bankers such as Alan Greenspan noted that they did not know how the economy works. 

But the huge wealth of developed nations is attributed to leverage of traditional economics theories. 

Beinhocker asserts the issue is that economics is not fulfilling its true potential as a science:
  • The big ideas are over 100 years old
  • The formal theories and mathematical models are undermined by unrealistic assumptions or directly contradicted by real-world data. 
Beinhocker outlines the conventional wisdom, history and key concepts of traditional economics:
  • Adam Smith's Wealth of Nations
    • Suggested that wealth is created when people transform raw materials into items that people want.  Smith realized that improving people's productivity will increase wealth creation for each person.  Smith concluded that productivity could be increased with division of labor that allows specialization.  
    • Smith suggested that the distribution of resources and wealth should allow individuals to pursue their own self-interest and choices.  But resources should be allocated to maximize the efficiency and total wealth of the society.  Smith asserted that competitive markets allow this most efficient allocation through the signal of price.  
  • Jacques Turgot argued that governments should minimize their interference in the operations of markets.  He identified the law of diminishing returns which will drive an economy towards stability and suggests a limit to supply.  
  • Jeremy Bentham introduced the rational actor and utility which he concluded shaped demand.  
  • Hermann Gossen developed Bentham's ideas and defined the law of diminishing marginal utility, which suggested a limit to demand.  
  • Leon Walras's Elements of pure economics aimed to provide a mathematical foundation for economics comparable to the work of Newton, Leibniz, Lagrange, Euler and Hamilton in science.  Walras used equilibrium as the core model.  And for the first time he applied the sophisticated mathematics developed for physics to economic problems.  
  • William Jevons's Theory of Political Economy applied the equations of field theory to Utility, and diminishing returns to consumption to build a mathematical model of human behavior.  Trade enabled the redistribution that allowed an optimal equilibrium to be achieved. 
  • Vilfredo Pareto enabled an estimation of utility by developing a model of types of trade.  He concluded that markets would reach the Pareto optimum allocates resources measurably so that each change must make at least one person better off and make no one worse off. 
    when all trades that are win-win or win-no-loose (Pareto superior) trades have occurred.  Utility was shown to be a relative measure. 
  • Alfred Marshall then bridged Jevon's single market in partial equilibrium with Walras's model of interlinked markets to define an economy in general equilibrium. 
  • John Hicks's Value and Capital integrated Walras, Marshall and Pareto's ideas into a coherent theory. 
  • Paul Samuelson's Foundation of Economic Analysis extended Hicks's theory into a mathematical standard model.  He equated observed choices (preferences) with utility allowing it to be measured. 
  • Kenneth Arrow & Gerard Debreu linked Walras's general equilibrium with Pareto's optimality allocates resources measurably so that each change must make at least one person better off and make no one worse off. 
    in a very general theory.  They showed how prices act as signals.  Their general equilibrium theory was based on a small set of axioms.  But some of these were hard to relate to observations. 
Beinhocker notes that from Walras to Pareto the equilibrium mathematics was best suited to studying the allocation of wealth.  Joseph Schumpeter was skeptical that this approach would explain the growth of wealth.  Schumpeter observed that technological progress happens in random streams of discoveries.  He concluded that wealth is created when entrepreneurs turn technologies into commercially successful enterprises.  But he could not find an associated mathematical model that coped with innovation's disruptive disequilibrium.  Robert Solow used equilibrium assumptions to provide that theory for growth.  He:
These economic ideas had melded into a major influence on public policy, business, and finance.  But the foundations were very weak

A Critique - Chaos & Cuban Cars
Beinhocker outlines the main criticisms of traditional economics.  A multi-discipline group of scientists at the Santa Fe Institute concluded that traditional economics was a brilliantly developed framework, but:
  • It was a throwback, based on 100 year old equations and techniques that had been borrowed from physics text books by Walras & Jevons.  An Institute scientist having recently visited Cuba likened the situation to the ancient Packards and DeSotos that were cleverly maintained but still vintage.  Walras & Jevons leveraged developments in thermodynamics.  But they borrowed them before
  • There was extreme use of simplifying assumptions by economists which actually contradicted reality: perfect rationality.  A point that Henri Poincare had made to Walras in 1901. 
In 1953 Milton Friedman argued in The Methodology of Positive Economics, that unrealistic assumptions do not matter if the results of the theory are correct.  Herbert Simon countered that scientific theories are not developed to make predictions but to explain things.  The predictions must be tests of whether the explanations are correct. 

Beinhocker's list of troubling assumptions that make the equilibrium mathematics work includes: Simplistic idea of time, Interesting changes are exogenous are changes to the external inputs of a traditional equilibrium economic model.  The model does not change these variables but takes them as inputs.  Typical exogenous variables include: Changes in consumer tastes, Technological innovations, Government actions, Weather; according to Beinhocker. 
, Positive returns, W. Brian Arthur's conception of how high tech products have positive economic feedback as they deploy.  Classical products such as foods have negative returns to scale since they take increasing amounts of land, and distribution infrastructure to support getting them to market.  High tech products typically become easier to produce or gain from network effects of being connected together overcoming the negative effects of scale. 
are transient and can be ignored or don't exist, Smart people in very simple worlds: No transaction costs, products are all commodities, Companies are efficient, Consumers can always purchase insurance reduces volatility in standard of living by compensating for losses of income during periods of unemployment, for catastrophic losses from disaster, or death of a family income earner as described by Gordon.  Insurance companies must set aside reserves to handle such claims.  Britain initially required that insurance buyers also have an insurable interest.  That is required in insurance markets to ensure buyers of insurance don't destroy their asset just to obtain the insurance.  Health insurance is treated separately being unusual, since the subscriber is likely to know more about their state of health than the insurer is and the subscriber is more likely to purchase the health insurance when aware of their increased risk.  This behavior collapses the risk pool by: forcing the insurer to increase the premiums, and encouraging healthy individuals to opt out of health insurance coverage. 
, Decisions are always based on price, mostly by using an auction.  

Beinhocker asks, how well does Milton Friedman's theory explain reality?  Alan Kirman argues it fits the data poorly, focuses in the wrong area, with a misleading idea of equilibrium.  It predicts poorly and explains only its self-contained models.  Traditional equilibrium economics has failed to match the operations of the financial markets or the results of experimental economics.  Markets are generally out of equilibrium & are designed to cope with that.  Prices vary while microeconomics asserts there will be one price (once transaction costs are removed).  There are no laws of supply and demand.  Stock markets have to employ agents that smooth demand and supply.  Stock prices do not follow a random walk.  Walras & Jevons asserted the economy was an at-equilibrium closed system where as it is an open system.  Beinhocker concludes that instead of fitting patches onto the equilibrium model, it should be replaced

Complexity Economics
Big Picture - Sugar & Spice
Brookings Institution's Joshua Epstein & Robert Axtell built a computer model with the aim of growing an economy from scratch with simple agents in a simple landscape:
  • Their initial conditions were:
    • Sugarscape Island is a 50 by 50 grid, differentiated into mountains, valleys, fertile areas and desert areas.  
    • People (agents) with a few basic abilities. 
    • An environment with some natural resources - Initially just sugar.  Each square on the island is allocated a different amount of sugar (0 - 4).  They are distributed to create two sugar mountains in the northeast and southwest corners.  Between the two are regions with no sugar.  As sugar is eaten it grows back at a rate of one unit per turn. 
  • The agents:
    • Were independent computer programs which take in information about the environment and then makes decisions about what actions to perform next.  The actions are:
      • Look for sugar
      • Move - north south east or west. 
      • Eat sugar 
    • Include details specific to them describing their ability.  The specific values are randomly distributed around the population of agents:
      • Vision (How far it can see: 1 - 6 squares)
      • Metabolism (How much sugar it burns each round: 1 - 4 units)
      • How old they will get before naturally die 
      • What sex they are. 
    • Followed rules:
      • Agents can look ahead as far as its vision will allow in each of the directions of movement. 
      • Agents can determine which unoccupied square in its vision has the most sugar. 
      • Agents will move to that square and eat the sugar. 
      • Agents are given metabolic credit for eating sugar and debits for metabolizing.  It can build up a surplus for use in future turns. 
      • Agents with no energy credits left are removed from the game.  
      • Agents otherwise live until a predetermined age.  
    • Genetic algorithm
      • Agents of child bearing age, and with enough sugar saved up can reproduce with an agent of the opposite sex in an adjacent square. 
      • Children are given half of details of each of their parent agents. 
      • Children are given half the wealth of each of their parent agents.  
      • Children are born next to their parents in an empty square. 
  • Initial game begins without operation of the genetic algorithm, with 250 agents randomly dropped on the Sugarscape.  After initial chaos, order appears with agents discovering the Sugar Mountains and coalescing there.  The distributed population stabilized around the carrying capacity of the Sugarscape. 
  • Initial setup resulted in the rich getting richer based on proximate access to the Sugar Mountains and agent capabilities.  The distribution of wealth followed a Pareto power law driven by chance decisions interacting with the dynamics of the game.  Small differences based on luck or bad position can lead to major differences in final wealth.  
  • Subsequently the genetic algorithm was enabled.  Three things happened:
    1. Least fit members of the population died off while the most fit had more and more offspring.  Over time average vision and metabolic efficiency increased.  Wealth increased. 
    2. The altered birth-death dynamics introduced population swings.  Feast and famine occurred in repeated cycles. 
    3. The gap between rich and poor widened further.  The rich get richer and the poor get poorer. 
  • Epstein & Axtell extended the model world further:
    • Added a second commodity: spice.  Any square could be growing both sugar and spice.  Spice was also concentrated into two mountains in the northwest and southeast corners of Sugarscape. 
    • Altered the agents' metabolism to require both commodities to survive.  Again the individual attributes varied and were manipulated by the genetic algorithm. 
    • Agents rules were extended to allow them to trade.  If agents encounter others in adjacent squares they offer to trade.  They are programmed to barter
  • When the trading enhanced game was run the agents overall became richer, as classical economics predicts.  Trade:
    • Allowed two neighbors that were near death, one starving from sugar, the other from spice, to trade and both survive.  Trade expands the carrying capacity of the landscape.   
    • Clustered geographically.  
    • Helps the rich get richer. 
  • Requirements for both commodities generated successful movement dynamics associated with heavily trafficked trading routes with agents moving between the spice and sugar mountains. 
  • Adding borrowing and lending capabilities to the agents transformed the situation.  Agents would borrow, from rich neighbors, when this allowed them to have children.  This resulted in emergent capabilities:
    • A complex hierarchic capital market emerged.  Tracing relations between borrowers and lenders it was observed that:
    • Some agents became simultaneously borrowers and lenders (banks).  
    • Certain really rich agents took on a wholesale role, lending to the banks.  This chain could grow quite deep with analogs of institutional investors, investment banks, merchant banks and retail banks. 
Beinhocker suggests Sugarscape illustrates a new approach to economics with different: dynamics, agents, networks, emergence, and evolution; from traditional economics

Dynamics - The Delight of Disequilibrium
Beinhocker uses an economics context to review what CAS dynamic phenomena: booms, busts; mean.  Dynamic systems are:
  • Represented by pools (stocks of: people, money, consumers' confidence;) with flows between them.  The interconnections can support positive and negative feedback loops which can include time delays.  Long time delays can make it very difficult to control a complex flow
  • Often nonlinear.  Beinhocker explains how the dynamics of a nonlinear flow can make it sensitive to:
    • Initial conditions - where he illustrates a flow B (t+1) = rB(t) - rB(t)**2 where a rate r of
      • 1.5 results in a fixed-point attractor equivalent to the equilibrium assumed by classical economics.  But altering the rate to
      • 3.3 generates the regular oscillations of a periodic limit cycle.  An increased rate of
      • 3.5 generates a more complex quasi-periodic limit cycle.  And a rate of
      • 4.0 generates a deterministic condition called chaos: which is non-random, will never repeat, and is bounded in where its values will reach.  Chaotic systems can't be solved analytically, but they can be modeled with computers. 
    • History. 
  • Together these two features make nonlinear dynamic systems difficult to predict.  
  • Beinhocker notes the economy is complex: nonlinear, dynamic; but probably not chaotic.  With more than 6.4 billion agents participating, forcasting is difficult except over the very short term.  He notes Sterman's hypothesis that the irregular periodicity of different markets (commodity cycles) could be due to time delays in buffer stock updates and flows, price adjustments and demand shifts.  People find this type of scenario hard to manage.  Sterman concluded the system must be changed instead: Reduce the time delays in the system (make capacity less chunky), get more forward visibility, increase transparency of the capacity in the whole system (including under construction). 

Agents - Mind Games
Beinhocker notes that the
This page introduces the complex adaptive system (CAS) theory frame.  The theory is positioned relative to the natural sciences.  It catalogs the laws and strategies which underpin the operation of systems that are based on the interaction of emergent agents. 
John Holland's framework for representing complexity is outlined.  Links to other key aspects of CAS theory discussed at the site are presented. 
CAS
agents in economies are mostly humans.  So economics must have a model of human minds that provides a good map in that it reflects the regularities in human behavior.  It must do better than traditional economics with its Vulcan like assumptions justified as normative models of how humans should behave.  Beinhocker uses the findings of behavioral economics as his foundation.  Beinhocker's regularities include:
John Holland argued that induction can be defined algorithmically:
  • Goal state can be compared with the current state. 
  • Condition-action rules can link the current state to actions to perform to get to the goal state. 
  • Feedback & learning based on models that track which rules helped with achieving a goal and which didn't.  
  • Rules self-organize into hierarchies based on the regularities present in the environment.  This enables analogy making. 
  • Holland, Brian Arthur, Blake LeBaron, Richard Palmer, and Paul Taylor, applied this inductive architecture in the Santa Fe Institute Artificial Stock Market.  
    • The program is analogous to Sugerscape but the genetic algorithm is additionally applied to the strategies about how to trade in the 'minds' of the agents.  It has
    • A single stock paying a random dividend is traded on the market. 
    • A hundred trading agents buy and sell the stock inducing a price for the stock. 
    • The agents' goal is to make as much money as possible.  To do this each agent must decide when to buy and sell the stocks. 
    • The agents have access to a stock model:
      1. Historical price patterns for the stock
      2. Historical dividend payouts
      3. Risk free interest rate.  
    • The condition-action rules were setup as schematic structures to map patterns in the market to the agent's expectation of the value of the stock. 
      • These rule of thumb strategies were a mixture of: fundamental, trends or a mixture of the two. 
    • The agents were provided with a learning model that allocated a fitness score to each strategy based on current conditions.  But the values allocated were adjusted based on historic success of the strategies. 
    • The genetic algorithm was applied at random points to the agents' strategies, removing the poorest 20% and transforming the high performers by recombination and mutation.  
    • They then ran the program with each agent only having one and the same rule.  The result was similar to the predictions of traditional economics:
      • Little trading volume, settling near to the predicted equilibrium price based on the fundamental value of the stock.  But when they
    • Ran the program with 100 rules per agent, with learning and the genetic algorithm applied:
      • Trading volume went up, volatility climbed, the stock price included bubbles & crashes, over time.  The market would become quiescent and then storm repeatedly.  The performance of the agents varied: 'Warren Buffett's emerged while other agents went bankrupt.  These results are much more in-line with real stock markets.  The stock prices were associated with the strategies of the agents rather than the fundamentals underlying the stock. 
Beinhocker sees these results as in line with real human behavior.  And he argues, as cognitive science progresses and modeling technology improves, our understanding of how behavior drives the economy will improve too. 

Networks - Oh What a Tangled Web We Weave
Beinhocker notes that networks shape complex adaptive systems.  And they can contribute positive returns, W. Brian Arthur's conception of how high tech products have positive economic feedback as they deploy.  Classical products such as foods have negative returns to scale since they take increasing amounts of land, and distribution infrastructure to support getting them to market.  High tech products typically become easier to produce or gain from network effects of being connected together overcoming the negative effects of scale. 
that drive the system due to
This page discusses the effect of the network on the agents participating in a complex adaptive system (CAS).  Small world and scale free networks are considered. 
network effects
Stuart Kauffman concluded that Erdos & Renyi's random-graph theory explains why, as it allows a tipping point when the network shifts from sparsly connected to densely connected. 

Beinhocker adds that our social networks are a mix of interconnected regular and random structures which allows the small world effect.  Beinhocker notes it is the random friends that allow the lattice of social connections to bridge to other lattices.  These random bridges support the six degrees connectivity of the small world.  Hence, large organizations should deliberately move a small number of people across functions and businesses to enable this effect. 

Beinhocker notes that Boolean networks, while influential, are simply characterized:
Beinhocker argues that when boolean networks include hierarchy and bias, the number of connections that can be supported before catastrophe occurs is between six and eight which Beihnocker notes is seen in human groups that needed to scale but could not cope with the diseconomies of complexity.  

Emergence - The Puzzle of Patterns
Beinhocker notes economics has tracked a number of patterns: Depressions, Recessions, Inflation, Long-run growth in wealth per person, Distribution of wealth; suggesting they reflect causes that are deep in the workings of economies.  Economists have modeled time series data: Business cycles; but they have not been able to use the patterns to predict future events accurately.  And macroeconomics is the top-down view that starts with questions such as why there is unemployment and then drills down to find an answer, according to Beinhocker. 
has not been able to meet up with microeconomics is a bottom-up view of the economy.  It starts with individual decision makers and then builds up to markets and economies, explains Beinhocker. 
to build a unified theoretical framework.  So Beinhocker compares how patterns are modeled by microeconomics, macroeconomics and complexity economics:
Beinhocker concludes complex emergent phenomena likely have three roots: Behaviors of the agents, Institutional structure of the CAS, Exogenous shocks; while traditional economics focuses on the exogenous shocks. 


Evolution - It's a Jungle Out There
Beinhocker asserts that evolution is a:
  • General-purpose and highly powerful recipe for finding innovative solutions to complex problems. 
  • Learning algorithm that adapts to changing environments and accumulates knowledge over time. 
He argues it is responsible for the order, complexity & diversity of the natural world and the economic world.  He uses Tufts University philosopher Daniel Dennett and Oxford biologist
Richard Dawkin's explores how nature has created implementations of designs, without any need for planning or design, through the accumulation of small advantageous changes. 
Richard Dawkins arguments
as a foundation.  He uses Karl Sims's Block Creatures as an example of applying the genetic algorithm to artificial life to find good tricks for survival. 

Beinhocker explains Dennett's argument that evolution algorithmically recursively applies a recipe to a substrate-neutral rule driven process to generate outputs of increasing value.  The algorithm is defined by the logic that it uses to transform information.  He notes that evolution has to search through the design space of available configurations to identify those that increase value.  Noting that the space is typically vast, evolution has to reliably and quickly find good designs. 

Beinhocker describes the model of evolution's algorithm to help him review the search mechanism:
Beinhocker notes that this algorithm must be made emergent to operate without support from designers.  He uses biological evolution's emergence mechanism as a model, where there is a self-copying molecule.  And the fitness function is supplied by the physical and chemical constraints and the competition of co-evolving organisms. 

Beinhocker concludes the setup for evolution boils down to information processing.  In the case of life this was dependent on thermodynamics and random chance.  For the economy it was dependent on spoken language and then writing

Beinhocker argues that design spaces with most small changes in schemata leading to small or no changes in fitness, but some small changes having large effects will be roughly correlated with the shape of the biological fitness landscape.  And this will mean evolution will be the ideal algorithm for searching fitness landscapes.  Without any ability to look ahead, the risk that a search agent will descend and be killed by natural selection, and the shifting nature of the fitness landscape, one effective search strategy is the adaptive walk is a fitness landscape search strategy that picks its direction of search randomly, and then selects for ascending steps, and backtracks if it starts to descend.  It gets trapped in local maxima and must be augmented with other strategies, such as a short random jump. 
, when it is augmented with a different strategy such as short random jump is a fitness landscape search strategy that picks its direction of search randomly, and jumps a random distance in that direction. It is risky since it can jump into danger where the searcher may die. 
performed by large numbers of replicated 'interactors'.  Genetic operators such as crossing over and mutation will spread the interactors out, but with small mutations they will still be relatively close together.  Since the jump length can also be changed evolution can both explore and exploit its current situation.  And Beinhocker notes if the environment suddenly changes and puts the majority of interactors at risk, the outliers will allow evolution to continue.  Holland concluded that evolution comes very close to achieving the optimal balance between exploitation and exploration. 

Dennett notes three attributes of roughly correlated fitness landscape topography:
  1. Good tricks - are very attractive moves because they result in interactor features that support fitness: eyes are major sensors in primates, based on opsins deployed in the retina & especially fovea, signalling the visual system: Superior colliculi, Thalamus (LGN), Primary visual cortex; and indirectly the amygdala.  They also signal [social] emotional state to other people.  And they have implicit censorious power with pictures of eyes encouraging people within their view to act more honorably.  Eyes are poor scanners and use a saccade to present detail slowly to the fovea.  The eye's optical structures and retina are supported by RPE.  Eyes do not connect to the brain through the brain stem and so still operate in locked-in syndrome.  Evo-devo shows eyes have deep homology.  High pressure within the eye can result in glaucoma.  Genetic inheritance can result in retinoblastoma.  Age is associated with AMD. 

  2. Forced moves - there is currently only one choice of move for the interactor, due to dangers or constraints. 
  3. Path dependence - results from the use of adaptive walk with short random jumps.  Where you are matters.  So we are all prisoners of our history. 
Evolution results in continuous adaptation, reflecting the fitness function and its shifts.  Knowledge, reflected in the schemata, about the fitness function and environment accumulates.  Novelty emerges from the parallel search discovering and instantiating the designs.  Successful schemata control more resources. 

How Evolution Creates Wealth
Design Spaces - From Games to Economics
Beinhocker recalls the application of genetic algorithms to search for winning strategies for the Prisoner's Dilemma is a game theoretical scenario explored by mathematicians and evolutionary biologists.  Two prisoners are to be interrogated separately.  They will benefit if they cooperate with one another - serving one year each.  But if just one defects they will go free while the other will lose serving three years.  If they both defect they will both lose serving two years each.  If the game is played once it is best to defect.  But if the game is iterative, cooperation can be beneficial using a Tit for Tat strategy.  Bootstrapping cooperation can be induced:
  • When a small founder population first becomes isolated and kin-selection increases and then the group connect to the main population.  The group can then use cooperation to out compete the other members.  
  • Through green-beard signals, driving cooperation and forcing non green-beards to shift to cooperation to compete. 
Economists are particularly interested in games like Prisoner's Dilemma where cooperation between the parties is non-zero-sum -- cooperation results in benefits to both participants.  Holland had proposed the GAs use to Axelrod, who built an initial model and published his results in 1987.  Beinhocker then introduces a recent contribution from Goteborg University's Kristian Lindgren who integrates two games: the Prisoner's Dilemma is a game theoretical scenario explored by mathematicians and evolutionary biologists.  Two prisoners are to be interrogated separately.  They will benefit if they cooperate with one another - serving one year each.  But if just one defects they will go free while the other will lose serving three years.  If they both defect they will both lose serving two years each.  If the game is played once it is best to defect.  But if the game is iterative, cooperation can be beneficial using a Tit for Tat strategy.  Bootstrapping cooperation can be induced:
  • When a small founder population first becomes isolated and kin-selection increases and then the group connect to the main population.  The group can then use cooperation to out compete the other members.  
  • Through green-beard signals, driving cooperation and forcing non green-beards to shift to cooperation to compete. 
and the Game of Life, is a cellular automaton defined by John Conway.  Cells of the automata are either on or off.  An infinite two-dimensional orthogonal grid of cells allows each cell to interact with its eight immediate neighbors.  The interactions follow set rules: Any on cell with less than two neighbors which are on turns off.  Any on cell with two or three neighbors remains on.  Any on cell with more than three on neighbors turns off.  Any off cell with exactly three on neighbors turns on.  A human watching the display of the cells executing the game of life rules can see 'gliders' move about the grid. 
.  In the composite:
Having inspected Lindgren's game exploring the strategy space of Prisoner's Dilemma is a game theoretical scenario explored by mathematicians and evolutionary biologists.  Two prisoners are to be interrogated separately.  They will benefit if they cooperate with one another - serving one year each.  But if just one defects they will go free while the other will lose serving three years.  If they both defect they will both lose serving two years each.  If the game is played once it is best to defect.  But if the game is iterative, cooperation can be beneficial using a Tit for Tat strategy.  Bootstrapping cooperation can be induced:
  • When a small founder population first becomes isolated and kin-selection increases and then the group connect to the main population.  The group can then use cooperation to out compete the other members.  
  • Through green-beard signals, driving cooperation and forcing non green-beards to shift to cooperation to compete. 
, Beinhocker asks: can evolutionary search be used to search the design space of the global economy?

Beinhocker describes a design space of all business plans.  He notes that with the matching management team and business plan from the overall space a business can be evolved as the plan's strategies specify.  Economic evolution consequently searches for fit designs in this design space.  The process is analogous to biological evolution:


Physical Technology - From Stone Tools to Spacecraft
Beinhocker sees the integration of artifact creation and teaching children about how to do it as:
He argues that economies are dependent on Physical Technologies - that allow products & services to be traded and Social Technologies are defined by Beinhocker as methods and designs for organizing people in pursuit of a goal or goals. He views the three most significant social technologies as: markets, science, and democracy. 
- that catalyze, an infrastructure amplifier.   cooperation between non-relatives to allow the trading.  Beinhocker presumes the initial tool making bootstrapped via deduction.  Successful experiments then produced inductive rules of thumb.  These socially transmitted technology recipes then supported Physical Technology evolution. 

Beinhocker sees signs of speciation of related technologies: Airplanes, hot-air balloons, dirigibles, hang gliders; judged a phylum of flying.  And technologies go extinct: Canal networks that are no longer in service.  He tests if technology evolution is just a misused metaphor, requiring that technology evolution be mapped onto a general model of evolution already described.  He concludes the job of technology evolution is to find the workable physical technologies in the vast overall physical technology design space.  And economic evolution must then find the even-smaller subset of physical technologies that have economic value. 

A physical technology reader must be able to transform the schemata in this design space into a real-world instantiation.  And the schemata must be transmittable.  Hence, Beinhocker argues language is a catalyst of physical technology.  He asserts physical technologies are auto-catalytic.  And Beinhocker argues they, and other schemata, are: modular, building blocks; in character.  The addition of a new invention, reflecting the realization of additional schemata, will add access to further areas of design space

Beinhocker, asks if the design space of physical technologies are defined by Beinhocker as methods and designs for transforming matter, energy, and information from one state into another in pursuit of a goal or goals.  The effects of nuclear and genetic physical technologies are already challenging.  Beinhocker adds artificial intelligence and nanotechnology as emerging physical technologies that support access to huge new niches and introduce additional challenges. 
is rough-correlated.  He notes that since it was created by emergent creatures using evolutionary search, it will reflect that character.  Beinhocker asserts that it is deductive tinkering that provides the evolutionary search with variation.  He argues that fitness for purpose provides the selection process.  Replication of 'fit' physical technologies occurs through copying of successful tool building by observation and deductive tinkering.  The presence of technology S-Curves also demands a rough-correlated design space.  A random fitness landscape would imply a random effect of investment in a technology. 

Beinhocker argues Christensen's disruptive innovations require a significant cascade of changes to shift from one physical technology to another.  Beinhocker suggests it is very difficult for companies to make a long jump from one technology area to another, especially when they are astride a local peak.  But many innovators searching the proximate design space eventually results in someone finding an attractive route up to a higher fitness peak. 

Around 1750, the accessible Physical Technology space are defined by Beinhocker as methods and designs for transforming matter, energy, and information from one state into another in pursuit of a goal or goals.  The effects of nuclear and genetic physical technologies are already challenging.  Beinhocker adds artificial intelligence and nanotechnology as emerging physical technologies that support access to huge new niches and introduce additional challenges. 
grew exponentially, triggered by the scientific revolution.  This revolution began in the 1500s based on rediscovered classical knowledge.  By the seventeenth century Bacon's scientific method and Galileo's highlighting of experiments supported the work of Newton, Boyle and others.  Science hugely increased the success rate of deductive insights.  And it allowed us to program our own search algorithm

Social Technology - From Hunter-gatherers to Multinationals

Beinhocker argues that Social Technology are defined by Beinhocker as methods and designs for organizing people in pursuit of a goal or goals. He views the three most significant social technologies as: markets, science, and democracy. 
is the most significant reason why one country is richer than another.  He refers to Institute of International Economics' Easterly & Minnesota's Levine study which found the key determinants were: Rule of Law, Existence of property rights, Banking infrastructure, Economic transparency; rather than: Availability of natural resources, Government competency, and Physical Technology are defined by Beinhocker as methods and designs for transforming matter, energy, and information from one state into another in pursuit of a goal or goals.  The effects of nuclear and genetic physical technologies are already challenging.  Beinhocker adds artificial intelligence and nanotechnology as emerging physical technologies that support access to huge new niches and introduce additional challenges. 
sophistication. 

Further Beinhocker sees Social Technology are defined by Beinhocker as methods and designs for organizing people in pursuit of a goal or goals. He views the three most significant social technologies as: markets, science, and democracy. 
impacting industries and companies' performance.  The rapid improvement of productivity of the US is the United States of America.   in the late 1990s was found by McKinsey Global Institute to be due mainly to innovations is the economic realization of invention and combinatorial exaptation. 
in Social Technologies: Wal-Mart's logistical system and large store format implemented during the 1980s were 40% more productive than its competitors, forcing the competition to respond.  That retail shift accounted for 25% of the US productivity improvement.  Social Technology innovation races in five other sectors accounted for most of the other 75%.  The prior deployment of networked computing Physical Technology was an enabler but not a primary factor. 

Social Technology, like Physical Technology has a design space.  Its schemata are memetic, and have three major attributes:
  1. Self-feeding & Exponentially unfolding
  2. Modular, and building-block like
  3. Fitness landscape is rough-correlated.  So evolution is a good search mechanism. 
Beinhocker asserts that people develop new Social Technologies through deductive tinkering.  He notes that for Social Technologies there is a higher ratio of tinkering than with Physical Technologies. 

He also notes that the landscapes of Physical Technologies and Social Technologies interact. 

The force driving the innovation for Social Technology is the added value of non-zero-sum games.  Beinhocker notes that biological evolution leverages this type of cooperation a lot: Dogs hunting in packs, Termites collectively building mounds, Fish swimming in schools, most primates living in groups. 

Beinhocker argues that Social Technology evolutionary search requires:
  1. The possibility of non-zero-sum payoffs - which must come from: Differences among people's needs & desires, Positive returns to scale, Division of labor, High benefit and low cost of sharing spoilable large resources,
  2. Facilities to allocate the payoffs so that all participants will be incented to start cooperating - Beinhocker reviews Nash's bargaining problem is how two bargainers come to agreement.  John Nash concluded how they split up the gains from exchange depends on:
    • How each values the benefits of the deal.  He suggests all bargainers assume the others are looking for the best deal.  
    • What the alternatives are.  Trade occurs at the Nash equilibrium when no one has any incentive to change position, given the actions of the others. 
    , noting that in a single round Prisoner's Dilemma is a game theoretical scenario explored by mathematicians and evolutionary biologists.  Two prisoners are to be interrogated separately.  They will benefit if they cooperate with one another - serving one year each.  But if just one defects they will go free while the other will lose serving three years.  If they both defect they will both lose serving two years each.  If the game is played once it is best to defect.  But if the game is iterative, cooperation can be beneficial using a Tit for Tat strategy.  Bootstrapping cooperation can be induced:
    • When a small founder population first becomes isolated and kin-selection increases and then the group connect to the main population.  The group can then use cooperation to out compete the other members.  
    • Through green-beard signals, driving cooperation and forcing non green-beards to shift to cooperation to compete. 
    the Nash equilibrium would be where both players defect, unless a powerful incentive was applied to encourage initial cooperation, and defection was managed. 
  3. Management of defection - Beinhocker notes that coping with cheating requires the development of sophisticated strategies. Results from the Ultimatum Game is an economic game involving two players: One makes an offer about how to split a pot of money.  If the offer is rejected neither party gets any money.  The other player can accept or reject the offer.  Rationality implies that any offer should be accepted by the recipient.  Instead recipients are keenly aware of being unfairly treated.  The longer the amygdala responds to the offer the more likely it is to be rejected.  The rejection is mentally costly and must be encouraged by a dopaminergic reward, fueled by the amygdala and insula.  When the offer is rejected the first player feels dissed, subordinated - especially if the result is shared with others, undermining status & reputation.  Sapolsky notes that:
    • People with damaged amygdalae are unusually generous because the BLA normally injects learned implicit distrust and vigilance into social decision making.  
    • People given testosterone before the game become more generous.  Sapolsky notes the effect demands fancy neuroendocrine wiring. 
    • People from small-scale, non-Western cultures were less trusting and punished more.  Joseph Henrich found three variables predicted how the play executed: Market integration, Community size, Religion; where large communities need ways to make strangers trustworthy.  Communities that trade are also more likely to act fairly and punish unfairness.  Sapolsky asserts that market interactions represent an impoverishment of human reciprocity with the total transaction having to be judged and occur in an instant.  Small-scale cultures are more practiced at the nuanced judgements about their long term neighbors. 
    • Chimps can be trained to play the game.  Max Planck Institute's Michael Tomasello found no evidence of chimp requirements for fairness.  But De Waal & Brosnan found chimps will be fair but only if they see a downside in being unfair.  Primates seem to reflect the same hypocritical strategies underneath any reciprocal altruism that humans display. 
    show people reject unfairness.  Evolution has found strategies that allow us to cooperate to capture the riches of non-zero-sum games, but it also equipped us to be sensitive to cheating, expectations of fairness, and a willingness to punish those that cross the line.  Beinhocker asserts that as people have deductively tinkered their way across the landscape in search of fit Social Technologies, humankind has evolved increasingly complex and sophisticated social structures for addressing these three issues. 
Beinhocker asserts that man climbed a social structure ladder: Family related unit, Cooperative hunting band of kin, Farming community - economies of scale allowing: Collective development of buildings, Division of labor to create artifacts, & Trading across communities.  And he suggests the social hierarchy naturally transformed into a socioeconomic status is a publically accepted, signal that one possesses assets: wealth, beauty, talent, expertise, access & trust of powerful people; to be able to help others. 
hierarchy of the Big Man Society providing the typical stability humans seek.  Beinhocker notes how human hierarchy should enable the network amplifier of information access & transfer

Inter-community trading requires trust and distrust are evolved responses to sham emotions.  During a friendship where no sham emotions have been detected trust will build up. 
.  Beinhocker notes the grouping of us and them.  And he suggests the rule of law allows this division to be overcome, amplifying trade. 

Beinhocker notes language development, including writing, also provides access to a vastly expanded area of the design spaces: mail, telephones, faxes & email. 

And Beinhocker argues that once large numbers of people could form cooperative networks, and had the means to communicate and record large amounts of data, human organizations could generate emergent networked computation

The expansion of the accessible high points of the Social Technologies are defined by Beinhocker as methods and designs for organizing people in pursuit of a goal or goals. He views the three most significant social technologies as: markets, science, and democracy. 
design space supported and leveraged the expansion of the accessible high points of the Physical Technologies are defined by Beinhocker as methods and designs for transforming matter, energy, and information from one state into another in pursuit of a goal or goals.  The effects of nuclear and genetic physical technologies are already challenging.  Beinhocker adds artificial intelligence and nanotechnology as emerging physical technologies that support access to huge new niches and introduce additional challenges. 
design space. 

Economic Evolution - From Big Men to Markets
Beinhocker reflects that the three design spaces: Business plans, Physical Technologies are defined by Beinhocker as methods and designs for transforming matter, energy, and information from one state into another in pursuit of a goal or goals.  The effects of nuclear and genetic physical technologies are already challenging.  Beinhocker adds artificial intelligence and nanotechnology as emerging physical technologies that support access to huge new niches and introduce additional challenges. 
& Social Technologies are defined by Beinhocker as methods and designs for organizing people in pursuit of a goal or goals. He views the three most significant social technologies as: markets, science, and democracy. 
; have provided support for most requirements of his test for evolution: A design space for economic evolution, A schema for the business plan designs, Building blocks that underlie the designs (Physical are defined by Beinhocker as methods and designs for transforming matter, energy, and information from one state into another in pursuit of a goal or goals.  The effects of nuclear and genetic physical technologies are already challenging.  Beinhocker adds artificial intelligence and nanotechnology as emerging physical technologies that support access to huge new niches and introduce additional challenges. 
and Social Technologies are defined by Beinhocker as methods and designs for organizing people in pursuit of a goal or goals. He views the three most significant social technologies as: markets, science, and democracy. 
), A schema reader, the management team, that turns Business Plans into reality, An environment, the marketplace, where evolutionary competition occurs; but he sees the need for two additional requirements:
  1. Define the interactors is evolutionary philosopher David Hull's term for the schematically specified, instantiated aggregated agent which can interact with the proximate environment and is subject to selection pressures.  Dawkins's equivalent term is 'vehicle'. 
    in economic evolution - businesses, which Beinhocker asserts are a person, or an organized group of people, who transforms matter, energy, and information from one state into another with the goal of making a profit.  These may exist within larger firms which Beinhocker defines as one or more businesses controlled in common by a person or group of people. 
  2. Identify the units of selection.  Beinhocker argues that the business plan must contain the unit of selection.  To define what it is in the business plan that gets selected Beinhocker reviews what makes a competitive success of a business.  But he notes it must be whatever is helping the business be successful at that competitive point in time.  That leads him to suggest it is a 'module' of the business plan which is a component that has provided in the past, or could provide in the future, a basis for differential selection between businesses in a competitive environment.  Beinhocker asserts that the glue that binds together the Physical Technologies and Social Technologies that make up the modules of the business plan is strategy which Beinhocker argues is a hypothesis that combines Physical Technologies are defined by Beinhocker as methods and designs for transforming matter, energy, and information from one state into another in pursuit of a goal or goals.  The effects of nuclear and genetic physical technologies are already challenging.  Beinhocker adds artificial intelligence and nanotechnology as emerging physical technologies that support access to huge new niches and introduce additional challenges. 
    and Social Technologies are defined by Beinhocker as methods and designs for organizing people in pursuit of a goal or goals. He views the three most significant social technologies as: markets, science, and democracy. 
    in a way it assumes will win against the competition.  A Business Plan is where strategies allow Physical Technologies and Social Technologies to meet, in modules, as the plans are made real as operational businesses. 
Beinhocker sees business execution as trying a lot of stuff and seeing what works.  He sees this as more deductive-tinkering by entrepreneurs and managers.  And they must be able to execute short (mostly), medium and long jumps through the business plan design space to stop evolution getting stuck on local peaks. 

And he argues that selection of the business is then performed, initially by Big Men, with the aristocratic hierarchies of feudal Europe controlling over 80% of economic output until about 300 years ago, and subsequently by markets.  Beinhocker explains that a major achievement of traditional economics was to show that the fitness function that markets attempt to satisfy is the overall welfare of the people participating in them.  A market economy is defined by markets selecting Business Plans, because to become a Big Man is to have ones Business Plans preferred by the market to the others.  Corporate hierarchies make visible decisions selecting Business Plans and allocating resources to their choices, but above these hierarchies is the market where the hierarchies compete with one another.  Beinhocker sees the decisions of managers in the hierarchy as transforming one Business Plan into the next.  Then the winning options will be executed in the market place where competition will decide the winner. 

Replication should be the measure of evolved success.  Here Beinhocker avoids the problem of the amorphous shape of his interactors by comparing the total resources: money, people, plant and equipment, brand, technical knowledge, customer relationships; amassed by the business with the business plan modules it executes.  He concludes evolved success is how its resources grow over time.  In part this growth will occur inside the corporate hierarchies as favored selections are copied into other interactors inside the firm.  Beinhocker sees market success being similarly copied and resourced by competitors adding to the replication of the module. 

Beinhocker notes that traditional economics justifications for the value of markets are based on the assumptions of equilibrium.  Beinhocker replaces these assumptions with:
  • Markets are evolutionary search mechanisms. 
  • Markets provide incentives for the deductive-tinkering process of differentiation. 
  • Markets provide the fitness function and selection process that support the broad needs of the population. 
  • Markets support shifting resources towards competitive modules, amplifying the module's influence.  In summary markets are effective at innovation in disequilibrium.  And they are relatively efficient at local allocation of resources. 
Beinhocker argues that around 1750 a set of innovations in Social Technologies altered the speed of economic evolution:

New Definition of Wealth - Fit Order
Beinhocker explains that Darwin, Teilhard de Chardin & Georgescu-Roegen observed two types of human evolution: genetic & cultural is how we do and think about things, transmitted by non-genetic means as defined by Frans de Waal.  CAS theory views cultures as operating via memetic schemata evolved by memetic operators to support a cultural superorganism.  Evolutionary psychology asserts that human culture reflects adaptations generated while hunting and gathering.  Dehaene views culture as essentially human, shaped by exaptations and reading, transmitted with support of the neuronal workspace and stabilized by neuronal recycling.  Sapolsky argues that parents must show children how to transform their genetically derived capabilities into a culturally effective toolset.  He is interested in the broad differences across cultures of: Life expectancy, GDP, Death in childbirth, Violence, Chronic bullying, Gender equality, Happiness, Response to cheating, Individualist or collectivist, Enforcing honor, Approach to hierarchy; illustrating how different a person's life will be depending on the culture where they are raised.  Culture:
  • Is deployed during pregnancy & childhood, with parental mediation.  Nutrients, immune messages and hormones all affect the prenatal brain.  Hormones: Testosterone with anti-Mullerian hormone masculinizes the brain by entering target cells and after conversion to estrogen binding to intracellular estrogen receptors; have organizational effects producing lifelong changes.  Parenting style typically produces adults who adopt the same approach.  And mothering style can alter gene regulation in the fetus in ways that transfer epigenetically to future generations!  PMS symptoms vary by culture. 
  • Is also significantly transmitted to children by their peers during play.  So parents try to control their children's peer group.  
  • Is transmitted to children by their neighborhoods, tribes, nations etc. 
  • Influences the parenting style that is considered appropriate. 
  • Can transform dominance into honor.  There are ecological correlates of adopting honor cultures.  Parents in honor cultures are typically authoritarian. 
  • Is strongly adapted across a meta-ethnic frontier according to Turchin.  
  • Across Europe was shaped by the Carolingian empire. 
  • Can provide varying levels of support for innovation.  
  • Produces consciousness according to Dennet. 
; with Georgescu-Roegen associating evolution & thermodynamic entropy requires that the Boltzmann entropy of a closed system increases. 
.  He argued that economic processes (1) irreversibly transform high (2) entropy to low entropy with some of the increased order being useful to and able to be captured by human agents [for achieving their subjective goals.  Goals that may help them survive and reproduce by reflecting (3) strategies to capture the cognitive niche is Tooby & DeVore's theory that reflects a flexible competitive strategy, described by Steven Pinker, which leverages the power and flexibility of intelligence to defeat the capabilities of genetically evolved specialists focused on specific niches.  ], and criticized traditional economics for ignoring this

Beinhocker notes that our current environments differ from the African savanna is the environment where hunter-gatherers primarily evolved.  Its grassland supported large herbivores that could be hunted.  Clumps of trees & rocks supported places to hide from large carnivores.  Streams and paths add to the signals enabling orientation. 
, creating opportunities to exploit the mismatch.  But more generally he sees necessary economic coevolution of businesses plans and humanity's current environmental niches. 

He argues wealth is a form of order: Patterns of economic order, in the form of products and services, which compete with each other to be needed, desired and craved by consumers.  The winners support the evolved amplification of the business plans that defined their development.  The preferences of consumers and the plans then coevolve, defining contingent wealth - fit order. 

Beinhocker relates this
This page introduces the complex adaptive system (CAS) theory frame.  The theory is positioned relative to the natural sciences.  It catalogs the laws and strategies which underpin the operation of systems that are based on the interaction of emergent agents. 
John Holland's framework for representing complexity is outlined.  Links to other key aspects of CAS theory discussed at the site are presented. 
CAS
representation of wealth to the ideas of traditional economic value where: scarce factors of production met individual preferences through the mechanism of markets.  Value was whatever two people were willing to trade for.  The equivalent CAS model has:
  • Supplies of low entropy having some intrinsic value. 
  • Human preferences determining the attraction of products and services, stimulating demand. 
  • Markets allowing businesses plans to match scarce order with individual preferences. 
Beinhocker adds that money is a Social Technology are defined by Beinhocker as methods and designs for organizing people in pursuit of a goal or goals. He views the three most significant social technologies as: markets, science, and democracy. 
that enables score keeping during the interactions. 

Beinhocker argues economic wealth and biological wealth are thermodynamically similar phenomena:
He concludes wealth is schematically useful information and its equivalent, schematically useful energy, to paraphrase Beinhocker.  It is useful because an agent has schematic strategies that can utilize the information or energy to extend or leverage control of the cognitive niche.    is knowledge and its origin is evolution.  He explains his conclusion: wealth being fit order corresponds to knowledge, which he equates to useful information.  Evolution is a knowledge-creation machine or learning algorithm. 

What it Means for Business and Society
Strategy - Racing the Red Queen
Beinhocker concludes that complexity makes the economy too complex, too nonlinear, too dynamic, and too sensitive to the twists and turns of chance to be amenable to prediction beyond the shortest of terms.  But:
  • CEOs are expected to determine which is the best business strategy
  • Investors expect to identify the highest returning investment approach
  • Political leaders are expected to select the best policy
Instead he argues complexity allows us to design institutions and societies to evolve effectively.  By understanding evolution he suggests we can harness its power to serve human purposes. 

Beinhocker notes that Chandler's view was strategy is forward looking, and used a plan for associating resources with actions that fulfill desired long-term goals.  The plan leverages the development of a number of scenarios and seeks attractive positions within those.  Harvard's Porter argued that by reducing competition and increasing market power through competitive advantage companies could capture profits.  And Harvard's Ghemawat noted that competitive advantage's strategic moves are risky, is an assessment of the likelihood of an independent problem occurring.  It can be assigned an accurate probability since it is independent of other variables in the system.  As such it is different from uncertainty. 
because they are costly to reverse.  This irreversibility is Georgescu-Roegen condition (1)

Classically business strategy makes two assumptions:
  1. One can make confident predictions about what strategies will be successful in the future
  2. One can make commitments that will result in sustainable competitive advantage; but Beinhocker asserts both assumptions are false
Beinhocker argues frozen accidents, dynamic, nonlinear flows amplify small events into significant outcomes.  Such uncertainty is when a factor is hard to measure because it is dependent on many interconnected agents and may be affected by infrastructure and evolved amplifiers.  This is different from Risk.   is associated with punctuated equilibrium is Steven Jay Gould and Niles Eldridge's proposal about how evolution occurs.  They suggested that most of the time 'nothing happens' and then there are intermittent rapid lurches.  The idea is analogous to Schumpeter's waves of creative destruction.  Complex adaptive systems will operate this way driven by the underlying slow mutations of the germ-line schemata and the action of infrastructure and evolved amplifiers. 
and power laws is a probability distribution which occurs in real world economics, physics and earth science situations.  The tail is fat because more extreme events occur than a random distribution about a mean would predict.  There is clustering of events over time typical of a punctuated equilibrium.  The statistics describing the data changes over time.  The mathematics of this distribution is far harder to leverage in models than the thin-tailed normal distribution.  So the normal distribution is sometimes inappropriately applied in fat-tail situations. 
.  This leaves competitive advantage as rare and relatively short-lived.  Punctuated equilibrium and power laws leave human pattern-recognizers flummoxed

There are no safe, stable industries.  Schumpeter's gales of creative destruction are seen everywhere.  Beinhocker notes that this is also seen in biology where species are locked in a never-ending co-evolutionary arms race with no opportunity to win.  Sustainable competitive advantage does not exist. 

Beinhocker concludes that an excellent company must be one which can string together a series of temporary advantages over time.  Johnson & Johnson & Merck are judged examples of such companies. 

Hannan and Freeman's studies on the organizational ecology of markets led them to conclude that individual companies do not innovate much.  They found that change was mainly due to companies entering and exiting the market.  Beinhocker adds that the process of differentiating, selecting, and amplifying Business Plans works better at the level of the market than inside the walls of most companies. 

Beinhocker argues it is possible to use strategy advantageously within a company by:
Beinhocker discusses Bill Gates approach when MS-DOS replacement products were being developed in 1987.  He suggests Gates setup a portfolio of strategic options - six competitive business plans within Microsoft that he felt reflected the competition going on in the market:
  1. Invest in MS-DOS to leverage its huge customer base.  DOS had become more powerful overtime. 
  2. IBM was a seen as a huge threat.  It was aiming to recapture control of the OS-market.  Gates got them to agree to partner on PS/2 and OS/2 with Microsoft acting as the developer!
  3. Microsoft negotiated with AT&T and other Unix companies to participate in Unix development.  Unix workstations remained niche. 
  4. Unix on PCs was led by Santa Cruz Operation (SCO).  Microsoft purchased a major part of SCO. 
  5. Microsoft continued to invest in applications for DOS, Apple Macintosh, Windows and OS/2. 
  6. Invested in Windows. 
Beinhocker argues this Gates story demonstrates a number of general lessons:
Organization - A Society of Minds
Beinhocker argues that for companies to sustain themselves through the inevitable downturns they must have a strong culture is how we do and think about things, transmitted by non-genetic means as defined by Frans de Waal.  CAS theory views cultures as operating via memetic schemata evolved by memetic operators to support a cultural superorganism.  Evolutionary psychology asserts that human culture reflects adaptations generated while hunting and gathering.  Dehaene views culture as essentially human, shaped by exaptations and reading, transmitted with support of the neuronal workspace and stabilized by neuronal recycling.  Sapolsky argues that parents must show children how to transform their genetically derived capabilities into a culturally effective toolset.  He is interested in the broad differences across cultures of: Life expectancy, GDP, Death in childbirth, Violence, Chronic bullying, Gender equality, Happiness, Response to cheating, Individualist or collectivist, Enforcing honor, Approach to hierarchy; illustrating how different a person's life will be depending on the culture where they are raised.  Culture:
  • Is deployed during pregnancy & childhood, with parental mediation.  Nutrients, immune messages and hormones all affect the prenatal brain.  Hormones: Testosterone with anti-Mullerian hormone masculinizes the brain by entering target cells and after conversion to estrogen binding to intracellular estrogen receptors; have organizational effects producing lifelong changes.  Parenting style typically produces adults who adopt the same approach.  And mothering style can alter gene regulation in the fetus in ways that transfer epigenetically to future generations!  PMS symptoms vary by culture. 
  • Is also significantly transmitted to children by their peers during play.  So parents try to control their children's peer group.  
  • Is transmitted to children by their neighborhoods, tribes, nations etc. 
  • Influences the parenting style that is considered appropriate. 
  • Can transform dominance into honor.  There are ecological correlates of adopting honor cultures.  Parents in honor cultures are typically authoritarian. 
  • Is strongly adapted across a meta-ethnic frontier according to Turchin.  
  • Across Europe was shaped by the Carolingian empire. 
  • Can provide varying levels of support for innovation.  
  • Produces consciousness according to Dennet. 
& values supported by an effective social architecture breaks down barriers to adaptability and allows organizations to obtain a better balance between near-term execution and long-term evolution. It is defined by Beinhocker as:
  1. The behaviors of the individual people in the organization. 
  2. The structures and processes that align people and resources in pursuit of an organization's goals. 
  3. The culture that emerges from the interactions of people in the organization with each other and their environment. 


He asserts that companies are organizations are goal directed, boundary-maintaining, and socially constructed systems of human activity, argues University of North Carolina sociologist Howard Aldrich. 
.  And organizations are:
So Beinhocker argues that firms are organizations that develop and execute business plans with the collective goal of making a profit.  He notes Ronald Coase asked: why form organizations? in 'The Nature of the Firm.'  Coase concluded it is a structure used when it minimizes transaction costs.  Beinhocker adds that it can also reach areas of Business Plan design space that freelancers can't:
  1. Incomplete contracts - because of complexity it is impossible to cover all possible contingencies in a contract.  So freelancing is restricted to simple part of business plan space. 
  2. The holdup problem can occur - specific assets, that are costly and only useful in a specific situation, must be held by someone in the group of freelancers.  If a freelance relationship unravels no one will want to be that person.  Who ever does have the assets is in a weakened negotiating position relative to the others. 
  3. Cooperative structures can be developed and sustained, supporting long term transactions, even if particular agents change.  
  4. Organizations allow collective learning.  They build structures that embed information that can be utilized by other cooperating agents.  Beinhocker differentiates between:
Beinhocker applies evolution arguing a firm must:
  1. Execute its current set of Business Plans to survive the challenges of today, and
  2. Adapt those plans to survive the challenges of tomorrow. 
Beinhocker asserts organizations find it easier to execute than adapt.  Viewing them as CAS he looks at three levels at why organizations find it hard to adapt:
Beinhocker highlights Edith Penrose's conclusions regarding the fundamental constraints on firm size and growth:
  • Managing complexity
  • Knowledge.  Beinhocker suggests we are limited by our innovation and knowledge-creating abilities.  He notes Marvin Minsky's observation that intelligence is an emergent phenomena which Minsky terms "the society of mind."  Beinhocker wonders if creating "societies of minds" through culture will free the minds of their people to be engines of wealth creation

Finance - Ecosystems of Expectations
Traditional economics support for finance theory uses equilibrium based stock market operations.  Black-Scholes can solve the contingent investment discount rate dilemma for pricing options.  It establishes a tracking portfolio with the same payoffs as the option and dynamically tracks the portfolio as the stock price evolves, adjusting the value of the option.  It is argued that the adjustment ensures the rate of return to a hedge position remains constant over time. 
provides a mathematical instantiation.  LTCM was Long-Term Capital Management, a hedge fund that used Black-Scholes quantitative models to trade in derivatives.  The hedge fund's bets failed during the Asian and Russian debt crisis of 1998 and it had to be rescued by the Federal Reserve. 
's failure provides us with a high profile repudiation of the theory: Robert Merton noted the day after the crash, "according to our models this just could not happen."  Stock market bubbles do not exist according to traditional finance theory.  The theories and equations are rapidly applied in the real world: investors, banks, corporate managers, & government policy makers; make decisions based on the predictions.  Beinhocker notes that finances empirical testing of finance theory has not been kind!

In 1954 Paul Samuelson, adopted Louis Bachelier's 1900 Theory of Speculation, which asserted that stock prices perform a random walk over time.  Samuelson's conclusion was the cornerstone of the ideas of Traditional finance developed over the next 30 years by: Samuelson, Paul Cootner, Harry Markowitz, James Tobin, Franco Modigliani, Merton Miller, Fischer Black, Myron Scholes, Eugene Fama, William Sharpe, and Robert Merton.  The framework was popularized by Princeton's Burton Malkiel, who published A Random Walk Down Wall Street, which became a fixture of MBA courses and deployed the models into the minds of a generation of traders and investors. 

Beinhocker explains the efficiency of the market in digesting information, into expectations and then into a consensus price change is judged by traditional finance theory to cause prices to move in a random walk.  The random walk occurs because, traditional economics assumes, the arrival of news occurs randomly.  To account for economic growth over time economics argues the news has a slight positive bias: a random walk with drift.  Because information digestion is efficient, it was assumed there is no useful information in past stock price movements.  If there was the rational investors would translate it into price changes reflected in the current equilibrium position.  Chicago's Eugene Fama noted in the efficient-markets hypothesis that rational investing and arbitrage means it is impossible to beat the market and generate higher returns than the market as a whole. 

Beinhocker explains in this random walk model, investors who win: Berkshire Hathaway's Warren Buffett; are assumed to be digesting all the information effectively and driving the price.  Those who loose did not bother to capture all the information available and act on it and so transferred their money to Buffett etc.  Among the fully rational investors there should be no winners and losers.  The only way one can stand out is to take on more risk, is an assessment of the likelihood of an independent problem occurring.  It can be assigned an accurate probability since it is independent of other variables in the system.  As such it is different from uncertainty. 
, or be lucky during the instant that the sample was assessed. 

There are three significant problems that mean a
This page introduces the complex adaptive system (CAS) theory frame.  The theory is positioned relative to the natural sciences.  It catalogs the laws and strategies which underpin the operation of systems that are based on the interaction of emergent agents. 
John Holland's framework for representing complexity is outlined.  Links to other key aspects of CAS theory discussed at the site are presented. 
CAS
approach must replace the traditional economics infrastructure:
At the end of the cold-war, physicists, who had been working on military problems switched over to Wall Street financeDoyne Farmer & Norman Packard took Mandelbrot's arguments and built a theory to explain them assuming an evolving ecosystem.  They noted that market signals predicted future share prices and once identified, the signals remained for some time instead of being arbitraged away.  And even as these signals were weakened by trading new one appeared.  And the successful strategies generating the signals depended on the strategies of the other agents in the market. 

Farmer built a simple model of a market where only three basic types of investor existed:
  • Value investors - who would buy & sell a stock based on fundamentals (earnings, growth, competitive position models),
  • Technical traders (who buy and sell based on past prices & trading volume models),
  • Liquidity traders (who sell when driven by a need to gain access to liquidity); along with a
  • Market maker - who reflected the details of how the market operates: buys and sells in a continuous auction. 

Farmer could customize the model:
  • Initially he just deployed one fundamental trader and a market maker.  But because of time delays the market did not match traditional finance theory.  The time delay caused oscillations.  The oscillations represented the rules being followed by the trader and maker and the delays. 
  • Then he added a technical trader, who purchased when the price was going up and sold when it was going down, amplifying the oscillations.  And if the technical trader was successful the agent would reinvest its gains adding to the size of the oscillations. 
  • Subsequently Farmer set the fundamental value of the stock to be constant.  He added seasonal traders who bought and sold alternately, creating an oscillating pattern.  He added technical traders who used information on price trends in prior periods to decide: if price went down and then up then buy, if the price went down and then down again sell.  Successful traders could keep the money and reinvest.  While traditional finance theory suggests the technical traders will find the oscillating pattern and then arbitrage the seasonal trend out what Farmer observed was:
    • As the technical traders found the oscillation pattern they started to gain money.  That allowed them to make bigger trades.  They almost arbitraged away all the oscillations but then
    • The larger trades of the successful technical traders caused new volatility.  The successful traders started to capture profits from each other and generated more wild oscillations.  This mimicked the data Doyne Farmer had seen on his company's trading floor.  Some technical traders were profitable. 
The model explains why hedge funds is an investment fund that accepts investments from a limited number of accredited individual or institutional investors.  Hedge funds are able to use investment methods that are not allowed for other types of fund. 
can exist and be highly profitable using arbitrage and technical strategies.  Farmer notes that competitive investors don't always arbitrage profitable opportunities.  That is because it isn't possible to recognize strategies that make abnormal profits, quickly (it typically takes at least five years of observation), and they may not have accumulated enough funds - or credibility to borrow - to fully arbitrage the signals when they decide to do so.  But this scenario does mean that at a particular time some people understand the situation better than their competition and can gain for a while. 

Major banks and hedge funds are using statistical and modeling techniques from complexity economics in designing their investment strategies. 

Business executives must also respond to these changes in finance.  Complexity based finance theory has three main effects on business:
  1. Widely used methods for calculating the cost of capital is the sum total nonhuman assets that can be owned and exchanged on some market according to Piketty.  Capital includes: real property, financial capital and professional capital.  It is not immutable instead depending on the state of the society within which it exists.  It can be owned by governments (public capital) and private individuals (private capital). 
    may be wrong.  Beinhocker notes the cost of capital influences executives' major decisions and directly effects shareholder returns.  CAPM is Chicago economist Harry Markowitz's capital asset pricing model, the standard method of evaluating the cost of capital of a business.  Beinhocker explains that it assumes investors are totally rational, fully informed, markets are efficient and economies operate in equilibrium.  And Markowitz's assumptions about how to offset risk are questionable: CAPM assumes all investors hold portfolios of stocks that optimize the trade-off between risk and return.  This allows the portfolios to be combined creating a market portfolio, allowing an individual stocks risk (beta) to be measured relative to the market portfolio.  But no one holds such portfolios.  That would require: Perfect information, unlimited capability to short stocks, matching time horizon for all investors, Continuous updating of the market portfolio -- which would drive up transaction costs prohibitively; so economists use a weighted average of all stocks in the market instead.  These problems mean investment managers are actually evaluated against indices such as the S&P 500. 
    assumes the correctness of Traditional Finance.  But at present there is no
    This page introduces the complex adaptive system (CAS) theory frame.  The theory is positioned relative to the natural sciences.  It catalogs the laws and strategies which underpin the operation of systems that are based on the interaction of emergent agents. 
    John Holland's framework for representing complexity is outlined.  Links to other key aspects of CAS theory discussed at the site are presented. 
    CAS
    based replacement. 
  2. It suggests granting stock options for executive compensation is inappropriate.  The stock price can deviate significantly from the value a company is generating and for years.  Typically these factors will be beyond the executives' control.  And the binding resulted in short-term incentives that drove up executive compensation. 
  3. Alters the nature of shareholder capitalism and the purpose of corporations.  Beinhocker argues that the CAS goal of any replicator is Richard Dawkin's name for the genotype since it has the evolutionary goal of surviving long enough to reproduce its schematic plan effectively.  The action of genetic operators means that the results of successful reproduction may be different to the parental genotypes and phenotypes (Dawkin's vehicle). 
    is to get replicated.  So a good business plan should support the survival and amplification (growth) of its business.  Beinhocker associates this with:
    • Capital being attracted to the enterprise & providers of the capital obtaining a return that is better than the other alternatives
    • Employees must be attracted and incented to work productively
    • Suppliers must see profitable relationships with the business
    • The business must develop goods and services that people want. 
    • Management must ensure the business meets its legal obligations
Beinhocker concludes that a major CAS constraint is that companies are profitable.  Traditional economics agrees but has driven executives to focus on short term performance.  He notes that DuPont has survived and grown for over 200 years, transforming itself from a start-up gunpowder maker to a major chemicals, materials, and life sciences company.  Long term survival and growth requires a more balanced view and focus on variables they can control. 

Politics & Policy - The End of Left Versus Right
Noting the close association between economics and politics Beinhocker asks: what will be the impact of Complexity Economics on politics? 

The 1789 Revolution French National Assembly included: Third Estate revolutionaries on the left and aristocratic First Estate on the right.  Over the next century economics was integrated into this political divide with the communist manifesto of Marks & Engels on the left and Adam Smith's capitalist doctrines on the right.  Following the collapse of the USSR after 1989, Beinhocker notes the advent of the Third Way championed by Bill Clinton in the US is the United States of America.   & Tony Blair in the UK is the United Kingdom of Great Britain and Northern Ireland.  .   They proposed to leverage the wealth generating power of Capitalism and humanitarian objectives of Socialism.  Beinhocker argues the Third Way evolved into a set of tactics for winning elections from the center, rather than a new economic paradigm.  Beinhocker concludes that Complexity Economics can fill this void. 

Beinhocker notes the Left-Right divide reflects the alternative views of human nature of: Rousseau/Marx and Hume/Locke/Hobbes.  Beinhocker notes that Adam Smith was more in line with the modern understanding of man as both self-interested and altruistic, is the property that since kin share genes natural selection will improve the replicator's selfish goals by supporting the survival of such relatives.  Improving the chances of survival of non-kin is hard to explain with a gene preservation theory.  Why help a competitive gene?  Trivers explanation of reciprocal altruism shows the special conditions under which it can occur. 
.  There are two crucial distinctions that follow from this:
  1. Real people care about outcomes and the fairness of the process. 
  2. As the ultimatum game is an economic game involving two players: One makes an offer about how to split a pot of money.  If the offer is rejected neither party gets any money.  The other player can accept or reject the offer.  Rationality implies that any offer should be accepted by the recipient.  Instead recipients are keenly aware of being unfairly treated.  The longer the amygdala responds to the offer the more likely it is to be rejected.  The rejection is mentally costly and must be encouraged by a dopaminergic reward, fueled by the amygdala and insula.  When the offer is rejected the first player feels dissed, subordinated - especially if the result is shared with others, undermining status & reputation.  Sapolsky notes that:
    • People with damaged amygdalae are unusually generous because the BLA normally injects learned implicit distrust and vigilance into social decision making.  
    • People given testosterone before the game become more generous.  Sapolsky notes the effect demands fancy neuroendocrine wiring. 
    • People from small-scale, non-Western cultures were less trusting and punished more.  Joseph Henrich found three variables predicted how the play executed: Market integration, Community size, Religion; where large communities need ways to make strangers trustworthy.  Communities that trade are also more likely to act fairly and punish unfairness.  Sapolsky asserts that market interactions represent an impoverishment of human reciprocity with the total transaction having to be judged and occur in an instant.  Small-scale cultures are more practiced at the nuanced judgements about their long term neighbors. 
    • Chimps can be trained to play the game.  Max Planck Institute's Michael Tomasello found no evidence of chimp requirements for fairness.  But De Waal & Brosnan found chimps will be fair but only if they see a downside in being unfair.  Primates seem to reflect the same hypocritical strategies underneath any reciprocal altruism that humans display. 
    shows people punish unfair behavior. 
Changing the core assumptions of human behavior causes radical shifts in the economic and political frameworks.  Christina Fong, Samuel Bowles, & Herbert Gintis argue that social policies should be specifically designed to mobilize reciprocal values rather than offend them.  Beinhocker views the popularity of Social Security is the social securities act of 1935 was part of the second New Deal.  It attempted to limit risks of old age, poverty and unemployment.  It is funded through payroll taxes via FICA and SECA into the social security trust funds.  Title IV of the original SSA created what became the AFDC.  The Social Security Administration controls the OASI and DI trust funds.  The funds are administered by the trustees.  The SSA was amended in 1965 to include:
  • Title V is Maternal and child health services. 
  • Title XVIII is Medicare.  
being due to its consistency with reciprocity norms. 

Beinhocker continues that a combination of individual behavior and institutional structures create the emergent behaviors of the
This page introduces the complex adaptive system (CAS) theory frame.  The theory is positioned relative to the natural sciences.  It catalogs the laws and strategies which underpin the operation of systems that are based on the interaction of emergent agents. 
John Holland's framework for representing complexity is outlined.  Links to other key aspects of CAS theory discussed at the site are presented. 
CAS
.  So he considers the role of markets versus states. 

Beinhocker reasserts his earlier logic: large scale cooperation between strangers has been facilitated by either hierarchies or markets.  Beinhocker notes that both capitalist and socialist economies operate based on plans.  He argues that the difference is that in the capitalist instantiation the plans are developed and operated by hierarchies inside firms within a market where selection and amplification occur.  In the socialist instantiation they are developed and operated by hierarchies directly or indirectly controlled by the state, which is where selection and amplification occur.  Hayek notes that the socialist process suffers from: knowledge coordination problems, perfectly informed planners.  Beinhocker adds that without markets providing the fitness function, human planners must use deductive rationality, with the limited success of any 'big man' approach. 

CAS theory implies markets are not totally efficient.  So Beinhocker concludes to assume markets can solve every problem is unrealistic.  And Beinhocker notes that Pareto optimality allocates resources measurably so that each change must make at least one person better off and make no one worse off. 
isolated from government influence, motivates the Right to restrain taxes, government spending and regulations.  But Complexity economics is built with social technologies are defined by Beinhocker as methods and designs for organizing people in pursuit of a goal or goals. He views the three most significant social technologies as: markets, science, and democracy. 
: Contract law, Consumer protection regulations, Worker safety rules, Securities law; that engender cooperation and trust.  And antitrust regulations serve to maintain healthy levels of competition.  Frameworks developed and deployed by Theodore Roosevelt. 

Complexity Economics indicates that government regulation is a significant part of the fitness function.  Beinhocker argues that as long as selection and amplifying are performed by markets the evolutionary process will innovate and adapt.  The dynamic nature of the system with its bounty of innovation undermines the concerns about costs of regulation.  Beinhocker notes that such government action to support evolution should be operated as a
Walter Shewhart's iterative development process is found in many complex adaptive systems (CAS).  The mechanism is reviewed and its value in coping with random events is explained. 
Shewhart cycle


Complexity Economics operates through the rules enacted by individual agents.  So, individual behavior can have significant and unexpected effects.  This is hugely different from classical microeconomic is a bottom-up view of the economy.  It starts with individual decision makers and then builds up to markets and economies, explains Beinhocker. 
assumptions of homogeneous rational actors. 

Beinhocker notes that the world's national wealth is highly unequally distributed.  The Left and Right differ about the causes:
  • Left - colonialism, racism, capitalist exploitation, aid problems
  • Right - bad governments, corruption, lack of free markets, dependency on aid, racial inferiority. 
  • Geography, Climate, Near-constant warfare in Africa. 

Harrison & Huntington proposes a significant role for culture is how we do and think about things, transmitted by non-genetic means as defined by Frans de Waal.  CAS theory views cultures as operating via memetic schemata evolved by memetic operators to support a cultural superorganism.  Evolutionary psychology asserts that human culture reflects adaptations generated while hunting and gathering.  Dehaene views culture as essentially human, shaped by exaptations and reading, transmitted with support of the neuronal workspace and stabilized by neuronal recycling.  Sapolsky argues that parents must show children how to transform their genetically derived capabilities into a culturally effective toolset.  He is interested in the broad differences across cultures of: Life expectancy, GDP, Death in childbirth, Violence, Chronic bullying, Gender equality, Happiness, Response to cheating, Individualist or collectivist, Enforcing honor, Approach to hierarchy; illustrating how different a person's life will be depending on the culture where they are raised.  Culture:
  • Is deployed during pregnancy & childhood, with parental mediation.  Nutrients, immune messages and hormones all affect the prenatal brain.  Hormones: Testosterone with anti-Mullerian hormone masculinizes the brain by entering target cells and after conversion to estrogen binding to intracellular estrogen receptors; have organizational effects producing lifelong changes.  Parenting style typically produces adults who adopt the same approach.  And mothering style can alter gene regulation in the fetus in ways that transfer epigenetically to future generations!  PMS symptoms vary by culture. 
  • Is also significantly transmitted to children by their peers during play.  So parents try to control their children's peer group.  
  • Is transmitted to children by their neighborhoods, tribes, nations etc. 
  • Influences the parenting style that is considered appropriate. 
  • Can transform dominance into honor.  There are ecological correlates of adopting honor cultures.  Parents in honor cultures are typically authoritarian. 
  • Is strongly adapted across a meta-ethnic frontier according to Turchin.  
  • Across Europe was shaped by the Carolingian empire. 
  • Can provide varying levels of support for innovation.  
  • Produces consciousness according to Dennet. 
in the performance of nations.  This was at odds with traditional economics and appeared racist.  But it now has additional scientific support.  Beinhocker lists cultural norms that contribute:
  • Individual behavior - Support a strong work ethic, Individual accountability, believe hard work pays.  Optimism about the future & realism about the current situation. 
  • Cooperative behavior - belief in non-zero-sum games and the payoff of cooperation.  Value generosity & fairness.  Sanction free riders. 
  • Innovation - Prioritizing rational science, allowing experimentation, Encouraging competition and celebrating achievement.   
  • Cultures that look backwards or live for today are less productive than those with a high intergenerational savings rate and long-term focus. 
Beinhocker uses cultural analysis to find economic impacts:
  • Harrison and Huntington correlate trust and distrust are evolved responses to sham emotions.  During a friendship where no sham emotions have been detected trust will build up. 
    and GNP per Capita.  Beinhocker asserts a relationship between high trust and economic cooperation.  Except the US is an outlier: highest GNP per Capita but middling trust.  Beinhocker advances two explanations:
    1. The US makes up for low trust with its powerful social technologies. 
    2. The US is living off the higher social capital of its past.  
  • Beinhocker highlights Fukuyama's conclusion that broad and strong family values limit the development of wider networks of trust.  Cultures with weaker family constraints are able to leverage social technologies to build trust beyond the family.  
  • He notes the World Bank was setup as part of the Bretton Woods agreements, as the International Bank for Reconstruction and Development, to repair and reconstruct Europe after the Second World War and as the World Bank continues to provide reconstruction and development resources for projects in developing economies. It includes:
    • International Finance Corporation 
    's Easterly's disappointment with the effect of $1 trillion in aid to the developing world.  Beinhocker assumes culture will be one reason for the lack of impact.  
  • Beinhocker views social capital is the collective quantity of resources such as trust, reciprocity & cooperation according to Sapolsky.   as the emergent result of agents creating cooperative networks, with cultural norms being the micro rules of agent behavior.  He notes Putnam's
    • Comparative analysis of Northern and Southern Italy, reinforcing the Western narrative of a dynamic North and an untrusting South.  
    • View of declining social capital in the US is the United States of America.  .  Beinhocker adds Fukuyama's complementary conclusions of a Great Disruption in the US between 1960 and 2000.  They both see a complex array of variables contributing including: Altered family structure, rising divorce rate, Entry of women into the work place; with a weakening of women's role in sustaining the social fabric of society.  They also include the impacts of: suburban sprawl, and mass media; which indicates to Beinhocker that a proactive approach must be taken to helping social capital to grow. 
  • Inequality is evident in the world.  And Beinhocker notes it was similarly distributed in ancient Egypt.  With lots of recent research on inequality an improved framework for understanding inequality it has emerged:
    • Lack of Social Mobility is evident but the causes are a mystery asserts Beinhocker.  He notes the answer may lie in the contribution of culture and social technologies.  Parental behavior and cultural norms are major influences on child behavior.  This leads Beinhocker to argue antisocial cultural norms lead to networks with weak social capital.  
    • Leverage John Rawls's question: If we did not know anything about our draw in the birth-lottery, what kind of system would we want?  Matt Miller's answer is to design a system that combines equality of upside opportunity with a downside social safety net.  This would have four policies:
      1. Universal health coverage
      2. Raise the quality of public education
      3. Leverage vouchers to delink education spending from property taxes and raise overall spending. 
      4. Federally guaranteed minimum living wage.  
    • Beinhocker notes there is a link between culture and history.  The legacy of 250 years of slavery and a subsequent 100 years of racial isolation has affected the culture.  Cultures do change.  Eliminating the culture of poverty requires changes to the norms. 
    • Beinhocker accepts that large multi-ethnic communities require more work to engender trust and cooperation.  He sees the ideal as a common layer of norms: supporting democracy (right to freedom of expression, importance of political participation), economic achievement (rewarding hard work, innovation); that are broadly shared by society as a whole.  The common layer depends on the: political system, education system, media; and will become increasingly necessary.  Beinhocker sees the US constitution and Declaration of Independence as both values and laws.  Beinhocker argues the values were effective until the Great Disruption.  Many countries must cope with similar stresses. 
Beinhocker concludes that none of these issues are left-right.  Culture is what determines the success of a society.  Politics can change a culture. 

Beinhocker sees many opportunities for Complexity Economics to contribute:
  • Strong reciprocity helps explain mysteries of traditional economics: wages sticking during business cycles. 
  • Environmental issues: Human induced pulse of change in the system.  The coevolution of the economy and environment can allow improved insights. 
  • Health care system reform
  • Campaign finance reform
  • Electoral system reform
  • International trade
  • Reregulation of industries 
Beinhocker suggests that economic growth will continue for a while.  In particular he sees the economy benefiting from a planet wide society of minds.  Evolution of Physical Technologies has exponentially reduced the cost and increased the speed of human interactions.  Beinhocker sees the development of a global memory.  But he notes three potential issues:
  1. The global economy may be turning on life by devouring resources and polluting the land and seas.  
  2. The Physical Technology evolution has been far faster than the Social Technology evolution. 
  3. Clash of cultures used to happen at metaethnic frontiers.  Now they can collide on TV and the Internet. 
Beinhocker asserts that understanding human CAS will help fend off these challenges.  Adjusting the fitness function can help drive evolution to encourage us to take a longer view. 




This page introduces the complex adaptive system (CAS) theory frame.  The theory is positioned relative to the natural sciences.  It catalogs the laws and strategies which underpin the operation of systems that are based on the interaction of emergent agents. 
John Holland's framework for representing complexity is outlined.  Links to other key aspects of CAS theory discussed at the site are presented. 
CAS theory
The agents in complex adaptive systems (CAS) must model their environment to respond effectively to it.  Samuel modeling is described as an approach. 
models
an economy as a
This page discusses the effect of the network on the agents participating in a complex adaptive system (CAS).  Small world and scale free networks are considered. 
network
of
Plans emerge in complex adaptive systems (CAS) to provide the instructions that agents use to perform actions.  The component architecture and structure of the plans is reviewed. 
schematic
Plans are interpreted and implemented by agents.  This page discusses the properties of agents in a complex adaptive system (CAS). 
It then presents examples of agents in different CAS.  The examples include a computer program where modeling and actions are performed by software agents.  These software agents are aggregates. 
The participation of agents in flows is introduced and some implications of this are outlined. 
agents
.  Beinhocker critiques & augments the models of traditional economic theory with complexity, M. Mitchell Waldrop describes a vision of complexity via:
  • Rich interactions that allow a system to undergo spontaneous self-organization
  • Systems that are adaptive
  • More predictability than chaotic systems by bringing order and chaos into
  • Balance at the edge of chaos
and CAS underpinnings. 

Beinhocker leverages Sugerscape as a vision of a CAS.  The approach, of simple agents in a simple landscape, has clear benefits but it deemphasizes other aspects:

The RSS is Rob's Strategy Studio focus on
Plans emerge in complex adaptive systems (CAS) to provide the instructions that agents use to perform actions.  The component architecture and structure of the plans is reviewed. 
schematic plans
and the details of
This page discusses the mechanisms and effects of emergence underpinning any complex adaptive system (CAS).  Key research is reviewed. 
emergent
This page describes the adaptive web framework (AWF) Smiley agent progamming infrastructure's codelet based Copycat grouping operation. 
The requirements needed for a group to complete are described. 
The association of group completion with a Slipnet defined operon is described.  Either actions or signals result from the association. 
How a generated signal is transported to the nucleus of the cell and matched with an operon is described. 
A match with an operon can result in deployment of a schematic string to the original Workspace.  But eventually the deployed string will be destroyed. 
Smiley infrastructure amplification of the group completion operation is introduced.  This includes facilities to inhibit crowding out of offspring. 
A test file awfart04 is included. 
The group codelet and supporting functions are included. 
aggregating
agents, constructed from the schemata by
This page discusses how Smiley can support the start of the development phase of an agent-based application. 
Startup is an artificial operation not found in living systems.  But Smiley must do it and so we discuss an example of starting the development phase. 
With the Smiley infrastructure and the application integrated the application's development phase is reviewed.
The association of structural Workspaces for state representation is discussed. 
The aggregation of schematic associations of codelets defines a development agent.  At the application level it processes the application's schematic strings. 
The schematic nature of the data processed by the test application suggests the use of an indirect integration framework.  This supports the binding of codelets to the schematic data and detecting and responding to the control operons. 
An application polymerase complex emerges. 
The codelets and supporting functions are included. 
polymerases
,
This page discusses how Smiley provides signalling to its agent-based applications. 
Alternative strategies for initiating the signalling are reviewed. 
The codelets and supporting functions are included.
generating signals
, is the opposite approach to Epstein & Axtell.  This RSS focus is augmented with the collected descriptions of games of grand master chess along with the analysis.  Chess highlights: Traps, Difficulty of evaluating the value of intermediate moves, Collapse; as well as the limited benefit of playing chess without recording the move sequences, since little modeling, analysis or learning takes place.  The businesses that Beinhocker discusses usually do not document the detailed strategies their agents use to execute on the high level business goals.  This leaves them unable to understand their state and so induces them to avoid complexity and enforce rigid hierarchy

RSS judges the exponential growth since 1750 as a stream of rewarding short term strategies that have
E. O. Wilson reviews the effect of man on the natural world to date and explains how the two systems can coexist most effectively. 
led to a problematic trap
This page introduces the complex adaptive system (CAS) theory frame.  The theory is positioned relative to the natural sciences.  It catalogs the laws and strategies which underpin the operation of systems that are based on the interaction of emergent agents. 
John Holland's framework for representing complexity is outlined.  Links to other key aspects of CAS theory discussed at the site are presented. 
CAS
analysis should allow us to avoid the trap.  We have recognized its presence, but the short term gains have pulled us closer over time anyway.  To be valuable Beinhocker's economic framework must be able to highlight the trap and drive avoidance. 

Abandoning the equilibrium assumption of Traditional Economics is central to Beinhocker's approach.  This makes sense but it is hard to do:

The following list supports the mapping of Beinhocker's CAS approach into the details supporting RSS is Rob's Strategy Studio's:

Beinhocker's insightful book details the history of Traditional Economics and the nature of his replacement Complexity Economics.  The details include an enlightening description of wealth is schematically useful information and its equivalent, schematically useful energy, to paraphrase Beinhocker.  It is useful because an agent has schematic strategies that can utilize the information or energy to extend or leverage control of the cognitive niche.   .  But they threaten the current economic power hierarchy and the responses will be typical of an evolving
This page introduces the complex adaptive system (CAS) theory frame.  The theory is positioned relative to the natural sciences.  It catalogs the laws and strategies which underpin the operation of systems that are based on the interaction of emergent agents. 
John Holland's framework for representing complexity is outlined.  Links to other key aspects of CAS theory discussed at the site are presented. 
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integrating quality appropriate for each market
 
This page looks at schematic structures and their uses.  It discusses a number of examples:
  • Schematic ideas are recombined in creativity. 
  • Similarly designers take ideas and rules about materials and components and combine them. 
  • Schematic Recipes help to standardize operations. 
  • Modular components are combined into strategies for use in business plans and business models. 

As a working example it presents part of the contents and schematic details from the Adaptive Web Framework (AWF)'s operational plan. 

Finally it includes a section presenting our formal representation of schematic goals. 
Each goal has a series of associated complex adaptive system (CAS) strategy strings. 
These goals plus strings are detailed for various chess and business examples. 
Strategy
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This page uses an example to illustrate how:
  • A business can gain focus from targeting key customers,
  • Business planning activities performed by the whole organization can build awareness, empowerment and coherence. 
  • A program approach can ensure strategic alignment. 
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