[Solution]Systems, economics and development

Several great books helped me flesh out the ideas behind systems thinking and apply them to economics. They included Hernando de Soto’s Mystery of Capital,…

Several great books helped me flesh out the ideas behind systems thinking and apply them to economics. They included Hernando de Soto’s Mystery of Capital, [1] a brilliant description of how property rights in successful economies emerge organically from gold rushes and other economic events, and The Origin of Wealth[2] by Eric Beinhocker,  [3]  who argues that the discipline that became mainstream economics took a tragic wrong turn in the nineteenth century when its adherents chose physics rather than evolution as the basis for its thinking. Mental models that stress stability and equilibrium (balls in bowls disturbed, then rolling back to rest) hardly capture the profound instability of real economies, which grow and evolve as technologies rise and fall, firms start up or go bust, countries wax and wane.
Replace Isaac Newton with Charles Darwin, and economies start to make much more sense. Firms, ideas and institutions obey the basic mechanisms of evolution. First comes variation (or differentiation), the endless frenetic churn of human activity, as we attempt to come up with the next big idea, new technology, trendier restaurant, catchier tune. Then comes selection: people either like/buy your idea, or they don’t. Next comes amplification: if your app is popular, more and more people buy your product, the company grows and becomes more powerful. And a new round of variation occurs within the bounds of your successful experiment or as competitors try to wipe you out. Evolution lies at the heart of what economist Joseph Schumpeter called the ‘creative destruction’ of capitalism, and its dynamism partly explains why the centrally planned economies of the last century could not compete.
If companies want to survive in such a system, says The Origin of Wealth, they should ‘bring evolution inside and get the wheels of differentiation, selection and amplification spinning within a company. Rather than thinking of strategy as a single plan built on
[1] Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000).
[2] Eric Beinhocker, The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics (London: Random House Business Books, 2007).
[3] See also David Hamilton, Evolutionary Economics: A Study of Change in Economic Thought (Albuquerque: University of New Mexico Press, 1970).

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