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Economics finally on-track Review of ‘The Origin of Wealth: Evolution, Complexity and the Radical Remaking of Economics’ David Creelman
Any professional needs to know a little about economics because so much of the talk about business refers to economic theory. Business people are always talking about supply and demand and efficient markets. Anyone who has taken a business program at university will have been exposed to a course on economics. The trouble is that the neo-classical economics we have all been taught is mainly nonsense.
If you have a background in science you may (long?) have been troubled by how confident economists seemed. Here was a field without experiments, sparse empirical data, and assumptions—like, humans are only motivated by self-interest—that are clearly wrong. Neo-classical economics is mainly about theory and at the higher levels complicated math. It never had much to do with the real world. The situation was so dire that economics students in the Sorbonne launched a protest demanding they be taught something that made sense.
However, poking holes in neoclassical economics is the easy part, the tough part is coming up with an alternative. Fortunately, Eric Beinhocker, a consultant at McKinsey, has come up with a thick, intelligent and highly readable book about the new foundations for economics: “The Origin of Wealth: Evolution, Complexity and the Radical Remaking of Economics.”
The fundamental difference between the economics you were taught in school and the new economics is that the old school assumed that everything ended up in equilibrium: supply and demand balancing out in the most efficient possible way. The new economics sees the economy as a “complex adaptive system” that is forever evolving as businesses try out new strategies and invent new technologies.
The phrase “complex adaptive system” sounds like a bunch of fancy words, but it actually refers to something fairly specific. The most important complex adaptive system is the ecosystem. The ecosystem has many components that interact in complex ways and the components (living things) adapt and evolve over time. The economy is like that too. Scientists have created computer models to study complex adaptive systems and have learned some interesting things about how these systems works—and hence how the economy works.
One thing they know is that these systems have a dynamic all their own, and can go from periods of stability to dramatic peaks or crashes without any particular external cause. Nothing in particular lead to the Asian monetary crashes in 1997; it is just that economies are complex dynamic systems and these systems are unstable. The crisis—which was inexplicable in neo-classical economics—is just the normal behaviour expected by the new economics.
Researchers also know that there is no such thing as a winning strategy or even sustainable competitive advantage. A good strategy is one that happens to work given the current technologies and the strategies that other businesses are following. As technologies and strategies change, what was once a winning strategy can quickly become a loser—and, by the same token, a strategy that was unsuccessful for years can suddenly be a big winner.
Beinhocker divides technologies into physical technologies, like how to build a better engine, and social technologies like how to organize a department or run a meeting. While it’s the physical technologies that get most of the press, the social technologies are probably more important in business. It’s not physical technologies that get thousands of people in one company aligned and innovative—it’s social technologies.
And this brings us into the world of HR. The day-to-day world of HR is mainly about keeping the company running. There are people to be hired, people to be paid, training courses to be delivered, and so on. However, I don’t think the HR role is just about delivering these services. HR is the function that brings social technologies into the workplace just like IT brings in information technology.
Social technologies are all about the best ways to get people to work effectively together. It’s the usual things like recruitment and compensation, but also issues like work place design, stress reduction and knowledge sharing. HR should not stick to its traditional services any more than IT sticks to traditional technologies. HR should build and apply a rich understanding of all the social technologies that can help the organization.
I don’t do justice to Beinhocker’s 500-page book in this short article but suffice it to say that it’s well past time to dump the neoclassical economics of the 19th century and learn about the new economics of the 21st century.
David Creelman is CEO of Creelman Research providing writing, research and commentary on human capital management. He works with a variety of academics, think tanks, consultancies and HR vendors in the US, Japan, Canada and China. Mr. Creelman can be reached at email@example.com