KEY POINTS:
When John Reed became chairman and chief executive officer of Citicorp, he discovered just how dismal economic science can be.
It was 1984. The merger that would beget Citigroup Inc was years in the future; the present was grim. The Mexican debt crisis of 1982 had triggered a
series of defaults, devaluations and economic collapses. Citicorp had lost US$1 billion ($1.4 billion) in one year.
Reed consulted economists to learn what caused the meltdown and found their answers wanting. The wonks were so "off with the fairies", as one writer put it, that Reed wondered if a new approach to economics might be needed.
He wasn't alone, Eric D. Beinhocker reports in The Origin of Wealth, an absorbing survey of how intellectuals ranging from physicist Doyne Farmer to mathematician Benoit Mandelbrot are chipping away at the foundations of traditional economics.
The book explores the missing links between economics and evolution, binding Adam Smith's The Wealth of Nations to Charles Darwin's On the Origin of Species.
Traditionally, economic theory has been considered an equilibrium system, "essentially a system at rest". Borrowed from physics, this construct allowed 19th-century French economist Leon Walras to apply mathematics to what was still a philosophical pursuit when Smith published his classic in 1776.
Beinhocker compares this paradigm to a ball rolling around inside a bowl until it settles at the bottom. External forces - be they the invention of the internet, the terrorist attacks of 9/11 or oil at US$80 a barrel - will bash into (or bend) the bowl, making the ball spin. Yet the ball always stops in a new equilibrium point.
The economy, in this view, is a place where perfectly rational buyers and sellers revolve in markets, like planets around the sun.
Unfortunately, markets don't always work that way, as Citicorp's Reed saw in the 1980s.
The economy, Beinhocker argues, is actually "a complex adaptive system".
It evolves, like the finches Darwin observed in the Galapagos, behaving not like an equilibrium system but like an ecosystem that is open and constantly adapting to mankind's struggle to impose order in a world of entropy.
Beinhocker, a senior adviser to McKinsey & Co, brings an impressive array of studies to bear in his 527-page tour de force.
Brookings Institution researchers, for example, created an economy called Sugarscape, a computer island where "agents" hunted for sugar, migrated, procreated, traded and even developed banks. Though Sugarscape evolved, it didn't go into equilibrium.
As for perfect rationality, it belongs to Spock, the Vulcan on Star Trek.
We humans are good at recognising patterns and telling stories, yet bad at making complex deductions a la Deep Blue, the chess-playing computer of IBM.
We're more like the California truck driver who lashed 45 weather balloons to a lawn chair and flew up 4875m, disrupting air traffic.
We may be irrational, but we do learn from experimentation.
In places, this book bogs down in elaborate exegeses on fitness landscapes and game theory.
If you weary of this, skip to the final chapters, where the author explains what evolutionary economics means for companies, investors and society.
Here we learn why General Electric was more fit to survive than Westinghouse Electric and how Bill Gates won the software war. Investors get a peek at how Wall Street banks apply complex economics to markets.
The new model, Beinhocker says, might even spell the end of left versus right in politics.
This is a lot of freight for one book, yet he's right to champion the cause. Economic models have shaped the world around us, from Adam Smith and the growth of free trade to Karl Marx and the rise of socialism.
It's time to wake up from what Beinhocker calls "the dream of a clockwork universe".
* The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics is published by Harvard Business School Press.
